Kevin Dietsch
Meta Platforms (NASDAQ:META) stock was the talk of the town this week, as Congress brought TikTok CEO Shou Chew before a hearing that may determine whether TikTok gets banned in the United States. Meta Platforms would be the obvious beneficiary of any U.S. TikTok ban, as it owns several apps that directly compete with TikTok–most notably Instagram.
As I watched the congressional TikTok hearing, I found my mind repeatedly wandering to Meta Platforms. META is a stock I’ve owned for some time. I started buying it at $250 several years ago; since then, I’ve bought it at prices higher and lower than that. Shortly after META started crashing in 2022 (it happened after the 4Q 2021 earnings release), I sold most of my shares, but I began buying them back after the fall to $160. My current META position is much smaller than it was at the peak, but I nevertheless continue watching the stock closely.
Having owned META for such a long time, it’s natural for me to ask:
“How much is this stock really worth now?”
I do not believe that Meta Platforms is worth (in fundamental terms) as much as it traded for in late 2021. Before Apple’s (AAPL) ATT policy and the rise of TikTok, Meta was routinely growing its revenue at 30% and its earnings even more than that. Today, Meta is barely growing the top line on a constant currency basis and is actually shrinking in U.S. dollar terms.
However, the stock has gotten so cheap at this point that I feel comfortable continuing to own it at today’s levels. Given today’s fundamentals, I think META has a fair value of about $250. I’ll probably sell at that level unless something big changes. In the ensuing paragraphs I’ll explain why that is the case.
Most of the Big Risks Have Materialized
One of the big reasons why I’m still a little bit bullish on META is because most of the big risks facing the company have materialized. Apple’s ATT policy was implemented. TikTok gained market share in the United States. The online advertising market softened.
Clearly, a correction from META’s all time high (about $380) was warranted. But the great thing is that most of the conceivable risks to Meta have already materialized. We know their effects, and as it turns out, these effects are mainly just causing a slowdown in the business, they are not existential threats.
Let’s take Apple’s ATT policy, for example. Meta CFO David Wehner said it would cost the company $10 billion a year, and subsequent earnings releases seemed to prove him right. The fall from 2021 levels was justified based on what happened. But was the fall to $100 justified? Is a price lower than $200 justified? That’s not immediately obvious. An asset does not need massive growth to have value. Fixed coupon bonds can be good buys, even though they don’t grow at all. If the market price is too low, they are worth it. Essentially, if the yield on an investment is greater than the treasury yield at the same risk level, it’s worth buying, even if it will never grow. That’s not to say that Meta can’t grow at all: the top line is still growing on a constant currency basis. Also, last quarter saw some positive free cash flow growth on a sequential basis. The point is, Meta might not need any growth to be worth buying today.
As another example, we can think about TikTok. There is no doubt that TikTok gave Meta a run for its money in its early days. However, the platform appears to have plateaued in the United States. Its user growth has stalled out while Instagram’s growth continues. And of course, many people in Congress want TikTok banned outright. Whatever damage TikTok could do to Meta has probably already been priced in.
Valuation
Having looked at some of the potential risks to Meta, it’s time to look at the stock’s valuation. We can start with multiples. According to Seeking Alpha Quant, META trades at:
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23.8 times earnings.
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4.7 times sales.
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4.25 times book value.
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10.5 times operating cash flow.
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29 times free cash flow per share (this multiple calculated by the author).
As you can see, Meta is certainly not as cheap as it once was, but it’s not the most expensive big tech stock out there. For comparison, Apple trades at:
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27 times earnings.
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6.6 times sales.
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44.4 times book value.
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23 times operating cash flow.
That’s a lot more expensive than Meta. Granted, Apple has positive top line growth over the last 12 months whereas Meta doesn’t. It’s not an apples-to-apples comparison (pardon the pun). But it does go to show that Meta is not the most expensive big tech stock out there.
How much is Meta worth exactly?
In a discounted cash flow model that assumes 0% perpetual growth, META stock is worth $210 at a 3.37% discount rate (the current treasury yield). I think going with no risk premium in the 0% growth scenario is OK, because the assumed growth is very pessimistic, and incorporates the effects of risk. For scenarios that assume some growth, we can use an 8.37% discount rate, which includes a 5% risk premium. Some possible scenarios at that discount rate include:
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10% growth for five years, 5% after that: $184.
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20% growth for five years, 5% growth after that: $276.
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5% perpetual growth: $210.
As you can see, even with a pretty big risk premium baked into the valuation, META ends up being worth more than today’s price. Most of the valuations I’ve calculated are less than $250, but remember, I’m being conservative in these estimates. There are many things that could cause Meta’s growth to ramp up more in the future than I used in my scenarios above. The next round of cost cuts could cause free cash flow to increase even if revenue grows 0%. A decline in the U.S. dollar could cause an increase in reported revenue. A rebound in the tech sector as a whole could cause constant currency revenue growth to improve. A fall in interest rates could increase the fair value of META stock with revenue and cash flows all unchanged. With the conservative assumptions I’ve used, a person would be wise to exit at $210, which is just slightly more than today’s price. However, I’m optimistic enough about the economy that I’m willing to hold on for a while.
Risks and Challenges
As we’ve seen, META is somewhere between fairly valued and undervalued at today’s prices, depending on how certain things play out. It’s probably fairly safe to hold right now, and it may even have some upside. Nevertheless, there are several big risks for potential investors to keep in mind, including:
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A recession. Most economists think we’re entering a recession sometime in 2023. There is disagreement about whether the recession will occur early or late in the year, but there’s a fairly strong consensus that there will be one at some point. Any recession would be a bad thing for META because advertising tends to get hit hard in recessions. Most businesses see sales take a hit in recessions, but advertising gets hit harder than most. Meta is working hard to diversify its revenue mix away from advertising, but it’s been slow going so far: only a small percentage of the company’s revenues come from direct product sales.
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Currency impacts. The U.S. dollar has spent most of the past year rising. If this trend continues then it will negatively impact Meta. Last quarter, Meta’s constant currency revenue showed very slight, positive growth. Unfortunately, reported revenue declined. That was due to the effects of currency fluctuations. Because the U.S. dollar made gains, Meta’s foreign source revenue was reported as a lower U.S. dollar amount compared to what was reported in the same quarter a year before. If the dollar makes more gains, then this problem will get worse.
Overall, the most pressing risks facing Meta shareholders have materialized already, and are priced in. Apple’s ATT policy and the TikTok threat are already quite baked into the stock price. It seems unlikely to me that things will get much worse for the business from here, but the temporary risks described above could materialize in the future.
The Bottom Line
The bottom line about Meta Platforms is that the stock isn’t as cheap as it once was, but it may still have upside. Using conventional valuation metrics, it’s about fairly valued now. If there’s a positive earnings surprise, or if Reality Labs really takes off, then it could rise from here. Personally, I’ll be holding on until $250.
