Meta Platforms (FB): Severely undervalued and expected to beat EPS

Hello fellow investors! I’m going to share with you my opinion about $FB (Meta Platforms) formerly known as Facebook as well as go through their financials, do a fundamental analysis and set some price targets for this stock after the stock has been caught in the recent market turmoil!

~Tl;dr~ $FB (Meta Platforms) Is a Strong Buy Right Now

Meta is one of the biggest technology companies in the world that owns platforms like Facebook, Messenger, Instagram, WhatsApp, Oculus & many other products & services.

My thoughts regarding the change of name are pretty mixed as it’s obvious the company is trying to get away from the past scandals and whistleblowers & focus more towards the future as they are trying to lead the way into the “Metaverse” which has been one of the hottest topics of investing in recent times.

It’s always important to take a look at the competition of a company but in this regard, Meta, stands out for sure as the leader of social platforms, taking 4 of the top 5 spots as recently as the end of 2023 with YouTube being the only other platform competing with the likes of Facebook, WhatsApp, Instagram & Messenger, though TikTok is making a really big push in the past couple of years, with the short-form videos being very hot right now, while other names like Twitter & Snap are also trying to compete with these giants for every digital advertising dollar out there.

The MOAT of this company in my opinion is huge as they are far & away leading the pack with over 7 and a half billion monthly active users on their platforms dwarfing away any competition

Though the Total addressable market for the platforms that Meta owns is reaching a saturation point, especially in the more developed parts of the World like the US, Canada & Europe, the company still has room to grow in the lesser developed countries, though these countries will bring on lower margins as the ad revenue/user in these countries is far lower compared to the more developed markets.

Until now the company hasn’t detailed that much their revenues & earnings report that much, but following next week more details will be included in their earnings report with the company splitting their revenue & operating income in two segments, the family of apps which includes Facebook, Instagram, Messenger, WhatsApp & other related services and on the other hand, a new reality Labs segment including its augmented reality hardware, services & other related content, but for now, last quarter, Meta reported that the Facebook platform continued to grow, gaining around 15 million monthly active users, with most of those coming from the Asia-Pacific region, though both the US & Canada region & Europe gained a couple of million each.

Meta has also managed to significantly increase their revenues in the past year, with more $29B in the last quarter, compared to just $21.5B in 2020 for the same quarter, and in my opinion, I expect Meta to continue to grow their revenues, especially as more & more advertising dollars will become available once people start traveling more, as those ad revenues are one of the biggest ones for Meta.

On the other hand, despite seeing a slight decrease in their net income in the past quarters, this has been mostly due to the huge investments that Meta is doing to develop more & more products & services as they are trying to become the leader in the “Metaverse”. As the company is expected to spend $40B in the next years on developing their “Metaverse” services & products.

So, alongside the huge Total addressable market for digital advertising & media of over $700B, Meta will also try to be one of the leaders of the metaverse, by spending somewhere in the range of at least $10B/year, which does significantly impact the current net income.

The balance sheet of this company is outrageously good with almost $170B in total assets and only $36B in Total liabilities, as the company can effectively pay all their liabilities right now as their current assets stand at over $75B.

It’s also very nice that Meta has started to buy back shares in the last couple of years and even accelerated this trend as is due to buy back at least $57B worth of shares as per their latest share repurchase program.

Meta reported a net income of almost $9.2B for the last quarter and a hair over $29B for the last 3 quarters, which is more than 45% year/year.

$FB – Google Spreadsheet Valuation Link HERE

I expect to see a continued growth for Meta Platforms, though I expect this to be a period of slowing down revenue growth, especially until the company manages to create something new either with their old platforms that haven’t been yet monetized to their fullest extent or with more & more revenue coming from the “Metaverse” pipeline of products.

I also expect their margins to remain pretty stable, at around 38% until they start cutting down on their spending on developing new services & products, especially related to the “metaverse”.

The capital expenditures of the company should continue to grow at a pretty high rate as well, while their other income & expenses should be pretty insignificant.

