Is Meta Overvalued? One company that gives me the biggest FOMO

📈 Trade Details

I'm watching META at $595.94 (the price at the time of writing). I'm not initiating a position yet, but I'm afraid I might regret it.

Warren Buffett famously said it is better to buy a great business at a fair price than a mediocre business at a discounted price. I believe this is the case for META, a great business with exceptional growth potential that is currently selling at a fair price. 

🎯 What can we expect?

If the expected Earnings Growth materializes, the expected return is 18.40% by 2026 or 7.83% annualized. This is lower than what I would like to see from my investments. I am looking for 20%+ per year returns. 

However, this valuation is given META's current growth expectations. Can the company deliver more than that?

🗒️ Quick Company Summary

NASDAQ Ticker: META

Meta Platforms, Inc. ($META) is a technology company focused on building products and services that enable people to connect and share in new ways. The company is best known for its social media platforms, including Facebook, Instagram, and WhatsApp.

In addition to social networking, Meta is heavily investing in augmented reality (AR) and virtual reality (VR) technologies, aiming to create immersive experiences and a metaverse where users can interact in virtual environments. The company is also exploring innovations in artificial intelligence (AI) to enhance user experiences across its platforms.

🎯 What analysts think (Stock Price Forecast):

Avg. Price: $590.40(-0.93%)
Highest Price:  $811 (+36%)
Lowest Price: $16 (-36%)

Wall St. Analysts believe that the stock is fairly priced at this point, and there isn't much room for growth.

Historically, the stock has traded below analyst targets. So, if we are buying here, we go against market sentiment. It is never a bad thing, but we have to understand where exceptional & unexpected growth will come from.

🎯 What do financial models think:

Avg. Price: 558.82 (-6.2%)

Breakdown by Model:

• 10Y DCF Revenue Exit: 554.73 (-6.92%)

• 5Y DCF Growth Exit: 514.82 (-13.61%)

• 5Y DCF Revenue Exit: 511.60 (-14.15%)

• 10Y DCF EBITDA Exit: 565.39 (-5.13%)

• 5Y DCF EBITDA Exit: 519.35 (-12.85%)

• 10Y DCF Growth Exit: 515.70 (-13.46%)

• Dividends: Stable Growth: 536.23 (-10.02%)

Again, this is not a positive outlook from the financial model point of view at the current price.

🕰️ Historical Performance vs. S&P500 ($10k Investment)

Here is the summary of your returns if you invested $10,000 in META vs. S&P 500 since 2021. 

Outperformance comes as no surprise when you look at the rate of EPS growth of META vs. SPY. META grew earnings 2x faster than SPY but saw a 3x increase in stock price.

🔮 Future Earnings Expectations

Future earnings expectations are quite tame for META but what is interesting is that META has been beating expectations for the last 4 quarters. 

🚚 Key Drivers of Future Growth

• Ad Revenue Growth: Meta's primary revenue driver remains its advertising business. Total ad revenue grew 22% year-over-year, bolstered by strong performance across Facebook, Instagram, and WhatsApp. Notably, ad impression growth was significant, particularly in regions like Asia-Pacific and the Rest of the World, with a 10% increase in the average price per ad due to higher advertiser demand and improved ad performance.

• AI Enhancements: AI continues to be a critical focus for Meta. The company has made significant improvements in its recommendation algorithms, especially in areas like Instagram Reels and Facebook’s unified video experience. This has helped increase user engagement, with AI-driven content recommendations playing a key role in driving interactions.

• WhatsApp Business Platform: Another standout performer was WhatsApp, particularly its Business Platform, which experienced a 73% increase in revenue. This growth aligns with the platform's broader strategy to monetize business messaging, providing a new revenue stream beyond traditional advertising​

• Reality Labs & Metaverse Investments: Meta continues to invest heavily in Reality Labs, which saw revenues grow by 28%, driven mainly by sales of the Quest headset. However, the segment remains unprofitable, with a $4.5 billion loss. Nonetheless, Meta views these investments in AR/VR and the metaverse as long-term bets that will pay off in future.

🐂 Key Bullish Arguments

So it all comes down to AR & if META can eventually turn Reality Labs into a profitable part of the business.

• AR Glasses as a Future Growth Driver: Meta's ambitious plans to develop augmented reality (AR) glasses, specifically the Orion prototype, could replace smartphones by 2030. If successful, these AR glasses could tap into the lucrative $500 billion smartphone market, positioning Meta to capture a significant portion of that value. This potential iPhone-moment product could substantially boost the company’s future revenues.

• High Spending on Reality Labs Justified: Although Reality Labs is currently posting significant losses, the heavy investments in AR/VR and AI are starting to pay off. Meta's ongoing development of smart devices and glasses is laying the groundwork for future success in these areas, creating new growth opportunities beyond the social media space.

• Strong Financials Despite High Investment: Despite large expenditures, Meta has maintained a solid 38% operating margin and produced nearly $15 billion in profits in Q2 2024. The company’s ability to sustain growth while investing heavily in futuristic technologies like AI and AR glasses demonstrates its resilience and long-term potential.

🐻 Key Bearish Arguments

• Overvaluation: Meta's stock has surged significantly, up 88% over the past year and 63% year-to-date in 2024. Despite strong financial performance, the stock's valuation ratios are higher than historical averages, suggesting potential overvaluation. The stock appears to be trading at a premium, which limits its upside potential from the current levels.

• Limited Upside Potential: While Meta remains fundamentally strong with robust profitability and revenue growth, the article suggests that much of this positive momentum is already priced into the stock. The market capitalization is closely aligned with Meta's fair value, leaving little room for significant upside unless there are unforeseen catalysts​

• Insider Selling: Insider activity also raises caution. Over the past year, insiders have primarily sold shares, with no reported purchases. This could indicate that insiders view the current price levels as favorable for selling, which might suggest limited confidence in further short-term stock gains​

Conclusion

I am watching from the sidelines at the moment as the valuation is too rich to initiate a position but the fear of missing out is real. I am interested to see if AI starts adding to the bottom line & if investments in AR turn profitable.

Disclaimer
I currently do not have an active position in any of the companies mentioned above but am thinking of initializing in the next few days. As usual, the information provided in this newsletter is for general informational purposes only. All information in the newsletter is provided in good faith, however, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information. The content of this newsletter does not constitute financial advice, investment advice, or any other type of advice and should not be relied upon for any individual circumstances. We are not financial advisors, and you should consult with a professional before making any investment decisions. Any action you take upon the information in this newsletter is strictly at your own risk, and we will not be liable for any losses and/or damages in connection with the use of our newsletter.

Happy Investing,
Andy