Meta Platforms Inc's (META, Financial) stock looks too cheap at curent levels. Even though its market cap is worth almost $1.30 trillion at the time of writing, its powerful free cash flow could make it worth substantially more.
This analysis will show how that works out, including a price target based on its FCF margins, analysts' revenue estimates and using a FCF yield metric to value the company.
However, one of the best reasons that Meta is attracting value investors is its return of capital to shareholders.
Meta's shareholder yield is attractive
Meta is now paying a dividend, having declared its first-ever dividend with its Feb. 1 release of 2023 earnings. This helped push the stock over 40.60% year to date when it closed at $497.37 per share on April 2, up from $353.58 at the end of 2023.
This dividend is easily affordable for the social media giant. It will cost only $5.10 billion annually (i.e., $2 dividend per share x 2.492 billion shares outstanding). That is only 10% or so of the estimated adjusted FCF of $48 billion this year.
And since Meta also bought back almost $20 billion worth of its shares in the market last year, total returns to shareholders are now over $25 billion. That provides a good shareholder yield of 2%, of which 0.40% comes from the dividend and 1.60% is from buybacks.
Source: Hake estimates
This helps put the stock in the same league as some of its peers. For example, Alphabet Inc. (GOOG, Financial) does not yet pay a dividend. However, it spent $62 billion on share repurchases in 2023. That represented 3.20% of its $1.93 trillion market capitalization at the time of writing.
However, Microsoft (MSFT, Financial) has spent just $20.40 billion on dividends and $20.70 billion on buybacks in the last 12 months ending December, according to GuruFocus financial data. In total, that $41.10 billion in shareholder returns represents just 1.32% of its market cap.
So Meta's 2% shareholder yield, including its dividend and buybacks, looks reasonable and could even grow higher as its free cash flow rises.
Meta's basic growth is solid
The company's basis metrics have been doing quite well. Monthly average users have climbed consistently in the last three years by 6.40% annually on a compound average growth rate basis. And this has led to a revenue CAGR of 16.20% in the last three years.
In fact, the total Facebook plus Instagram and What's App MAU figures are now almost 4 billion as of fourth-quarter 2023. At this pace in the next years, its “family” or group of products MAU figures could reach almost 5 billion by sometime in mid-2026.
And revenue, using a survey of 57 analysts, could rise 17.50% this year to $158.50 billion and 12.50% to $178 billion in 2025. That works out to a three-year CAGR of 10% this year and over 15% by the end of 2025.
Meta's free cash flow is strong and growing
Moreover, last year, Meta Platforms generated $43 billion in free cash flow. That means this is the cash the company generated after all its operating cash expenses, including working capital changes and capital expenditure spending.
The company calculates its free cash flow by deducting from operating cash flow both its capex spend as well as principal payments on its finance leases. This slightly lowers its FCF figures, but it provides a useful way to forecast the company's FCF going forward.
In the past five years, Meta's revenue has almost doubled from $69.70 billion in 2019 to $134.90 billion in 2023. This has been driven by its consistent MAU growth.
As a result, analysts now project revenue could rise by over 32%, or almost one-third, by the end of 2025. That will lead to much higher adjusted free cash flow, as seen in the chart below.
This shows the company's adjusted free cash flow margins have now recovered from the post-Covid low of 15.80% in 2022 to almost 31.90% in 2023. Moreover, based on company guidance, it is likely its FCF margin will stay over 30% in both 2024 and 2025.
For example, management told analysts in the earnings call that its capex spending will be in the range of $30 billion to $37 billion.
So using a $35 billion estimate and also its operating cash flow margin of roughly 53%, its adjusted FCF will be $48 billion this year, up 11.60% from last year's $43 billion in adjusted free cash flow.
This calculation can be seen in the table below. It is based on analysts' revenue forecasts, a 53% operating cash flow margin, a 30% increase in 2024 capex spending over 2023 (from $27 billion to $35 billion) and a deduction of lease principal payments.
The net result is that by 2025 Meta may be generating $55 billion in adjusted FCF, a 28% rise over 2023.
Price targets
As a result of this strong FCF forecast, a much higher price target can be set. For example, assuming the company was to pay out 100% of its FCF as a dividend, its dividend yield is likely to be around 3%. This, in fact, is higher than its existing 2% shareholder yield, as shown earlier in this discussion, so it is a conservative estimate
It is also the same as multiplying Meta's adjusted FCF by 33.30 times since 3% is the inverse of a 33.30 multiple. The table below shows how this works out.
The bottom line is Meta stock could be worth $1.60 trillion by the end of 2024 and $1.83 trillion by 2025 using these metrics.
That implies that currently the stock is at least 26% undervalued at the time of writing, compared to its $1.26 trillion market cap. The price target is about $627 per share this year and $719 next year.
This is significantly higher than most other analysts. For example, AnaChart.com, a new sell-side analyst tracking service, shows the average price target of 46 analysts today is $542.13 per share. That is only 10% above today's price. However, the highest target of $575 per share is close to our price target of $627 per share based on its free cash flow margins and FCF yield.
The bottom line is that Meta looks undervalued, given its consistent MAU and revenue growth, even after much capex spending is factored in. The company's powerful FCF is likely to continue to surprise the market and push its underlying value much higher.
