Software company Meta Platforms stunned Wall Street today as it plummeted to $278.33, marking a -3.6% change compared to the S&P 500 and the Nasdaq indices, which logged -0.0% and -1.0% respectively.
META currently sits within range of its analyst target price of $280.74, which implies that its price may remain stable for the near future.
Surprisingly, analysts give the stock an average rating of buy, which shows that they believe prices could continue to move. Over the last year, Meta Platforms shares have outperformed the S&P 500 by 59.0%, with a price change of 70.4%.
Meta Platforms, Inc. engages in the development of products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and wearables worldwide. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.
Meta Platforms's trailing 12 month P/E ratio is 33.6, based on its trailing EPS of $8.29. The company has a forward P/E ratio of 19.1 according to its forward EPS of $14.56 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio of US technology companies is 27.16, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
Meta Platforms's PEG ratio of 1.34 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
To better understand the strength of Meta Platforms's business, we can analyse its operating margins, which are its revenues minues its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 116,609,000 | 62,416,000 | 24.82 | -37.4 |
| 2021-12-31 | 117,929,000 | 48,527,000 | 39.65 | 4.31 |
| 2020-12-31 | 85,965,000 | 36,602,000 | 38.01 | 12.02 |
| 2019-12-31 | 70,697,000 | 33,941,000 | 33.93 | n/a |
- Average operating margins: 34.1%
- Average operating margins growth rate: -7.5%
- Coefficient of variability (lower numbers indicate less volatility): 19.5%
Meta Platforms's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 50,475,000 | -31,431,000 | 19,044,000 | -51.31 |
| 2021-12-31 | 57,683,000 | -18,567,000 | 39,116,000 | 65.52 |
| 2020-12-31 | 38,747,000 | -15,115,000 | 23,632,000 | 11.41 |
| 2019-12-31 | 36,314,000 | -15,102,000 | 21,212,000 | n/a |
- Average free cash flow: $25.75 Billion
- Average free cash flow growth rate: -2.7%
- Coefficient of variability (lower numbers indicating more stability): 35.4%
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, META is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. Meta Platforms's P/B ratio is 5.72, telling us that the market value of the company exceeds its book value by a factor of 5, but is still below the average P/B ratio of the Technology sector.
Since it has an inflated P/E ratio, an average P/B ratio, consistent free cash flow with a flat trend, Meta Platforms is likely fairly valued at today's prices. The company has mixed growth prospects because of an inflated PEG ratio and strong margins with a negative growth trend. We hope you enjoyed this basic overview of META's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.
