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Meta Platforms, Inc. (META) produces massive free cash flow (FCF) and 40% FCF margins. These could push META stock 34% higher to $473 per share. As a result, investors can short out-of-the-money (OTM) puts to make extra income.
We discussed this very profitable play in my last Barchart article on Dec. 15, 2023, “Meta Platforms Stock is in a Trading Range - Good for Short Put Income Plays.” At the time META stock was at $336.46 and today, Jan. 15 META is trading for $352.77.
We recommended shorting the $325 put option for $3.70 in premium. That worked out to a 1.139% immediate yield to the short put seller for a strike price that was 3.39% out-of-the-money. Today it makes sense to repeat this kind of trade.
But first, let's review again why META stock could rise significantly higher, at least 34% according to my calculations. This is based on its powerful free cash flow and FCF margins.
FCF Could Push META Stock Higher
For example, last quarter Meta Platforms generated a massive $13.64 billion in free cash flow from $34.15 billion in revenue. That means that after all its cash expenses, plus all its capex spending as well as changes in working capital, it still had 40% of its incoming cash flow left over.
That amount is “free” cash flow, with no obligations on it, especially since the company still doesn't pay a dividend.
As a result, we can project how much FCF it will generate in 2024. For example, 56 analysts surveyed by Seeking Alpha now project, on average, that Meta Platforms will make $150.75 billion in revenue in 2024.
That implies over $60 billion in FCF for 2024 (i.e., $150.74b x 0.40 = $60.3b). That is a huge amount of FCF and represents 6.66% of its $900 billion market cap.
A more realistic FCF yield is 5.0%. For example, in the last 12 months (LTM) ending Sept. 30, Meta Platforms produced $37.58 billion in FCF. That works out to 4.175% of its $900 billion market cap. So using a 5% FCF yield to value META stock is conservative.
Here's how that works out. If we divide our $60.3 billion FCF projection for 2024 by 5% (which is the same as multiplying it by 20x), we get a target market cap of $1,206 billion. That is 34% higher than its present $900 billion market cap.
In other words, META could be worth 34% more, or $473 per share.
Shorting OTM Puts for Extra Income
One way existing shareholders in META stock can play this is to short near-term expiry put options in strike prices below the spot price, i.e., out-of-the-money (OTM). For example, look at the Jan. 26 expiration period option chain.
The $335 strike price puts have a $2.60 premium. So, if you short that strike price, which is almost 5% below today's spot price, you make an immediate yield of 0.776% (i.e., $2.60/$335.00). That is a very good yield with a reasonably safe distance away from the spot price.
More adventurous investors can sell short the $340 strike price, which is 3.5% or so below the spot price. Those puts have a higher premium and yield: i.e., $3.65/$340, or 1.07%.
Keep in mind that the breakeven price is $340-$3.65, or $336.35. That is still 4.65% below the spot price, so there is also good downside protection.
The bottom line here is that existing shareholders can look forward to a significantly higher stock price ($473) based on Meta's huge free cash flow. Given that the company does not pay a dividend, they might as well short out-of-the-money put options.
That way they can make extra income while they wait for the stock to hit its target price.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
