Should you buy Meta stock?
$Meta Platforms, Inc.(META)$ announced a $15 billion deal last week but the shares barely moved.
Is now a good time to buy the stock?
Balance Sheet
At the most recent price Meta has a market value of 1.75 trillion. The company's balance sheets has:
- Cash and investments: 76 billion
- Long-term debt: 29 billion
The enterprise value is 1.67 trillion
Over the past 12 months
- Revenue: 170 billion
- Net income: 67 billion
- Free cash flow: 52 billion
Stock valuation metrics
- EV/Revenue: 10x
- P/E: 26x
- EV/free cash flow: 32x
Historical Performance
For context over the last 10 years, Meta has average a PE ratio of 32, 30% annual revenue growth and a 33% free cash flow margin.
Risks
There are some risks to owning Meta stock. The company is battling several lawsuits including an antitrust case that seeks a divestiture of Instagram or WhatsApp. There's also mounting political pressure against social media with some countries considering a ban for under 16s. On the financial side there are fears that Meta's heavy investments in artificial intelligence may not produce an adequate return Meta's capital expenditures which includes investments in data centers and servers are up to $44 billion on a trailing 12-month basis, about a quarter of annual revenue.
Strengths
But despite the risks, Meta maintains a strong position. The company's family of apps Facebook, WhatsApp, Messenger, Instagram and threads reach 3.4 billion of people a day, providing the company with multiple opportunities to sell ads. Additionally, Meta is confident that its investments in AI will pay off. According to court documents made public by Tech Crunch, Meta made a prediction it could make an additional 400 billion to $1.4 trillion from its generative AI products by 2035. A truly huge number. In the meantime, AI can help Meta serve better ads improve recommendations and reduce hiring costs. With Google search losing out to chatGPT Meta's advertising monopoly may get even stronger.
Stock valuation
assumptions:
- 13% revenue growth rate for the next 10
years
- 33% free cash flow margin
- discount rate of 10%
- terminal free cash flow: 20x
Fair value: $767/ share which is roughly 11% above today's price.
Futher thoughts
A lot depends on Meta's investments in AI if they pay off. Free cash flow margins could return to the 40% plus levels that was seen in 2014-2015. But if spending continues or even gets heavier, those margins might not fully recover. Ultimately, though this is a company you don't bet against.
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