Finally the stock should continue to pay an effective tax rate lower than the standard 21% which is very likely to remain at this level as the US should be gridlocked for the next couple of years at least, though for safety reasons, I will slowly increase the Effective tax rate in the spreadsheet by half of a percent each year, while I also include a share buyback of 2% year to be conservative, as the current share repurchase program should account for about 190million shares at the current price levels.

On the other hand, if you are a dividend kind of investors, you will be disappointed as Meta doesn’t pay a dividend and I don’t expect them to pay any dividends anytime soon, as the company focuses on growing and buying back shares as the preferred equity return to investors.

After all of this boring stuff probably for most of you, but which I believe to be very important to evaluate a company, I believe we will see $33.21 earnings / share by 2026 from Meta, which would mean, I expect this company to trade anywhere from $664 to $913 depending on their PE multiple.

The other side of fundamental analysis that I like to take a look at, is the discounted cash flow model, so let’s also check that out for Meta.

I will base this DCF template on the same 38% operating margin, which means Meta will earn just over $83B after tax by 2026. I will also add back the Depreciation & Amortization of just over $12.5B which would mean a relatively small 10% increase while taking out over $143B in capex in the next 5 years and discounting those by a 12% rate which I believe is pretty fair, given an 8% annual return for the SP500 and a much higher than current 4% risk free rate, thus, Meta will produce just over $160B in free cash flows by 2026.

To these free cash flows we also have to add or subtract the net assets or debt of the company which in this case stand at just over $114B in net assets.

I will also combine both the perpetuity approach with a 4% long term growth rate, as I don’t expect Meta to stop growing after 2026 and the EBITDA exit multiple approach with a 20 times multiple which is pretty standard for tech company historically.

And though the company is slightly overvalued based on the growth in perpetuity approach, the company is substantially undervalued based on the EBITDA approach. And that’s why an average of these 2 usually works the best, and based on that Meta should be a buy anywhere under $450 if you want to earn yourself at least a 12% return by 2026.

I don’t usually look at other analyst’s price targets & estimates, but whenever I finish doing a fundamental analysis, I find it interesting to check out how my expectations compare to Wall St. Analysts.

In this case I’m slightly more bullish on this company with the average analyst expecting just $25.5 in earnings per share by 2026 on a $235B revenue.

On the other hand, TipRank’s analysts have an average price target of over $400 for the next 12 months which is 10% lower than what I expect the stock to trade at by the end of the year.

For investors and for me to keep a level head approach it’s usually good to also take a look at weaknesses or possible weaknesses for a company, and in my opinion, Meta’s biggest weaknesses are its anti-trust issues with social media platforms being more & more targeted, while on the competition side, TikTok & YouTube could pose a threat for time spent by people on their apps.

The other big weakness related to Meta could be Apple’s new privacy policies and their IDFA that will have an impact on ad revenues for companies like Meta, though I believe, this impact shouldn’t be critical, as the average revenue per user, has continued to increase steadily over the last decade.

Other things like short-selling aren’t a problem for Meta, with just over 1% of the stock being shorted.

On the other hand, though I like a founder-led company usually, Mark has been a very unpopular person recently, though his ideas regarding the metaverse and everything else might just pay off in the long run.

A great added bonus to this stock is that it’s more than 80% owned by Institutions with names like Vanguard, Blackrock & others owning huge pieces of the company, which should bring long-term price stability, despite the recent sell-off in the markets, which has affected almost all companies.

Meta has also popped up in the news lately, with the company building an AI that could become the fasted in the world by the end of the year, which is extremely impressive given than many other big names are also building supercomputers for more & more advanced AI’s. So, I really expect Meta to remain a leader in the tech industry alongside other big names like Microsoft, Apple & others.

Finally, before I share with you my final opinion, I think we should stay aware of the earnings report coming up next week, as I might adjust the Price targets if something big changes.

My opinion is that Meta is one of the best names to buy out there right now, especially after the recent market sell-off. And based on my simple algorithm, Meta has a score of 9.28 out of 10 and I expect the stock to trade towards the $450 in the next 12-18 months, with a base case price target of $788 by 2026, giving us an annualized return in excess of 21%.

This article was written by u/0toHeroInvesting.