Meta: Attractive Valuation

Aug. 13, 2022 3:00 AM ETMeta Platforms, Inc. (META)28 Comments
Tom White profile picture
Tom White
699 Followers

Summary

  • At 13 times earnings (fiscal year-end 2021), Meta's stock is trading at a discount relative to its long-term growth prospects.
  • Authorized stock buybacks should boost returns by 10%.
  • Target Price: $451 per share.

Meta logo is shown on a device screen

Fritz Jorgensen

Meta Platforms (NASDAQ:META) (formerly Facebook) has been experiencing some headwinds of late as a result of weakening advertising demand and foreign currency exchange rates. This has led to Meta's net income declining 29% for the first six months of its fiscal year. With the stock trading close to its 52-week low, it provides long-term investors with an opportunity to buy the stock at an attractive valuation. Yet, despite the challenges the company faces, it continues to grow its user base and engagement across its family of apps.

Meta Stock Chart

Google Finance

Analysis

Buy Rating: I have a Buy rating for Meta's stock with a five-year target price of $451 per share.

In my analysis of Meta stock, I believe the company can continue to grow its revenue long term with a 20% growth rate. This is a conservative estimate relative to the 33% growth rate the company has seen in the last five years. Albeit, we are in a new phase of the market with high inflation that is tempering growth moving forward.

With the company's ability to monetize user engagement into revenues, I am estimating that the company can continue to generate net margins in the high 20s to low 30s. For purposes of this analysis, I will use a 28% net margin moving forward.

In terms of valuation, I am estimating that Meta's stock will eventually trade on par with the overall market, which currently stands at 17. As the overall market recovers, I expect Meta's stock's price-to-earnings ratio (P/E) to expand as well. Lastly, the company has an additional $24 billion authorized for their share repurchase program. At current prices, I estimate that Meta's outstanding shares will decrease by 136 million shares. This will ultimately have an effect of boosting returns to investors by an additional 10%.

Below is a table contrasting the company's current metrics (as of the end of its last fiscal year) and stock price to the 5-year estimate:

Meta Platforms

Current* (as of 8/11/22)

5-Year Estimate

Revenue (in millions)

$117,930

$244,538

Net Margin (%)

33.384%

28.16%

Net Income (in millions)

$39,370

$68,862

# Outstanding Shares

2,859,000,000

2,592,000,000

Net Income per Share

$13.77 per share

$26.57 per share

Price/Earnings (PE) Ratio

13

17

Stock Price

$177.49

$451

Source of company metrics: Morningstar, Meta Platforms

*Current metrics based on fiscal year end 2021

How to Read the Table

The table above shows the metrics I use in calculating the stock's future target price. Taking the most recent year end revenues in millions ($117,930) and multiplying it by the estimated growth rate (in this instance 20%) over five years, you get the estimated revenues five years out of $244,538 (in millions).

You then multiply the revenue five years out with the estimated net margin (28.16% for Meta in 2026) to arrive at the net income of $68,862 (in millions). Divide the net income by the number of outstanding shares (2,592,000,000), and you arrive at the estimated net income per share of $26.57.

To get the estimated share price in 5 years, multiply the net income per share ($26.57) by the estimated P/E (17) in 5 years. This results in a share price of $451. At its current price of $177.49, and a five year estimated price of $451 per share, Meta's stock could potentially return 154% in five years or an average annual return of 30.8%.

Author's Note

As a long-term investor, I provide a 5-year price target. In identifying a stock for a Buy rating, I look for stocks that can double in price within 5 years. This would produce close to a 20% annual return which would still exceed the market's long-term average annual return of 8.91%.

When estimating a target price in the future, I try to be as transparent as possible in the methodology and metrics I use in my analysis and research to gain the reader's confidence in my conclusions. This is a methodology that I have successfully used for over 25 years as an investment adviser and portfolio manager through the bull market of the 1990s, the dotcom bubble, the credit crisis of 2008-2009 and more recently through the Great Resignation.

This article was written by

Tom White profile picture
699 Followers
Tom White is an investor and entrepreneur with over 25 years experience. He is a retired investment manager, and was formerly Principal of CAP Partners, LLC, a wealth management firm that he founded and sold. Tom has over 25 years experience in the investment management industry having successfully managed money through the dot com bubble of 2000-2002 and through the credit crisis of 2008-2009. He received his Bachelor’s degree from Loyola Marymount University in Los Angeles. He is a Fulbright-Hays scholar.

Disclosure: I/we have a beneficial long position in the shares of META 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.

Additional disclosure: *Disclosures: Author is not providing investment advice via this report. This report is not a solicitation to the reader to purchase or sell this stock. Author does not guarantee any returns. The 5-year estimate in this report is an estimation based on proprietary methodologies and is not guaranteed. Reader should consult a financial advisor before making any trades related to this stock. Readers of this report attest that they rely on their own conclusions with respect to any actions (buy, sell or hold) they take regarding this stock.

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