Meta Platforms Stock: 4 Reasons To Buy

Summary:

• Meta’s stock surged higher in early 2023 as investors appreciate the company’s leadership team refocusing on profitability.
• In this note, I will share four reasons to buy Meta after a 70% YTD rally.
• Despite having a strong preference for staggered accumulation, I continue to like META as a long-term investment at $206.

Introduction

Meta Platforms’ (NASDAQ:META) “Year of Efficiency” has seen the social media-digital advertising giant cut ~21K jobs (~25% of Meta’s peak headcount) in the last four months [including a second round of layoffs announced on 14th March 2023].

While the digital advertising market continues to remain under pressure amidst a challenging macroeconomic environment, Meta’s new-found cost religion is working wonders for the company’s shareholders. So far in 2023, Meta’s stock has rallied by ~70%, wiping out a big chunk of the losses from last year.

Despite a scintillating run in its stock, META is still down ~46% from its all-time highs set in September 2021, and in my view, it is not too late for investors to buy into Meta Platforms stock.

Last month, we analyzed Meta’s Q4 2022 report and highlighted some of the salient points of our bullish thesis for META:

• Meta Stock: 5 Things Smart Investors Should Know

Since then, META’s stock price has gone up by 18%; and as of writing, the stock is now fairly valued according to TQI’s Valuation Model.

With META no longer being undervalued, we do need to rethink our bullish stance on the company. At our SA investing group – The Quantamental Investor – we own META stock within multiple portfolio strategies at an average cost of ~$153 per share. Despite having enjoyed a stunning rally in recent weeks, I think META is still investable at current levels. And in this note, I’ll share four reasons to buy META right now.

1. Meta Has Robust (And Improving) Business Fundamentals

Over the last couple of years, Meta’s top and bottom-line numbers have come under pressure due to multiple headwinds:

• Apple’s IDFA policy changes
• Huge spending on the Metaverse
• Greater competitive pressures (from the likes of TikTok)
• Cannibalization of revenues due to the rapid growth of Reels [Meta’s short-form video service], and
• A challenging macroeconomic environment

In the face of adversity, Meta’s business fundamentals have stayed robust with impressive user growth and engagement metrics offsetting a good chunk of the steep decline in Ad prices. We studied these dynamics here in more detail, and for the purpose of brevity, I will not share all of it again in today’s note.

Now, as you can see above, Meta’s TTM revenue has flat-lined in recent quarters and margins have come under significant pressure, which has in turn, driven a sharp decline in Meta’s free cash flow generation.

In Q4 2022, Meta delivered free cash flows of $5.3B and if we were to remove restructuring charges of ~$4.2B, this figure would have been ~$9.5B. With Meta slashing its spending and improving monetization across its Family-of-Apps, the free cash flow generation is inevitably going to get better from here.

In his latest update on Meta’s “Year of Efficiency”, Mark Zuckerberg opined that macroeconomic challenges could haunt Meta (and the digital advertising market in general) for some time to come:

While Zuckerberg’s warning seems scary, we understand that the economic cycle will turn at some point. For now, Meta is getting leaner by flattening the organizational structure (fewer managers), canceling lower-priority projects, and reducing headcount and hiring rates.

Meta is building the future of human connection, and today I want to share some updates on our Year of Efficiency that will help us do that. The goals of this work are: (1) to make us a better technology company and (2) to improve our financial performance in a difficult environment so we can execute our long term vision.

– Mark Zuckerberg

The most positive development from Meta’s Q4’22 report was Zuckerberg and Co. getting cost religion. And now that Meta’s leadership is re-focused on delivering compounded earnings growth to investors, I feel far more comfortable owning the social media giant now compared to four months ago. Here’s why:

The macro uncertainty persists for now; however, with engagement metrics staying robust during this period, Meta’s financial performance can show a strong rebound once the digital advertising spend recovers. Please note that Meta’s strong engagement metrics are a result of its significant investments in its recommendation AI engine. While Reels monetization is not at the level of Stories or Feed, I think it is only a matter of time before we get an inflection point. According to Meta’s management, Reels will not be cannibalistic by Q4 2023. Furthermore, Meta is working on the monetization of WhatsApp and Facebook Messenger, which is a business now running at ~$10B ARR. Overall, Meta’s Family-of-Apps still remains robust, and the investments being made here are bearing fruit for the social media giant.

In my earnings analysis report for Meta’s Q3 results, I said –

The biggest issue with Meta’s Q3 report was its expense guidance for 2023, which showed a lack of respect for Meta investors and sheer abhorrence to financial discipline.

This feeling was echoed by several Meta investors some of whom expressed it via open letters to the management, while some others aired their frustration by selling off the stock down into the $90s. Since Meta’s capitulatory sell-off on the back of its Q3 results, its management team has been changing the company’s free-spending ways.

And the updated expense guide for 2023 is the polar opposite of the expense guide presented to us during the Q3 earnings report. Clearly, Meta’s leadership has gotten cost religion, and this is fantastic news for Meta’s shareholder base.

