It wasn’t long ago when Meta (formerly Facebook) CEO, Mark Zuckerberg went all-in on a concept known as “the metaverse” a virtual world that is made possible through augmented reality headsets like Oculus that Facebook acquired.
Zuckerberg was so committed to the development of the project that he oversaw $13.7 billion in R&D costs to build out his vision and changed the name of his company from Facebook to Meta Platforms (NASDAQ:META).
Spectacularly, the metaverse failed and was swept under the carpet by management, who from one earnings to call to the next didn’t speak of it again. And there’s a good reason why they didn’t discuss it further.
Facebook, or more precisely Meta Platforms, share price had plunged as investors concerns heightened that Zuckerberg’s company was spending enormous sums of money that were flowing into the abyss, and would never generate a positive return.
Around that time, the share price fell to $80 per share, a clear signal by Wall Street to Meta Platforms management that the current strategy was not supported. And so they listened, and the billions in R&D spend was written off as sunk cost.
But then the tides changed and management changed their focus, and the stock roared back higher, so the question now becomes is Facebook stock undervalued at these price levels?
Is Facebook Stock Undervalued?
Although Meta Platforms share price has shot up by 140% year-to-date, it still has more to go if Wall Street is accurate. Among 52 analysts, the consensus fair value for Meta Platforms is $365 per share, representing 21% upside from current price levels.
A discounted cash flow forecast reveals a moderately more conservative price target of $358.15 per share, which corresponds to upside potential of 19.6%.
Facebook Financials Reveal Impressive Growth
Despite the heavy R&D spend over the past few years, Facebook has continued to post extraordinarily impressive revenue figures. Last quarter alone was the second highest on record with $31.99 billion recorded on the top line. That represented year-over-year growth of 11%, a solid report given the massive base off of which Meta must build upon.
Operating income was even impressive too at $10.1 billion, a figure Wall Street embraced after a string of quarters where EBIT came in under that key threshold level.
For the last twelve months, EPS has grown to $8.54 per share but management can still improve upon this number because every single quarter from Q4 2020 to Q3 2022, the earnings-per-share number came in above $10 per share.
Generally speaking, analysts are convinced that Facebook will finish the year strong. Earnings are expected to rise as follows:
- 2024 EPS: $16.61
- 2025 EPS: $19.06
- 2026 EPS: $22.24
- 2027 EPS: $26.27
Is Facebook Valuation Too Low?
Facebook’s price-to-earnings ratio is just above 34.3x, and its market cap is up to $772 billion.
Compared to the company’s FAANG peers, Facebook looks like something of a bargain:
If you look at Facebook’s P/E ratio history, you can see how it has compressed during its primary growth period.
- December 2013 – P/E ratio 91x
- December 2014 – P/E ratio 71x
- December 2015 – P/E ratio 81x
- December 2016 – P/E ratio 33x
- December 2017 – P/E ratio 33x
- December 2018 – P/E ratio 17x
- December 2019 – P/E ratio 32x
- December 2020 – P/E ratio 27x
- December 2021 – P/E ratio 24x
- December 2022 – P/E ratio 14x
Facebook is currently trading at a reasonable discount of approximately 20% to fair value, which makes this an attractive time to buy for those who want to round out their portfolios with top quality technolgy stock.
Will Facebook Stock Rise?
Facebook is likely to continue its upward trajectory, but it has an uphill battle to move the needle materially.
First, there is the simple issue of a saturated market. More than 3.2 billion people already have profiles on one or more of Facebook’s platforms, which works out to nearly 42 percent of the world population that currently stands at 7.8 billion.
For now, most of the markets that don’t use Facebook already are out of reach for social media companies, as they lack reliable access to the internet. Those numbers lead to an undeniable conclusion. Facebook is running out of room to grow its user base.
Second, the Federal Trade Commission has been looking at big tech for some time, and there is always worry that the agency may move forward with antitrust suits.
Facebook is at risk, because it controls a massive portion of the social media advertising market. That sparks concern among antitrust regulators.
Finally, privacy concerns have inspired new technology that prevents platforms like Facebook from tracking users’ online activity. If adoption of this technology becomes widespread – a strong possibility – Facebook may struggle to maintain and grow its unique brand of ad revenue.
With all of that said, the consensus is that Facebook will continue to grow shareholder value. It’s just that the pace may not be as rapid as it has been since the IPO. Facebook is likely to continue delivering double-digit returns – but those may be in the teens versus the 30s, 40s, and 50s.
Is Facebook Stock Undervalued? The Bottom Line
The bottom line is that Facebook is undervalued at this time to the tune of approximately 20% but much less so than a year when its P/E ratio was around 14x.
The company is expected to continue its growth trajectory and deliver shareholder returns, though the rate of growth is likely to slow over the next few years.
Of course, all of that could change if Facebook announces new features, new platforms, or new products, which seems likely given the caliber of talent it employs. That would be a game-changer for short-term growth prospects, and investors who buy now will be in the right place at the right time to profit.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.