To The Moon

$Meta Platforms, Inc.(META)$

Market Update

Last Thursday marked the worst day for the S&P in 2025 so far, so it's no surprise that investor sentiment remains deep in the extreme fear zone. Adding to the concern, the market has now entered correction territory—a 10% decline from all-time highs seen in December 2024. The primary driver of this downturn appears to be the escalating impact of tariffs, though recent developments suggest some relief. Over the past few days and even hours, Donald Trump has begun granting exemptions, with the number seemingly increasing over time, leaving uncertainty about where the market will head next.

Meanwhile, fresh data this morning revealed that U.S. payroll growth stands at 151,000—falling short of market expectations, largely due to reductions in the federal workforce. However, this downturn could be presenting new investment opportunities, as certain stocks are approaching undervaluation. While not many companies have reached that point yet, notable names like Apple (trading at a forward P/E of 29) and Walmart (at 32) hint at potential bargains, along with several others that could be worth watching.

Meta Platforms (META) Analysis

Today, we want to turn your attention to Meta Platforms, the tech giant best known for owning Facebook, Instagram, WhatsApp, and Oculus. While Meta generates revenue from various sources, its primary income stream comes from advertising, where businesses pay to target users with ads across its platforms. The company also earns revenue from its hardware products, including Oculus VR headsets and other portable devices. Additionally, Meta has been heavily investing in the development of the metaverse, focusing on virtual and augmented reality technologies as it shifts from a pure social media company to creating immersive digital experiences.

Despite these advancements, advertising remains Meta’s dominant revenue driver. However, with the rise of artificial intelligence, the future remains uncertain, and the company's evolution could take new directions in the coming years. Regular viewers may recall that we previously flagged Meta as a potential sell or hold when it was trading near its 52-week high. Since then, the market has moved quickly, and the stock is now trading around the midpoint of its 52-week range, with a slight drop noted in pre-market trading—though, as always, pre-market fluctuations can go either way. Just yesterday, the stock fell around 4.5%.

Looking at a broader timeline, Meta remains up 27% over the past 12 months, 7% year to date, and has significantly outperformed the S&P 500 over the last decade, surging 726%. Some investors may recall when the stock was trading around $90 a little over two years ago, a time when it was largely out of favor.

Wall Street analysts continue to see Meta as a strong buy, and Seeking Alpha also considers it a solid investment. The company recently introduced a dividend, though at a modest 0.33% yield. Additionally, Meta's user base has been steadily growing. In Q4 2018, the company had around 2.03 billion active users; today, that number has climbed to 3.35 billion. This consistent growth strengthens Meta’s revenue model, as advertising earnings increase alongside user engagement. Moreover, the average revenue per user has shown long-term growth, despite occasional quarterly fluctuations. Comparing Q4 2024 to the same period the previous year, this metric has risen from $12.33 to $14.25—an encouraging sign for investors.

Earnings Overview

In their most recent quarter, Meta reported a 21% year-over-year increase in advertising revenue, reaffirming its position as the dominant contributor to overall revenue. Other segments, such as payment infrastructure and Meta Quest’s Reality Labs, remain relatively small in comparison. We’ll dive into margins shortly and compare them to the broader sector, but looking ahead, Meta expects growth in three of its next four quarters, maintaining a 100% track record of meeting growth targets over the last four. This consistency strengthens confidence in the company’s ability to hit its EPS estimate of $25.25 by the end of the year, with shares now trading at a forward valuation below 25. Today, we aim to assess whether Meta should be considered a key part of our overall portfolio.

Digging deeper into earnings, Meta shares initially rose following the release, as the company delivered a strong beat on expectations. EPS came in at $8.02, significantly surpassing the $6.77 forecast, while revenue reached $48.3 billion, exceeding the expected $47.04 billion. While we've already highlighted Meta's impressive revenue growth, another notable milestone is that its AI chatbot now boasts over 700 million monthly active users. This marks a significant jump from 600 million in December, with Mark Zuckerberg predicting the platform could reach 1 billion users by year-end. He also emphasized that once a service scales to this level, it typically gains a lasting competitive advantage.

