Meta Platforms Inc. (META, Financial) is a social media company which, despite having multiple platforms and a huge user base already at over 4 billion, is still growing. It has a market share close to 20% in total digital advertising spend in the U.S. according to Insider Intelligence, which reflects its potential for a rebound as advertising is on a cyclical downtrend at the moment.
According to my personal valuation model, the stock has a fair value estimate of $387 per share, giving it a margin of safety of 92% on the basis of its net profit and free cash flow growth over the last 10 years. In the last 10 years, Meta’s net profit has grown by a CAGR of 35.6%. According to its 2022 annual report, by year end it had about 2.702 billion shares outstanding, which was down 5.49%as compared to 2021. Below is a breakdown of my valuation model:
Although the net profit and free cash flows of Meta have grown by about 35.6% and 21%, respectively, in the past 10 years, in an economic downturn it would be prudent to take a conservative approach when valuing this business. That's why I have applied a more conservative growth rate estimate of 10% and a discount rate of 6% to its free cash flows, resulting in a fair value estimate of $387 for Meta. According to this estimate, the free cash flows are expected to grow from $16.3 billion to $845.5 billion over the next 10 years, yielding 8.39% annually.
At the end of 2022, Meta had about $40.7 billion of cash and marketable securities as compared to $47.9 billion in 2021. Therefore, it is evident that Meta has a policy to maintain a very strong cash position at all times, which should benefit the company even as it invests billions in Metaverse growth efforts.
In the last 10 years, Meta’s retained earnings have also grown from $3.1 billion to $64.79 billion, representing a compounded growth rate of 35.27%. Its book value has also grown from $6.10 in 2013 to $48.09 in 2022, representing a growth rate of 22.93% per year.
These metrics and variables reflect that Meta is a high growth and deep value stock which has been unduly punished by the market just because investors are wary that it is taking a new growth direction via the Metaverse. Therefore, in my opinion, the stock is well positioned to benefit from an economic recovery in the short to medium term and Metaverse growth in the long term.
Meta was once a $1 trillion dollar company in 2021, and yet it is trading at half of that value today, despite the fact that its core business is not even in decline.
However, I don't think this can all be laid at the feet of the Metaverse investments. Meta also has a problem with paying its exectives too much, which can be disguised in bull markets via share buybacks but is harder to hide when the economy is in decline. Meta paid out $9.2 billion in restricted stock units (RSUs) in 2022 according to its 10-K filing. In 2022, the company also bought back $28 billion shares out of its total commitment and authorization of $40 billion which was first announced in 2017.
Furthermore, according to the company’s 2022 annual report, its total share-based compensation increased from $6.53 billion in 2020 to $11.99 billion in 2022, representing close to a 100% increase. It could be argued that the RSUs were not performance based, which is why the investors received this negatively. Fortunately, the company is taking steps to solve this problem and has introduced reforms to its compensation plan, strictly linking stock option compensation to performance and profitability.
In November 2022, the company also announced its "year of efficiency" (i.e. layoffs and cost-cutting) with the company planning to cut more than 10,000 employees representing 13% of its total workforce. Investors are receiving this positively as it should help improve profitability in a time of lower business.
It seems investors have received the more recent news positively, as Meta's stock price has surged more than 100% year to date, recovering from its bottom $91 in 2022 to trading at $202 a share this week. However, I believe it still has room to run after reforming its share-based compensation plan and taking a new growth direction with its Metaverse investments. The reduced stock option compensation should also hopefully increase the value of buybacks to come.
