Meta Stock Upgraded To Strong Buy This Week On Valuation (NASDAQ:FB)

With the share quote breaking $200 yesterday (April 20th), I feel the time is ripe to seriously consider purchasing Meta Platforms, Inc. / Facebook (NASDAQ:FB) in your portfolio. I wrote an article just a few weeks ago here explaining my rating move to a Hold, with the reasoning why a Buy proposition might be approaching.

I laid out the logic from the technical trading chart for a retest of the $186 low trade in March. And, that’s exactly what we have been getting in the market: a lower-volume zigzag down in price, hugging the 50-day moving average.

The next step to confirm a bottom is in place (at least from a relative strength perspective vs. the S&P 500) will be an eventual advance above the 50-day moving average, perhaps back to $220 in the coming months.

Wall Street Worries

Of course, it’s hard to buy a stock that has descended in price nearly 50% since September. Changes in July over how Apple (AAPL) iPhone privacy options work for consumers and the App Store functions for developers like Meta, alongside extraordinary investment into the Metaverse thingy (reported as $10 billion in 2021), plus slowing user/ad growth at Facebook and Instagram rightly have investors concerned about the future.

Yesterday’s -7% price dump came on the heels of a research report that forecasted even weaker than expected Q1 numbers. Cleveland Research reduced its estimates well below street consensus, based on projected weakness for e-commerce efforts, overall traffic, and advertising spend, with market share losses to rivals.

Other risks to an investment in Facebook include new government regulations on social media and minimum corporate taxes or raised tax rates on Big Tech. Whether its unchecked speech on their platforms, or gripes that Big Tech is not paying its fair share of the tax burden, politicians may succumb to voter pressures and create a more difficult income environment for Meta in the years ahead. I would consider these issues the biggest long-term risks to keep an eye on for investors. The shorter-term operating problems will eventually be overcome, as internet reach and engagement cannot help but expand over time.

Ultra-Bullish Valuation

Without doubt, Meta Platforms today represents an excellent “growth at a reasonable price” pick (GARP). Meta operates one of the highest gross margin businesses in the history of mankind and free market capitalism. And, until the 2021 business slowdown, FB was a high growth affair. Typically, high margin, high growth businesses are valued and priced at the highest valuations on the equity market. This condition described Meta to a “T” through 2020.

Below are two graphs of its super-profitable business design vs. the next 10 mega-cap blue-chips by weighting in the S&P 500 index. Gross margins and final, after-tax margins have been the best (or nearly so) in the U.S. over the past five years (including the last couple of years of crazy spend on its Metaverse buildout). This peer group includes Apple, Microsoft (MSFT), Amazon (AMZN), Tesla (TSLA), Alphabet/Google (GOOG) (GOOGL), NVIDIA (NVDA), Berkshire Hathaway(BRK.A) (BRK.B), UnitedHealth Group (UNH), Johnson & Johnson (JNJ), and Visa (V).

The good news is this amazingly profitable enterprise can be purchased at its lowest valuation in years, maybe ever. On price to trailing earnings, sales, cash flow, and tangible book value, FB is selling at HALF its 5-year averages, and is approaching its cheapest valuation since it started public trading with its 2012 IPO. Both time periods are pictured below.

The great news is Meta/Facebook now sells for LESS than most of the equivalent valuation multiples on the blue-chip standard, S&P 500 index for American equities. Only the price to sales ratio of 4.8x is slightly above the S&P 500’s 3x equivalent. Such has never happened before now. So, we have a super-profitable business, with still above-average growth potential (as the vast majority of the world’s population has yet to join social media, much less understand what the Metaverse is), today available for investment at a relative “discount” valuation to the average U.S. business alternative.

Compared to our subset of the largest capitalization companies in America, Meta/Facebook is absurdly cheap. You might even characterize it as a bargain. For starters, free cash flow generation of 6.8% (perhaps the most important accounting stat for serious investors) is running DOUBLE the median average rate of the mega-cap peers at 3.2% (or far better than the S&P 500 FCF Yield under 4% or NASDAQ 100 Big Tech group number of 3.5%, not pictured).

Taking Wall Street analyst consensus numbers for 2023, Meta is selling for roughly HALF of the peer group forward 1-year P/E ratio, at 13.7x vs. 26x. Not pictured, the S&P 500 is projected to be selling around 20x and the NASDAQ 100 Big Techs above 25x income generation in 12-18 months. This is another critical piece of the investment puzzle, as investors prefer to analyze the future, not as much the recent past for rationale to buy or sell stocks.

When you include FB’s large cash stash of $48 billion and ZERO debt at the end of December (vs. $41 billion in total liabilities), enterprise value calculations look considerably better. EV to earnings before interest, taxes, depreciation and amortization is at a ludicrously low 9.9x. This compares to the mega-cap peer median average of 21x (or S&P 500 index as a whole of 16x or NASDAQ 100 ratio well north of 20x, not pictured).

Lastly, EV to Revenues is 4.6x, far below the FB 15x multiple of 2017 or 6x peer group median average today (or S&P 500 number closer to 5x or NASDAQ 100 Big Tech average above 8x, not pictured).

Final Thoughts

Regarding CEO Mark Zuckerberg’s Metaverse dream, either consumer interest and revenue begins to grow rapidly this year or next, or Meta may be encouraged to spin off the idea into a separate company with partnership rights, as FB retains a large ownership stake. Either way, I expect the Reality Labs division to be additive to shareholder value starting in 2022, or 2023 at the latest.

What is the Metaverse? My wife keeps asking, and this is my answer – it’s a gaming/entertainment venue sold to consumers as a virtual realty experiment. The concept is you can enter an alternate world to meet with friends and family, make new connections, and basically entertain yourself inside a virtual world on a personal computer (or through special 3D headsets). I think the best way to think about it is as a game, with Meta retaining up to 50% of all fees you pay to third-party developers to play a part in this human connection experience. The Metaverse is definitely a profit-center targeted at young adults and kids. Meta is hoping you get addicted and play for life, with a recurring revenue and profit stream for the business decades into the future.

For disclosure, I have never owned Meta/Facebook shares before last week. The whole social media experiment and clear overvaluation on the operating business numbers encouraged me to stay on the sidelines. To me, being able to purchase this revolutionary company at market multiples or even below Wall Street averages for U.S. business valuations in early 2022 is worthy of serious exploration. Meta’s share drop has honestly taken on bust proportions over the last eight months, following years of boom times for Big Tech names.

Can FB move lower in price first, before recovering later in the year? Sure, that’s one possibility. But in my experience trading over 35+ years, when a leading blue-chip is selling at a discount, buying it and waiting a year or two has almost always been the right decision.

I rate the stock a Strong Buy today, after Hold and Sell feelings for years. I have been purchasing shares almost daily this week, on the retest of its March lows. I am modeling worst-case scenario downside to $170 over the next 12 months, with upside to $300 if growth picks up steam in the second half of 2022. A range of total return outcomes between -15% and +50% annualized, alongside amazing profit margins and a record low valuation appear to offer a decent financial “margin of safety” for both growth and value investors.