On the other hand, Reality Labs continues to post substantial losses on a quarterly basis. Meanwhile, Meta remains committed to aggressive investment in artificial intelligence, planning to allocate $60–65 billion in capital expenditures toward AI development. This aligns with broader trends among major tech players, with Amazon, for instance, viewing AI as a once-in-a-lifetime opportunity and leading the spending race among the "Magnificent 7" with an estimated $100 billion investment.

Unlike many of its peers, Meta does not provide a full-year revenue outlook. However, the company remains confident in its strong performance trajectory, anticipating continued revenue growth through the end of 2025.

Metrics v Sector v 5Y Average

Looking at Meta’s valuation, the company currently receives an "F" rating. However, similar to our assessment of Alphabet, we don’t believe Meta is directly comparable to the broader sector. That said, with the sector median at a forward P/E of 13, Meta is trading at an 87% premium. While we do think the company deserves a premium, the key question is how much investors should be willing to pay. A more relevant comparison is its own five-year average, where its current forward valuation is only about 6% higher.

In terms of growth, Meta earns a "B-" rating, reinforcing the case for a justified premium. Year-over-year revenue growth stands at 22%, with forward projections at 17%—well above the sector’s low single-digit growth, yet not far from Meta’s own five-year averages of 20% and 17.7%, respectively. Additionally, the company expects to grow EPS at an 18% annualized rate over the next three to five years, outpacing the sector’s 12% growth and aligning closely with its historical 17.5% rate.

Profitability remains a standout, earning Meta an "A+" rating. The company's trailing 12-month operating margin sits at 82%, far exceeding the sector average of 53% and even surpassing its own five-year average of 81%. Net income margin is similarly strong at 38%, well above the sector’s 3.8% and its own five-year average of 30%. This indicates not only consistent revenue growth but also improving margins—an important factor when identifying high-quality companies.

Meta's cash flow from operations is another indicator of its strength, reaching $91 billion—significantly above the sector median of $354 million and its own five-year average of $55 billion. This financial strength reinforces Meta’s position as a high-quality company that continues to expand both revenue and profitability.

Meta 10Y Metrics Review

We also want to assess the overall quality of Meta based on key financial metrics. First, its dividend safety score stands at 70. While we'll analyze this further using valuation models, it's worth noting that Meta recently increased its dividend by 5%—roughly in line with inflation. This score was reaffirmed last month, suggesting that a dividend cut is unlikely, especially since the company only recently introduced it.

Looking at Meta’s resilience during economic downturns, its recession sales growth during the 2007–2009 financial crisis was an impressive 154%, significantly outperforming the S&P 500, which saw a decline of 12%.

Our first valuation model is based on Meta’s five-year average P/E ratio. The "blue tunnel," representing the expected fair price range, has been trending upward over time—a positive sign. Currently, the stock sits in the mid-to-upper portion of this range, indicating a reasonable valuation. When compared to its five-year peak, it is not significantly overvalued. However, it does trade at a premium to the overall sector, which is something to consider.

Next, we analyze free cash flow payout, which is a more reliable indicator than earnings, as earnings can be influenced by accounting adjustments. Meta’s free cash flow payout ratio is currently at 9% on a trailing 12-month basis and is projected to be 13% over the next 12 months. This leaves ample room for future dividend increases, should the company choose to expand its payouts. Free cash flow per share has shown consistent long-term growth, increasing substantially from 2015 to 2024. However, an anticipated temporary drop to $16.40 over the next 12 months should be noted.

Sales growth has also been consistently strong, with near double-digit increases annually. At a bare minimum, we like to see 3–7% growth, but Meta exceeded this with 22% growth in its 2024 annual report. To put its expansion into perspective, revenue stood at $18 billion a decade ago, while its most recent full-year revenue was $165 billion.

