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Meta Platforms (META) stock is off its highs and could be undervalued ahead of earnings due out on Jan. 29. As I wrote last month, one way to play this is to sell short out-of-the-money put options for income and a lower buy-in.
META is at $606.90 in mid-day trading on Monday, Jan. 13, well off its recent high of $632.68 on Dec. 11 (-4.1%).
That might provide an opportunity for investors who believe META is undervalued here. This article will describe one way for investors to play the stock.
In my last article in Barchart, I discussed how to set a lower buy-in price target and make income while waiting.
For example, I described selling short puts options at the $600.00 strike price expiring Friday, Jan. 10: “How to Make a 1.5% Yield on META Stock in the Next Month.”
As it turned out META closed at $615.86 on Friday, so these puts remained out-of-the-money (OTM). As a result, anyone who shorted these puts not only kept the 1.5% yield income (i.e., $9.10 premium/ $600 exercise price = 1.1516%), but there was no assignment.
(In other words, the investor's $60,000 in cash secured to buy 100 shares at $600.00 per share was not assigned to be exercised at that price). This frees up the capital, so another short-put play can be made.
Why META Looks Cheap Here
In my last article, as well as the prior one, I showed that Meta Platforms stock could be worth as much as $649 per share. This is based on its strong free cash flow (FCF) and FCF margins.
This was based on analysts' revenue forecasts and $52.9 billion in FCF for 2024 and $61.7 billion for 2025. The latter assumes a 33.1% FCF margin in 2025, up from 32.5% in 2024. We shall see on Jan. 29 if those projections look realistic.
For example, if you look at the table in my Nov. 19 Barchart article, I forecast a whopping 60% FCF margin for Q4, or $27.9 billion in FCF on $46.5 billion in Q4 revenue. Analysts are now projecting slightly higher revenue of $46.98 billion in sales for Q4.
Using a 3.50% FCF yield metric Meta Platforms could be valued between $1.51 trillion and $1.75 trillion:
Market cap 2025 projection = $52.9b FCF / 0.0.35 = $1,511 billion,
$61.7b FCF/ 0.035 = $1,753 billion)
Average = $1,632 billion
Given today's market cap of $1.53 trillion, this implies META could be worth 6.67% higher, or $647.38 per share (i.e., 1.067 x $606.90). But note also that my higher 2025 estimate of $1,753 billion is 14.6% higher, or $695.51 per share.
This coincides with the average analyst price target now. For example, AnaChart reports that 48 analysts have an average price target of $679.06. Moreover, Yahoo! Finance shows that 63 analysts have an average price of $663.38 (Barchart's survey has a mean of $667.58.
The bottom line is that if Meta continues to show strong free cash flow in Q4, META stock could be undervalued.
However, high-tech stocks often “sell on the news” right after earnings come out. This means that it could take some time for the price to hit these target prices. One way to play this is to set a lower buy-in price by selling short out-of-the-money puts.
Shorting OTM Puts
For example, look at the Feb. 7, 2025, expiration period. It shows that the $560 strike price put options have a whopping high premium of $12.95 on the bid side.
That provides a cash-secured short seller of these put options an immediate income of over 2.31% (i.e., $12.95/$560.00). That is just until Feb 7, or a little over 3 weeks away.
Here is what that means. An investor who secures $56,000 in cash and/or buying power in the brokerage account can do this play. They get approval to do cash-secured put trades from their brokerage account first.
Then they enter an order to “Sell to Open” one put contract at $560.00 for expiration on Feb. 7. The account will immediately receive $1,295. That is why there is an immediate yield of 2.31% (i.e., $1,295/$56,000 invested = 0.023125).
Moreover, even if META stock falls to $560 on or before Feb. 7 and the account is assigned to use the collateral to buy 100 shares at $560.00, the investor's breakeven is lower. For example, $560-$12.95 already received is equal to $547.05. That is almost 10% below today's trading price.
The bottom line here is that this is one way to conservatively set a buy-in target price and get paid. Moreover, repeating this play, as seen in my previous articles is a cheap way to keep making income, especially if the investor already owns META shares.
