Meta Platforms' High Free Cash Flow Yield Contributes To My Buy Rating
Summary
- At the current stock price, Meta Platforms has a Free Cash Flow Yield [TTM] of 7.29%, currently making it a less risky investment than in previous years.
- Meta Platforms' current stock price is no longer based on high growth expectations.
- Additionally, Meta Platforms has a P/E [FWD] Ratio of only 17.37, which is 31.61% below its average of the last 5 years (25.40).
- While assuming a Revenue and EBIT Growth Rate of only 5% for Meta Platforms for the next 5 years, my DCF Model calculates a fair value of $203.13.
- The fair value of $203.13 according to my DCF Model, results in an upside of 13.80% for Meta Platforms, showing that the company is currently an attractive buy.
Fritz Jorgensen
Investment Thesis
- The Seeking Alpha Quant Ranking shows attractive results for Meta Platforms (NASDAQ:META): the company is ranked 9th (out of 62) within the Interactive Media and Services Industry and 71st (out of 251) within the Communication Services Sector.
- My DCF Model as well as Relative Valuation Models (such as the P/E Ratio) show that Meta Platforms is currently undervalued. Its current Free Cash Flow Yield [TTM] of 7.29% is relatively high and shows us that the company's current stock price is not based on high growth expectations like it was in the past. This indicates that Meta Platforms is now a less risky investment.
- I rate Meta Platforms as a buy: the company has strong competitive advantages (such as its brand image, and the presence of its own ecosystem by integrating some of the world's most used communication platforms like Facebook, Messenger, Instagram and WhatsApp), a relatively high Free Cash Flow Yield of 7.29%, high profitability (EBIT-margin of 33.41%) and strong financials (with a Moody's credit rating of A1).
Meta Platforms' Business Model and Competitive Advantages
Meta Platforms aims to build technologies that help people to connect, to find communities and to grow businesses. With Facebook, Instagram and WhatsApp, it connects people all around the world.
Meta Platforms distinguishes between two business segments: Family of Apps [FOA] and Reality Labs [RL]. While the business unit FoA includes Facebook, Instagram, Messenger, WhatsApp, and other services. RL includes augmented and virtual reality related consumer hardware, software, and content.
In 2Q22 Meta Platforms generated a total revenue of $28,822 million. 98.43% ($28,370 million) of this total revenue was generated within the FoA business unit. Overall, Meta Platforms derives 97.67% of its revenue from advertising. These figures prove that the company is even more dependent on advertising than its competitor Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), which generates about 80% of its revenues from advertising, as shown in my previous analysis.
Meta Platforms' high EBIT margin of 33.41% is an expression of the enormously strong market position the company holds in the Interactive Media and Services Industry. A Return on Equity of 25.48% shows that the company efficiently uses its shareholders' equity in order to generate income.
Meta Platforms has managed to successfully build a strong brand image: according to Brand Finance, Facebook is ranked as the 7th most valuable brand in the world with an estimated value of $101,201M.
The company has managed to build its own ecosystem through the integration of some of the world's most popular communication platforms: Facebook, Instagram, Messenger and WhatsApp. Meta Platforms revealed in its 2Q22 report that Facebook alone had an average of 1.97 billion daily active users in June 2022, demonstrating the enormous global usage of just one of its platforms.
All these factors contribute to the fact that Meta Platforms has strong advantages over its competitors and therefore contributes to my buy rating on its stock.
Overview: Meta Platforms
Meta Platforms | |
Sector | Communication Services |
Industry | Interactive Media and Services |
Market Cap | $449.12B |
Employees | 83,553 |
Revenue [TTM] | $119.41B |
Operating Income | $39.89B |
Revenue 3 Year [CAGR] | 24.02% |
Revenue 5 Year [CAGR] | 29.20% |
Gross Profit Margin | 80.47% |
EBIT Margin | 33.41% |
Return on Equity | 25.48% |
Free Cash Flow Yield | 7.7% |
Dividend Yield | 0% |
Source: Seeking Alpha
Meta Platforms' Valuation
Discounted Cash Flow [DCF]-Model
In terms of valuation, I have used the DCF Model to determine the intrinsic value of Meta Platforms. The method calculates a fair value of $203.13. The current stock price is $178.48, which results in an upside of 13.80%.
Meta Platforms' Average Revenue Growth [CAGR] Rate of the last 3 years is 24.02%. I have made much more conservative assumptions for my DCF Model by assuming a Revenue and EBIT Growth Rate of 5% for the company over the next 5 years. Furthermore, I assume a Perpetual Growth Rate of 3%, which is the United States' Average GDP Growth Rate. I have used Meta Platforms' current discount rate [WACC] of 7.75% and Tax Rate of 16.7%. Furthermore, I used an EV/EBITDA Multiple of 8.7x, which is the company's latest twelve months EV/EBITDA.
Based on the above, I calculated the following results:
Market Value vs. Intrinsic Value:
Market Value | $178.48 |
Upside | 13.80% |
Intrinsic Value | $203.13 |
Source: The Author
Relative Valuation Models
Meta Platforms' P/E [FWD] Ratio
Meta Platforms' P/E Ratio is 17.37, which is 31.61% below its average of the last 5 years (25.40), thus providing an indicator that the company is undervalued.