Though Meta hasn’t always paid dividends, it has historically returned excess cash to investors through aggressive share buybacks, reducing its outstanding share count by nearly 10% over time. Currently, the share count sits at 2.61 billion, and if management accelerates buybacks—especially if they view the stock as undervalued—it could be a major advantage for investors.

Return on invested capital (ROIC) is another strong point, currently at 29%. A figure above 10% indicates that management is efficiently allocating capital, making this a standout metric.

Margins are also a key factor. While we prefer to see them not only above the 12% threshold but also improving over time, Meta’s profitability remains high despite some minor inconsistencies. Free cash flow margins are particularly impressive at 34% on a trailing 12-month basis, reinforcing the company’s ability to generate cash.

On the balance sheet, Meta’s net debt-to-EBITDA ratio is below 3, which is ideal. This metric reflects how many years it would take the company to pay off its net debt using EBITDA. Remarkably, Meta’s strong financial position means that over the past decade—and even looking ahead to the next 12 months—it would take the company less than a single day to pay off all its debt, demonstrating exceptional balance sheet strength.

Lastly, institutional ownership remains high, with 80% of shares held by large investors—another sign of confidence in the company’s long-term prospects.

Institutions/Insiders Review

Institutional investors have been active in Meta, selling approximately $47 billion worth of shares over the past 12 months, mainly in 2024. However, they have also purchased nearly twice that amount—$83 billion in total. Notably, institutional buying doubled in the most recent quarter, indicating strong confidence in the company.

Moving to insider ownership, insiders currently hold around 14% of the company. In the most recent quarter, they sold approximately $1.12 billion worth of shares, including $383 million in the latest reported transactions. For transparency, we can look at specific insider transactions, such as one on March 4th, where an insider sold 921 shares, netting around $600,000. However, insider selling isn’t necessarily a bearish signal, as sales can be driven by personal financial decisions rather than a lack of confidence in the company. As always, investors should conduct their own due diligence rather than blindly following institutions or insiders.

Stock Performance vs. Sector & S&P 500

Meta has outperformed its peers in the interactive media and services sector, including Alphabet, over multiple time frames. Over the past year, Meta has been the best performer, with a 27% increase. Expanding the view to five years, it remains the top performer, and over a 10-year period, it has outpaced Alphabet by approximately 539%.

While past performance does not guarantee future returns, the company has also consistently outperformed the S&P 500. It has led over the past year, the past five years, and significantly over the past decade. Even year-to-date, it appears to be on track to continue this trend.

Meta’s Valuation

Based on our valuation analysis, we arrive at an intrinsic value just under $700 per share using a discounted cash flow (DCF) model. The company’s free cash flow growth has averaged 34% year over year, but for our conservative estimate, we use a lower-end growth rate of 10%.

Using a discount rate, we determine the present value of future free cash flows and terminal value, add the company’s cash holdings, subtract total debt, and divide by the number of shares outstanding. This results in a valuation of $700 per share, implying an 11% upside.

For transparency, we also assess different discount rates:

• At 12%, the valuation suggests an upside of 28%, reaching $850 per share.

• At 14%, the valuation rises to $925 per share, reflecting a 47% upside.

For our conservative approach, we stick with the 10% rate. Applying a margin of safety (MOS):

• A 10% MOS suggests a buy level around $595.

• A 15% MOS would lower the target to $560.

• A 20% MOS indicates a buy at $525.

Wall Street Price Target

Analysts on Wall Street have a strong buy rating on Meta, with a consensus price target of $765 over the next year, translating to a 22% upside. If investors believe a higher growth rate (e.g., 12%) is more appropriate, the margin of safety increases, further strengthening the investment case.

Overall, using a conservative 10% growth rate, Meta still presents a compelling opportunity with a 22% potential upside. Given its strong financial metrics, competitive advantages, and forward-looking growth prospects, do you see Meta as a buy, hold, or sell at its current valuation?

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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