FB Stock Is Deeply Undervalued as Meta’s Q1 Results Show Higher Users

FB stock - FB Stock Is Deeply Undervalued as Meta’s Q1 Results Show Higher Users

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Meta Platforms (NASDAQ:FB) announced in its Q1 results on April 27 that its daily average users actually increased from the prior quarter. They rose 1.6% from 1.92 billion daily active users (DAU) to 1.96 billion DAUs. That doesn’t fit the narrative that short-sellers wanted to see after a slight quarterly consecutive dip in the prior quarter. But not to worry, FB stock is still cheap.

In fact, it is incredibly cheap. The bottom line is that Meta Platforms generated a large amount of free cash flow (FCF) during Q1. For example, it reported that its FCF during Q1 was $8.52 billion, up 9.7% over last year when FCF was $7.81 billion. This also represents a 29.7% FCF margin on its revenue, a very high margin for most companies.

Much has been written about the effects that the Apple (NASDAQ:AAPL) changes to their Identifier for Advertiser’s (IDFA) policy restrictions. Everyone with iOS was opted out by Apple from allowing advertisers to see details about any user. According to Seeking Alpha, the company estimates that this will reduce its revenue by $10 billion this year.

However, that is not even 10% of the $127 billion forecast by analysts on average this year, according to Refinitiv via Yahoo Finance. Moreover, given Meta Platform’s huge FCF margins, it looks like FB stock could be worth significantly more than its price today.

What FB Stock Could Be Worth

Assuming the company generates one-third of its revenue as FCF, it could hit $42.5 billion this year, and $49 billion next year, based on $148.7 billion in sales in 2023.

That implies that FB stock could be worth $981 billion at 20 times FCF. This is also the same as using a 5% FCF yield metric to value FB stock since 1/0.05 = 20x.

This $981 billion target market cap is 92.4% higher than the $510 billion market value today at Meta Platforms. Here is how we can look at this. If it takes two years for FB stock to reach this level, the average annual return will be 38.7% each year for the next two years. This shows that FB stock has now fallen to the point where it is good value for most value investors.

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

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.

Article printed from InvestorPlace Media, https://investorplace.com/2022/05/fb-stock-is-deeply-undervalued-as-metas-q1-results-show-higher-users/.

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