Source: Meta Stock: 5 Things Smart Investors Should Know

For 2023, Meta is projected to return to positive sales growth. Moreover, the cost-cutting measures being undertaken by management are set to boost earnings growth. The clamor around a TikTok ban is louder than ever before, and if it were to happen, Meta would certainly be a big beneficiary.

With the regional banking crisis likely to create a credit crunch, I like the idea of taking shelter in Meta’s well-capitalized, rebounding business. Now, the digital advertising market could get worse in the event of a deep recession, which could throw a spanner in Meta’s growth re-acceleration. However, as of today, Meta is looking good for 2023 (and beyond that).

With a net cash balance of $30B, Meta has little to no liquidity or bankruptcy risk. In recent quarters, a violent free cash flow compression had forced Meta’s management to moderate their stock buybacks. With Meta’s free cash flows expected to recover gradually, I expect the pace of stock repurchases to pick up in the back half of 2023.

In the Q4’22 report, Meta’s management announced an addition of $40B to their remaining buyback authorization of $10.87B. With a stock buyback authorization of ~$51B, management could easily reduce Meta’s outstanding shares by ~10%. In the past, I have posited that a robust capital return program combined with a meager ~5% CAGR sales growth will be enough for META to deliver significant alpha to investors over the next decade. And I firmly believe in the power of such applied financial engineering!

2. META Offers Favorable Risk/Reward For Long-Term Investors

Despite Meta’s stock no longer being undervalued, it still offers solid risk/reward for long-term investors.

Assuming a base case P/FCF exit multiple of ~15x, I see META’s stock trading at ~$430 per share by the end of 2027, which implies a ~16% CAGR return over the next five years.

Since the expected return on META stock is greater than our investment hurdle rate of 15%, I continue to like Meta as a long-term investment.

3. Near-Term Technical Setup Is Still Bullish

Before we discuss Meta’s technical setup, here’s what I wrote on this subject in February 2023:

Back in late October, I rated Meta a “Strong Buy” in the $90s and said the following at the time –

The latest downdraft in Meta’s stock looks like a capitulatory move. At ~$250-260B in market cap, Meta is ridiculously cheap. Yes, cheap could get cheaper, as we have seen over the last few quarters; however, the risk/reward situation is still heavily tilted in favor of bulls and too compelling to ignore for long-term-oriented investors.

Source: Meta Q3 Review: Firmly In The Penalty Box

While it is impossible to time bottoms, Meta appears to have bottomed right at those levels, with the stock now up ~100%. We own META in TQI’s GARP portfolio at ~$153 per share, and I feel comfortable owning Meta at that price over the long run. Now, let’s look at the recent action.

After announcing its Q4 results, Meta’s stock bounced up by more than 25% in a single session. While the results were nothing to write home about, Meta’s management getting cost religion and further improvements in engagement metrics are seemingly enough to lure investors back into the social media giant’s undervalued stock.

As you can see on the chart above, META has literally gone vertical after breaking out to the upside from the downward-sloping trendline marked in red. Now, such vertical moves tend to get retraced, and hence, I think a re-test of the $130-$150 range is likely to materialize at some point. However, if META can consolidate at (or around) current levels, and move higher, then the stock could test pre-COVID highs at $225-$250 on the upside.

Source: Meta Stock: 5 Things Smart Investors Should Know

Over the last month, Meta’s stock consolidated in the $170-$180 range, and it has now moved back above the $200 level. As I see it, Meta’s stock is ready to push up into the $225-$250 range in the short-term [especially if the broad market strength persists for the next few weeks]. This means Meta offers an additional near-term upside of 10-20%.

Now, Meta’s RSI is getting close to “overbought” territory and I think we will see strong resistance in the $225-$250 range. A significant pullback could still lead Meta back down to the $130-$150 range for a technical gap fill later in the year; however, for now, the near-term technical trend remains bullish.

4. Improving Quant Factor Grades

After the recent run-up in Meta’s stock, its momentum factor grade has improved from “C-” to “A+”. In my view, the positive trend in Meta’s momentum factor grade is hinting toward a significant turnaround in the stock. With META still trading 46% below its all-time highs, the recovery is far from over. Now, momentum may continue to carry the stock higher towards the $225-$250 range; however, Meta’s factor grades for valuation and growth are not supportive of a significant upside move from here.

With quant factor grades for profitability and (earning) revisions holding up strong, Meta’s stock could hold the recent rally and even build on it in the coming months. Hence, I view the current quantitative factor grades for Meta favorably, despite an overall SA Quant Rating of ‘Hold’ [3.49/5.00].

Concluding Thoughts

Considering Meta’s healthy fundamentals, reasonable valuation, favorable risk/reward, improving quant factor grades, and bullish technical setup; I think the bullish thesis for Meta is still quite strong. Despite being bullish at current levels, I do have a strong preference for staggered accumulation given the rapid run-up in the stock.

Key Takeaway: I rate Meta a buy at $206.

Thanks for reading, and happy investing! Please share your thoughts, questions, and/or concerns in the comments section below.

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Disclosure: I/we have a beneficial long position in the shares of META either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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