Meta Platforms Is On A Run Again And Could Be Worth North Of $400

Mark Hake

Meta Platforms (FB) is off 32% year-to-date, although this is better than its decline of over 40.1% from its recent peak. However, FB stock is up 22.6% from its recent lows.

  • There is no question that TikTok, owned by Bytedance, is taking away market share from Facebook, but FB stock largely reflects this drop.
  • Meta Platform's Q1 financials will show profits but reflect year-over-year usage metric declines. This could push FB lower and create another buying opportunity for value investors.

Meta Platforms has been sliding ever since its most recent earnings report after the market closed on Feb. 2. FB stock has fallen from $336.35 on Dec. 31 to about $228.70 as of midday March 30. At one point, the stock fell to $186.63 as of March 14. 

The market seems scared. But it's overdone. 

Why The Market Is Worried About Meta Platforms

They worry that Facebook is apparently losing market share (i.e., eyeballs) to TikTok. 

However, although FB stock could take another hit, it seems like a value bargain now. 

The reason is very simple - the company produces a huge amount of free cash flow (FCF) and will likely continue to do so.

On Feb 2, Facebook reported that it lost less than 0.05% of its daily average users (DAUs). The company’s DAUs fell ever so slightly from 1.93 billion in Q3 to 1.929 billion.

That means its DAUs fell by 1 million. The market is scared this figure could start to fall off of a cliff, so it took the stock down by 38%.

In fact, on March 22, Buzzfeed (BZFD), which relies heavily on revenue generated from Facebooks ads, addressed this issue. Its management talked at length about lower Facebook revenue.

CNBC said this was a “continuing theme in tech: consumers are moving away from Meta’s Facebook.”

Buzzfeed CFO Felicia DellaFortuna noted: “…the shift in audience time away from Facebook has disproportionately impacted our commerce revenues relative to other businesses.”  She also said: “…we continue to see audiences spending less time on Facebook.”

But she also said this: “Instagram and TikTok are also significant platforms for us in terms of audience engagement … young people continue to spend more time on emerging platforms such as Instagram and TikTok.” In fact, when she talked about the shift to TikTok, she also often mentioned Instagram, which is owned by and earns ad revenue that accrues to Meta Platforms.

So Meta is picking up users that are dropping viewing time on Facebook. They are moving to Instagram and BuzzFeed’s short-form video platform called Tasty, even though some traffic is also going to TikTok.

Therefore, don’t expect revenue at Meta to completely fall off a cliff as the market fears.

Facebook’s Powerful Free Cash Flow

Last quarter, Meta Platforms made $12.56 billion in free cash flow (FCF). This works out to an FCF margin of 37.3%, based on its Q4 sales of $33.67 billion (i.e., $12.56b/$33.67b = 0.373).

Analysts forecast revenue will rise to $132 billion in 2022 and $155 billion in 2023. The latter is up 31.5% from 2021 revenue of $117.9 billion.

That implies FCF could hit $58 billion by 2023. That is because if we take 37.3% of $155 billion, using a 37.3% FCF margin implies FCF will reach $57.8 billion. 

But to be conservative, let’s say that Meta Platform's FCF margin floats down to 35%. That would lower its estimated FCF to $54.25 billion by 2023.

Valuing Meta Platform's Stock

Next, we can assume the market will value FB stock using a  metric called FCF yield. If we use a 5% FCF yield to value the stock, that is the same as a price-to-FCF (P/FCF) multiple of 20x (i.e., 1 divided by 0.05 = 20.) That means if we multiply its projected FCF of $54.25 billion by 20x, the target market capitalization will work out to $1.085 trillion. That is more than 75% higher than Meta’s present $618 billion market cap.

In other words, FB stock is still worth 1.7557 times $228.70, its price as of March 30. That works out to a target price of $401.53. That shows the potential upside in FB stock.

What To Do With FB Stock

The problem going forward is that FB stock might not go up on a straight path to this target price. For example, after the upcoming Q1 earnings report, there could be another leg down in the stock.

The reason is investors might be alarmed if Meta Platform's quarterly DAUs are lower than last year again. Remember the DAUs were down only 0.05% in Q4. So even small moves in these metrics can stoke huge downdrafts in the stock. 

Here is what shareholders should do if that happens. Check to make sure that FCF is not negative, which it almost certainly will not be. In fact, I suspect FCF will continue to grow. The market may ignore this. This is what will help the company weather these difficult periods. It will show that despite losing viewers, it may just be that Facebook's current product line is mature. So what? The company is still extraordinarily profitable.

So, investors should look for some interesting buying opportunities over the next several months. Based on the analysis we showed above, you know its implied value is much higher. The market might not care. That is where value investors shine. They know how to be patient and accumulate value stocks when they go on sale.

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This is not financial advice and you should not rely on my analysis to buy or sell any stock. I am not undertaking to induce you to buy or sell any securities.

I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

Mark Hake writes articles on InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com on stocks and cryptos.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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