Meta Platforms Stock Is A Buy On Multiple Growth Drivers (NASDAQ:FB)

We are bullish on Meta Platform (FB), formerly known as Facebook, and we recommend investors buy shares here. Meta shares underperformed S&P in 2021, with the stock up about 23% versus S&P up nearly 27%. The underperformance of FB is attributed to privacy changes Apple (NASDAQ:AAPL) enacted as part of iOS 14.0, leading to challenges with measuring and tracking ad effectiveness. The challenges with measuring and monitoring effectiveness led some advertisers to shift ads to other platforms, culminating in Meta missing revenue by about $558 million in F3Q21. With reset and with estimates conservative (F4Q22 revenue is expected to grow at 18% Y/Y), we expect the company to beat estimates handily when it reports F4Q results on February 2nd. FB is currently trading at 24x versus a large-cap average of 32x and S&P of 26x. Historically, FB usually traded at roughly 30% premium to S&P. With estimates conservative, strong cash flow generation, and a reasonable valuation, we believe Meta is a must-have stock for 2022. Therefore, we recommend investors buy shares ahead of earnings.

Overcoming IDFA privacy challenges

Meta shares endured a perfect storm of bad press during the last couple of years, much of it due to its own making. The barrage of bad press and the changes to Apple IDFA led many institutional investors to lighten their involvement with Meta, leading to underperformance last year. However, we believe Meta is rolling out changes to circumvent IDFA changes, and we believe this will position Meta for growth again. Please refer to this blog post for a detailed discussion on what IDFA is and why it is essential to Meta’s business. Here is the article on how the IDFA/ATT changes impacted Facebook.

Facebook has already rolled out ad technology for targeting and measuring to overcome iOS changes. These new ad-technology changes are already bearing fruit, and we expect Meta to report solid numbers when it reports results on February 2nd. We expect the company to beat estimates handily and provide guidance exceeding estimates.

With interest rates set to rise, we believe Meta is one of the few large-cap companies that continues to grow at double digits yet is highly profitable. Therefore, we expect the sentiment on the company to improve through 2022, positioning it to outperform its peers.

Newer products to drive fresh growth

Meta has several features and several newer assets that are still under-monetized, including Messenger, WhatsApp, Marketplace, Watch, and Checkout. Reels, Watch, and e-commerce functionality, should drive growth for the company in 2023 and beyond. Instagram Reels could be about $50 billion over the next three to four years, Shopping could add another $15 billion, while Facebook Watch could add another $2 billion. These new growth engines are not in our estimates and will likely be an upside from the current forecast.

Valuation

Facebook is one of the few growth companies profitable on a GAAP basis. Hence we prefer to use P/E to value the company. Facebook is trading at 19.4x on the C2023 P/E estimate versus the peer group average of 32.3x. On a C2023 EV/Sales basis, Meta is trading at 5.2x versus the large-cap peer group average of 7.3x. The peer group revenue is expected to grow at 12%, but Meta is forecasted to grow at 18%. Yet, Meta stock does not get the respect it deserves and is undervalued relative to the peer group on both the metrics – EV/Sales and P/E. Much of the investor apathy is driven by the company’s many self-inflicted wounds over the last two years. We expect the sentiment to improve in 2022, and we expect many large funds to increase their position in the stock, driving the stock higher.

The following charts illustrate Meta’s valuation within the large-cap stock universe.

Meta is highly profitable and generates plenty of cash. It reports results on a GAAP basis compared to other names such as VMware (NYSE:VMW), Adobe (ADBE), and Salesforce (CRM), reporting GAAP and non-GAAP purposes for valuation. Meta deserves a premium multiple given that the company is a dominant player in consumer-facing internet with multiple growth properties such as Instagram and WhatsApp. Meta is cheaper than most high-growth and large-cap peer group stocks by almost all metrics. Therefore, Meta should be a prominent investment in any portfolio, whether growth or value.

What to do with the stock

We are bullish on Meta, and we are buyers of shares at current levels. An overwhelming majority of Wall Street analysts are optimistic about the story and are recommending investors buy the name. Out of the 58 analysts covering the stock, 48 are buy-rated, nine are hold rated, and one has a sell rating. The stock’s current price is well below the mean of $401 and the median of $410. The following charts illustrate analyst ratings and the price targets.

Meta is currently trading around $332. We expect Meta stock to hit $400 by the end of 2022 and $450 by the end of C2023, reaching $500 by the end of C2024. To get $500 is not overly ambitious since we expect revenue to grow only in the high teens through C2024. We are forecasting revenue to grow 19% in C2022, 17% in both C2023 and C2024. We believe these estimates are conservative and not overly ambitious, given Meta is the pre-eminent consumer-facing social media app with multiple growth drivers. While we are not modeling for EPS growth to exceed revenue growth, we believe our EPS estimates are overly conservative, and we think that a beat on the EPS line is fairly certain. We believe EPS will exceed the Street consensus estimates, driven by gross margin expansion and likely Opex leverage. The following chart illustrates consensus estimates for revenue and EPS for C2021-C2024. C2025 revenue and EPS estimates are our estimates, as consensus estimates are not available.

Given our belief Meta estimates are conservative, we expect the company to beat the estimates handily when it reports results on February 2nd. We expect the stock to rally from the current levels, as we expect many value/institutional investors to load up on shares as they look to stay invested in tech. Therefore, we recommend investors buy shares here and on any weakness.