With a P/E ratio of just 15X, Meta Platforms (NASDAQ:META) is the original FAANG group of stocks’ most undervalued technology stock. Although the advertising sector is experiencing a sharp downturn, Facebook’s significant reach and influence in the industry could result in a growth recovery over the upcoming year. Although the social media company’s revenue growth has slowed in FY 2022, I think Meta stock is fundamentally undervalued and has a reasonable value of roughly $300. I think the risk profile for long-term investors is substantially skewed to the upside because Meta stock is so inexpensive.
Value of Meta Platforms
The unmatched reach of Meta Platforms’ Facebook platform is where its actual value rests. Meta Platforms had 1,968 million daily log-in users in the second quarter, a 3% increase over the previous quarter. Although the platform saw some user losses in Q4 2021, the long-term trend is upward, and Meta Platforms is again expanding.
For better or worse, Facebook has repeatedly been rated as the (non-Chinese) social media site with the broadest reach, far surpassing competitors like YouTube and Snapchat.
For obvious reasons, platforms with the greatest reach and engagement will continue to be the most alluring sites for marketers to invest their advertising expenditures. These platforms promise the best return on investment for advertisers. Although the advertising sector is currently experiencing a downturn threatening the company’s short-term income prospects, Meta Platforms will continue to generate a vast majority of its revenues from its ad business. Only 2% of Meta Platforms’ Q2 2022 revenues came from other services, such as the metaverse, and 98% came from advertising. Facebook’s metaverse opportunity was covered in this article.
Facebook alone generated $114.9 billion in advertising revenue in FY 2021, representing a revenue share of 97.5%. The platform also produced a staggering $38.4 billion in free cash flow, translating to an FCF margin of 32.6%. The decline in the advertising industry and more significant investments in the metaverse possibility caused Meta Platforms’ free cash flow to fall to just $4.5billion in the second quarter. Meta Platforms has produced $13.0 billion in free cash flow this year, translating to a still respectable FCF margin of 22.9%.
Estimates Show That Top Line Growth Will Return in FY 2023
Estimates for Meta Platforms’ FY 2022 and FY 2023 have trended lower due to challenges in the advertising industry and a strong USD. Meta Platforms projected third-quarter revenues of $26.0-28.5 billion, indicating the possibility of a top-line decline of up to 10% from quarter to quarter. The annual revenue forecasts for Meta have undergone 47 downward revisions and 0 upward revisions in the previous 90 days, partially due to this guidance. Although top-line growth is anticipated to return the following year, the revenue forecast for FY 2022 ($118.2 billion) suggests a 0% year-over-year revenue increase. According to estimates, overall revenues would reach $131.2 billion in FY 2023, up 11% from the previous year.
Meta Stock Is Very Cheap
Given the company’s great potential for free cash flow and its considerable power in the digital advertising market, Meta stock presently trades at a forward P/E ratio of 15X, which is incredibly low. With a P/E ratio of 15X, Meta Platforms is also the least expensive FAANG stock.
Meta Platforms is anticipated to report earnings per share of $9.80 in FY 2022 and $11.12 in FY 2023. As a result of the sharp decline in Meta stock price over the past year, the stock is currently trading at a significant discount to its 1-year average P/E (23.4X) and P/FCF (19.1X) ratios. Shares of Meta might increase up to $260, or 54%, if they were to trade at the average P/E ratio of the previous year. Meta stock may rise to $245, or 45% if it could just manage to trade at the average P/FCF ratio of the previous year.
Stock Repurchase
The strength of Meta Platforms’ FCF, the company’s declining core business, and its low stock price could result in a significant share repurchase, which I think would be a wise use of capital. Meta repurchased $5.1 billion and $9.4 billion worth of its common stock in the second and first quarters. At the conclusion of Q2 2022, Meta Platforms’ authorized stock buyback amount was roughly $24.3 billion. Meta Platforms has aggressively repurchased stock throughout time. Stock buybacks have never made more sense than they do now because Meta Platforms’ business prospects are trading at a reduced rate.
The main issue facing Meta Platforms is big advertisers’ ad spending slowing down. The value proposition of Meta, with close to 2 billion daily active users, is in its unmatched reach. Hence, I think the slowdown is temporary as consumers will continue using social media platforms. Additionally, estimates show that the economic downturn is only temporary.
However, Meta Platforms would experience a more severe decline in revenues and free cash flow if the social media company lost more subscribers to competing platforms like TikTok or whole new social media start-ups. What would make me reconsider Meta stock is if the business significantly downgraded its forecast for Q4 revenues in late October and saw a material decline in free cash flow margins.
Meta Stock Is a Buy
The market is incorrect in valuing Meta stock at merely a 15X P/E ratio. Given the platform’s free cash flow and the value the social media firm still offers advertisers, I think the price of Meta stock is too low. According to revenue projections for the upcoming year, Meta Platforms is expected to experience an excellent return in top-line growth.
The value of Meta Platforms comes from its reach, free cash flow, and potential for stock buybacks, which could increase now that shares are so cheap. In my opinion, meta stock has the greatest potential for a rebound out of all the FAANG stocks.
Featured Image – Megapixl © Alexandersikov
