META, Will the Rollercoaster Extend even Further?

+ 127% YTD

- 14% from all-time high

Looks like a crypto or very low cap company, doesn’t it?

Luckily for us it is not. I’m dedicating this post to Meta Platforms Inc. , sometimes dubbed as the phoenix.

Ready to ride? Let’s go.

After losing more than 60% of its capitalization during 2022, this company posted a triple digit performance YTD (year-to-date).

On July 6th it launched Threads (the notorious rival to Twitter) which was the fastest-growing app ever (106M users in 5 days). The tangible impact of that? Meta CEO said: 

Second Quarter 2023 results were encouraging:

• Revenue + 11% Y-o-Y to $32.0 billion,

• Net Income + 12% Y-o-Y to $ 7.8 billion,

• Diluted EPS + 20% Y-o-Y to $2.98 thanks to buybacks of $793 million of Class A common stock (with $40.9 billion available for more repurchase [when the price will be appropriate, ed.]).

• FCF was $10.96 billion in Q2-2023 (with $53.45 billion in cash, cash equivalents, and marketable securities and “only” $18.38 billion in long-term debt

• Both monthly and daily active user/people increased during the quarter around 6% across the “Family of Apps” and around 4% for Facebook alone.

• Of note: ad impressions delivered across Family of Apps increased by 34% year-over-year and the average price per ad decreased by 16% Y-over-Y.

The stock has “momentum” (for what it’s worth) since it beat expectations for two quarters in a row and more than 40 analysts upgraded their estimates for the year.

The company's balance sheet remains solid (current ratio 2.33x; total debt/equity 27.6%).

The management team is laser focused on harmoniously mixing growth and innovation (AI, Reels) with cost-cutting and profitability (user retention, ad impressions).

Risk factors remain the same, essentially acceptable, three: cybersecurity; ESG risk (ethical questions on data usage and content moderation) and competition for ad space (GOOGL , SNAP etc…).

Now turning to a more sensitive point: valuation.

Standard metrics are not encouraging: forward P/E of 40 is higher than peers but lower (hence more valuable) PEG ratio of 1.13x .

I’d like to use the DCF (Discounted Cash Flow) method to better estimate true value.

I chose to use different data for the starting value of annual FCF ranging from $38.4 billion (as reported in FY2021) to $11.6 billion (as reported in FY2016) (Figure 1).

Figure 1 - META yearly FCF (free cash flow), Author's work. Source: SEC filings.

In the graph below you can spot the 5 different scenarios I computed with the relative multiple used (Figure 2).

Figure 2 - Author's work, DCF (Discounted Cash Flow).

The resulting number is Enterprise Value (EV) which I found to be very useful as it accounts also for Debt and additional info otherwise neglected. EV gives the aggregate value of a firm as an enterprise.

All data used are publicly available from SEC filings and Meta investor relations website.

Here are the resulting estimated EV and the delta from current EV (of $712 billion):

• bullish (28.3% growth for next 5y) → upward potential of 165%

• neutral (26% growth for next 5y) → almost at target

• average (22.6% growth for next 5y) → OVERvalued by 30%

• recession (20% growth for next 5y) → OVERvalued by 62%

• depression (16% growth for next 5y) → OVERvalued by 82%

As you can see the downside risk is quite limited to the same amount of upside potential, that’s to say that we have an almost balanced risk-return investment curve, slightly tilted toward the reward (+165% for the euphoric scenario vs. -84% for the depression scenario).

I will open a position with around 1% of AUM, with caution.

(adapted from eToro post of 08/21/2023)

Disclosure: I/we are long META and GOOG/GOOGL.

Disclaimer:  I am not a financial advisor or registered investment advisor. The information contained in this article is for informational purposes only and should not be construed as financial advice. Past performance is not a guarantee of future results. You should always conduct your own research before making any investment decisions.