Meta Platforms, Inc. (NASDAQ:META) is positioned for a potential 34% surge to $473 per share, driven by its robust free cash flow (FCF) and impressive 40% FCF margins. Investors looking to capitalize on this upward potential can consider shorting out-of-the-money (OTM) puts to generate additional income.
Previously, we recommended shorting the $325 put option for a $3.70 premium, resulting in a 1.139% immediate yield for the short put seller. This trade, with a strike price of 3.39% OTM, proved successful. Now, it appears reasonable to replicate such a strategy.
The case for Meta’s stock appreciation is anchored in its formidable free cash flow. In the last quarter, the company generated an enormous $13.64 billion in FCF from $34.15 billion in revenue, translating to a remarkable 40% of incoming cash flow remaining unallocated. Meta Platforms doesn’t pay dividends, so this “free” cash flow holds significant value.
In 2024, analysts project Meta Platforms to generate $150.75 billion in revenue, implying over $60 billion in FCF based on a 40% margin. This substantial FCF, representing 6.66% of its $900 billion market cap, suggests a potential conservative valuation at a 5% FCF yield.
Using a 5% FCF yield to value META stock, its 2024 target market cap is estimated at $1,206 billion, indicating a 34% increase from its current $900 billion market cap. In practical terms, this implies a potential share price of $473.
Investors holding META stock can leverage this anticipated upside by shorting near-term expiry put options with strike prices below the spot price (OTM). For instance, the Jan. 26 expiration period option chain offers the $335 strike price puts with a $2.60 premium, yielding an immediate 0.776%.
Alternatively, more daring investors can consider shorting the $340 strike price puts, offering a higher premium and yield at $3.65/$340, or 1.07%. Both options provide a reasonable safety buffer below the spot price.
In summary, existing shareholders can anticipate a considerable increase in stock price ($473) based on Meta’s substantial free cash flow. While waiting for the stock to reach its target price, shorting OTM put options allows them to generate extra income.
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Author Faith Yakubu 
