Meta Stock Has Cratered Over 38% Based on a Less Than 1% Drop in DAUs

Meta Platforms (NASDAQ:FB), which will soon change its symbol to META, has cratered over 38% based on a less than 0.05% drop in its daily active users (DAUs). Something is off with that. FB stock is probably undervalued and is now clearly a bargain. This article will look into why.

Meta logo is shown on a device screen. Meta is the new corporate name of Facebook.
Source: Blue Planet Studio /

FB stock has fallen to $200.25 on Friday, March 4. This is down 38% from its price right before the results on Feb. 2 of $323.00 per share. And that is also after FB stock has drifted lower than its peak price of $382.18 on Sept. 7.

It appears to me that this whole sell-off has been overdone. Let’s look into some reasons why.

Why Facebook Stock Might Be Oversold

For one, Facebook is still producing huge amounts of free cash flow (FCF) and will likely continue to do so. For example, according to page 17 of the company’s slide deck, FCF rose 31.6% from $9.547 billion in Q3 to $12.562 billion in Q4.

But that was after the company’s DAUs fell ever so slightly from 1.930 billion in Q3 to 1.929 billion. By the way, the only way you would know this is from page 13 of the slide deck.

In fact, in the earnings press release, Meta Platforms states on page 1 that the two quarters had flat at 1.93 billion — the same as in the Q3 press release.

The Market Fears about DAUs

In fact, this drop from 1.930 billion to 1.929 billion DAUs is a drop of just 1 million, a 5 basis points drop (i.e., 0.05%). This is what has caused all the damage in FB stock. It seems to me that it is a bit overdone.

Now, to be fair, Mark Zuckerberg made it clear on the conference call that people are turning to TikTok and taking away from their time spent on Facebook and Instagram.

As Barron’s magazine points out, Zuckerberg was quoted as saying that “People have a lot of choices of how they want to spend their time, and apps like TikTok are growing very quickly.”

Barron’s quotes a recent research report by Brian Nowak, a Morgan Stanley analyst, who did a deep dive on Facebook’s Reels product designed to compete in the short video format against TikTok.

As a result, he cut his revenue, EBITDA (earnings before interest, taxes, depreciation, and amortization), and price targets for FB stock. The EBITDA numbers were cut 10% this year and for 15% next year.

Nowak’s assumes Reels will monetize at a 45% lower rate than the rest of Facebook, and 35% less than the rest of Instagram. As a result, he cut his target price to $325. Interestingly, that is still well over today’s price on March 7 of $191.95 per share.

What To Do

Last quarter Meta Platforms produced a FCF margin of 37.3% (i.e., $12.56b/$37.67 b). Given analysts’ revenue forecasts that 2023 revenue will rise to $155.5 billion, up 31.9% from 2021 revenue of $117.9 billion.

That implies FCF could hit $58 billion by 2023, up 51% from $38.4 billion in FCF in 2021. But that assumes a 37.3% FCF margin. Let’s say it deteriorates 10% t0 33.57%. That would lower FCF to $52.2 billion.

Next let’s assume the market gives the stock a 5% FCF yield, up from its prior 3% yield (i.e., a lower valuation). That is the same as lowering its P/CF multiple to 20x from 33.3 times. That means we multiply $52.2 billion by 20x, which results in a potential market capitalization of $1.04 trillion. That is over twice Meta’s present $522 billion market cap.

In fact, let’s just say that FCF rises to just $46 billion by 2023, implying a 30% FCF margin, over 20% lower than its present 37% FCF margin. Therefore, at 20 times FCF (i.e, a 5% FCF yield), the target market cap would still be $920 billion, or 64.9% over its $522 billion market value today.

So the minimum target price we derive is $329.90 (i.e., 64.9% over $191.95per share). That is close to the Morgan Stanley price target of $325 per share.

So, you can see that using a simple model to measure the value of Meta Platform’s free cash flow, FB stock is still significantly undervalued.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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