Is This Social Media Giant Undervalued?

Shares of Facebook parent company Meta Platforms (NASDAQ:META) have gone through a tumultuous two years in the market. After losing some $230 billion in value in early 2022, the stock has gradually advanced as investors regain confidence in tech companies. Year-to-date, shares of Meta are up over 150 percent.

With these wild swings in price, investors may be wondering what Meta is really worth and how the current price compares to the company’s intrinsic value. We investigate whether Meta is on sale at this time.

Meta Value Multiples

Considering its position as a leading tech company, Meta trades at relatively modest multiples to most of its key financial metrics.

The forward price-to-earnings ratio, for instance, is 24.6, closely mirroring the price-to-cash-flow ratio of 24.1.

Somewhat less positive are the stock’s price-to-sales and price-to-book ratios of 7.0 and 6.3, respectively.

Although these ratios are fairly high, it should be noted that they are not terribly unusual for a still-growing tech company with high margins.

One of the key multiples for a high-growth company like Meta is the price-to-earnings-growth ratio. In Meta’s case, this ratio stands at 1.2.

While a ratio of over 1.0 typically doesn’t indicate that a stock is undervalued, it’s worth noting that Meta’s growth is expected to remain quite high over the next several years.

The PEG ratio, meanwhile, only takes the expected growth of the forward 12-month period into account. On the 5-year horizon, Meta is expected to achieve a compounded annual growth rate of 22.3 percent.

Is Meta a Good Stock to Hold?

By most standards, Meta appears to be a good stock to hold onto for the long run. In addition to a high rate of projected growth and decent valuation metrics, the company is also in what appears to be a strong financial position. Its net margin over the past 12 months has been a fairly robust 18.7 percent, while its return on equity has been 21.7 percent.

Meta’s balance sheet is also fairly healthy. The company’s debt-to-equity ratio is just 0.14, which should be quite manageable given its robust profitability.

CEO Mark Zuckerberg’s firm also maintains a reserve of $28.79 billion in cash and cash equivalents and another $24.66 billion in short-term investments. This massive reserve gives Meta ample capital to invest in research, development and new growth initiatives.

Although it is beginning to face competitive pressure from new platforms like TikTok, Meta still maintains a wide moat in the social media world.

As of Q2, the company’s platforms totaled 3.88 billion average monthly users. While growth has slowed as the platforms approach maturity, this is still an increase from the 3.65 billion users averaged a year ago.

Meta Analyst Ratings

Even with the stock having risen drastically this year, analysts believe that Meta still has at least some room left to run.

The median target price for Meta shares based on 46 analyst forecasts is $375. Based on the most recent price, this would give Meta a projected upside of 18.4 percent.

Turning to analyst ratings, an overwhelming 43 of the 56 analysts who have rated Meta recommend it as a Buy.

Although this does not necessarily imply that Meta is priced beneath its intrinsic value, it does suggest that Wall Street as a whole remains firmly bullish on the tech giant.

What Is the Fair Price for Meta Stock?

While there are many different ways to estimate the proper value of a stock, one of the most reliable and time-tested is the discounted cash flow (DCF) method, which prices a stock using the net present value of its future cash flows using a discount rate based upon the expected return of a competitive baseline asset.

In the most recent full fiscal year, Meta generated cash flow of $13.86 per share. Assuming that cash flow grows at roughly the same rate as earnings are expected to over the next five years and that the benchmark S&P 500 index continues to return about 10 percent annually, the net present value for Meta would be about $328 per share.

This, however, ignores the fact that Meta is a young company that will likely continue to grow well beyond the 5-year time frame.

If Meta averages cash flow growth of 15 percent over 10 years, for example, the stock’s intrinsic value would approach $395 per share.

For investor purposes, however, it’s likely best to assume a more bearish case. Taking this into account, the median analyst forecast of $375 seems to be roughly in line with the stock’s probable intrinsic value.

Is Meta Stock Undervalued?

Based on current cash flows and expected growth rates, Meta appears to be 18.4% undervalued. This is especially true if Meta can maintain a solid, stable growth rate over the next 10-15 years.

Even though the company is facing increased competition from younger social media platforms and may lag due to the downward effect of high interest rates on tech stocks in the short term, Meta appears to be a good stock to hold well into the future.

How Undervalued Is Meta vs. Intrinsic Value?

Assuming Meta continues to grow at its expected pace, the stock appears to be undervalued by roughly 15-20 percent. While not a massive margin of error, this is likely enough to protect investors from overpaying for Meta.

Barring a substantial obstacle to growth, investors will likely see average or better-than-average returns from Meta over the next several years.

It’s also important to note that Meta could gain an additional tailwind from a loosening of interest rates at some point in the next year or two.

Interest rates are expected to drop modestly in 2024, a trend that could drive dollars back into the stock market and increase the prices of leading stocks like Meta. In this event, shares of Meta could go somewhat higher than currently expected.

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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.