Meta Platforms' Free Cash Flow Yield
Meta Platforms currently shows a Free Cash Flow Yield [TTM] of $13.02. At the company's current stock price of $178.48, this results in a Free Cash Flow Yield of 7.29%. This means that in theory, Meta Platforms would be able to pay a dividend of 7.29%.
I also interpret this high Free Cash Flow Yield to mean that the current stock price of Meta Platforms is no longer based on high growth expectations. This theory is also confirmed by my DCF model, which shows an upside potential of 13.80%. I've made conservative assumptions regarding the company's Revenue and EBIT Growth Rate, assuming both to be 5% for the next 5 years.
This also leads me to the conclusion that investing in Meta Platforms is currently less risky than it was in the past when the company showed higher P/E Ratios. This means that an investor can currently invest with a higher margin of safety. Furthermore, these interpretations of the current Free Cash Flow Yield of Meta Platforms contribute to my current buy rating on the company's stock.
Meta Platforms According to the Seeking Alpha Factor Grades
According to Seeking Alpha's Factor Grades, Meta Platforms is rated with a C- in terms of Valuation. For Growth, it gets a D- rating. In terms of profitability, Meta Platforms is rated with an A+. The company receives a rating of D+ for Momentum, and a C for Revisions.
Source: Seeking Alpha
Meta Platforms According to the Seeking Alpha Quant Ranking
The Seeking Alpha Quant Ranking places Meta Platforms 9th (out of 62) within the Interactive Media and Services Industry and 71st (out of 251) within the Communication Services Sector. In the Overall Ranking, Meta Platforms is placed 1589 out of 4660.
Source: Seeking Alpha
Meta Platforms relatively attractive rating as according to the Seeking Alpha Quant Ranking, strengthens my belief that the company is currently a buy.
Meta Platforms According to the Seeking Alpha Quant Rating
According to the Seeking Alpha Quant Rating, Meta Platforms is rated as a hold.
Source: Seeking Alpha
Meta Platforms According to the Seeking Alpha Ratings Summary
According to the Seeking Alpha Authors and the Wall Street, Meta Platforms is rated as a buy, which underlines my own rating for the company's stock.
Source: Seeking Alpha
Risk Factors
One of the biggest risk factors I see regarding an investment in Meta Platforms is that the company derives almost 98% of its revenue from advertising in Facebook and Instagram. As a result, the company is particularly dependent on its advertising revenue and even more so than, for example, its competitor Alphabet. Alphabet derives about 80% of its revenue from advertising, as I showed in my analysis on the company. The loss of marketers as well as a reduction in customer spending on marketing would significantly impact the company's business results and thus result in declining profit margins.
Additionally, customers don't generally have long-term advertising commitments with Meta Platforms and many of them spend only a relatively small portion of their overall advertising budget with the company. This could result in them deciding to reduce their advertising expenditure over the short term, which would significantly harm Meta Platforms' business results.
Another risk factor I see when investing in Meta Platforms is the effect that data privacy will continue to have on the revenue of the company. Proof of this is the fact that Alphabet announced new privacy restrictions in February this year, which cut tracking across apps on its Android devices. In doing so, they follow a similar move to their competitor Apple (NASDAQ:AAPL) which resulted in a decrease of Meta Platforms' revenue by about $10 billion.
Due to the risk factors mentioned in this analysis, I would recommend not to overweight the Meta Platforms position in your investment portfolio.
The Bottom Line
Meta Platforms currently high Free Cash Flow Yield [TTM] of 7.29% shows that the price of the stock is no longer based on high growth expectations. It's also a further indicator that an investment in Meta Platforms can be considered less risky as compared to previous years when its valuation was higher; Meta Platforms' P/E Ratio is currently 17.37, which is 31.61% below its average of the last 5 years (25.40).
My DCF Model, for which I used a Revenue and EBIT Growth Rate of 5%, shows an upside of 13.80% for Meta Platforms. This is yet another indicator that the stock price is not based on high growth expectations. In my opinion, this also shows Meta Platforms to be a less risky investment than in previous years; allowing one to invest in the company with a significant margin of safety.
Meta Platforms has strong competitive advantages over its rivals: the company has a strong brand image, has been able to create its own ecosystem by integrating some of the world's most used communication-platforms such as Facebook, Messenger, Instagram and WhatsApp, it has high financial strength (proved by Moody's credit rating of A1) and a high cash position ($40,489 million in Total Cash & ST Investments).
Meta Platforms ranking, according to the Seeking Alpha Quant Ranking, underlines the company's strong market position within its sector: Meta Platforms is ranked 9th (out of 62) within the Interactive Media and Services Industry and 71st (out of 251) within the Communication Services Sector.
All these are indicators that strengthen my belief that Meta Platforms is currently a buy.
I have already analysed a number of companies from the technology sector. Here you can find my analyses on Alphabet and Apple:
Alphabet: Very Attractive In All Categories Of The HQC Scorecard - Strong Buy
Apple: Highly Attractive According To The HQC Scorecard And Currently A Buy
Author's Note:
Thank you very much for reading! If you have any questions regarding this analysis, feel free to leave a comment below! I'm happy to discuss your thoughts on Meta Platforms.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of META, GOOG, AAPL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (4)
FCF Q1'22 = 8,528M
FCF Q2'22 = 4,450M (high capex)Interested in your take on it.
