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Meta Platforms (META) stock has significantly higher analyst price targets and is off its recent highs. That could make it appealing to value investors. One way to play this is to sell short out-of-the-money put options to set a lower buy-in.
META is at $668.71 in midday trading on Monday, March 3, from its peak of $736.67 on Feb. 14. This was after the company released its Q4 earnings on Jan. 29, showing strong growth, especially in its free cash flow (FCF).
As a result, META could be worth significantly more. I discussed the company's price targets in my Jan. 28 Barchart article, “Meta Looks Cheap As its AI Costs Just Lowered with DeepSeek's AI Innovations.”
I showed that META could be worth $819 per share using a 2.75% FCF yield metric and based on the company achieving $53.1 billion in FCF in 2024 and $56.9 billion in 2025.
Strong FCF Results and Projections
As it turned out, Meta Platforms generated $52.1 billion in adj. FCF in 2024 - very close to my estimate. This was after significantly higher capex spending, which could continue.
More importantly, the company's FCF margins were very high, as seen in the table below.
It shows that despite significantly higher capex (i.e., $37b vs. $27 last year) Meta still generated 31.7% FCF margins (vs. 31.9% last year) with 21% more FCF in 2024 (i.e., $52.1b vs. $43 billion).
Nevertheless, the company now expects to see $60 to $65 billion in capex spending for 2025, according to the CFO. That is a $25 billion increase (+67%) in spending vs. the $37.2 billion in 2024.
Given analysts' sales projections of $188.48 billion for 2025 (i.e., $24 more than the $164.5 billion in 2024, or +14.6%), most of that increase will go to spending on its AI data center initiatives. That could lower its FCF and FCF margins.
Here is how we can project the company's FCF going forward. Over the next 12 months (NTM), using the 2025 estimate and analysts' forecasts of $214.33 billion for 2026, sales will be on a run rate of about $201.4 billion. So, using its historical operating cash flow (OCF) margins, we can forecast its FCF:
$201.4b NTM sales x 55.5% OCF margin = $111.8 billion op cash flow (OCF)
$111.8 OCF - $62.5 b capex = $49.3 billion FCF
That would be slightly lower than the $52.1 billion in 2024 FCF. However, the FCF margin will be lower since revenue will be much higher.
Nevertheless, the market seems to have already taken this into account. Here is what Meta stock could be worth.
Valuing META Stock
For example, if the market were to value Meta's FCF with a 2.66% FCF yield, (i.e., 37.5x multiple), it could be worth:
$49.3b FCF x 37.5 = $1,849 billion market value
This is 9.0% higher than its present market cap of $1.7 trillion. In other words, META stock could be worth 9% more or $728.89 per share.
However, even a slightly lower FCF yield could give it a substantially higher target price. For example, with a 2.5% FCF yield (i.e., 40x FCF), Meta would be worth 16% more:
$49.3b FCF x 40 = $1,972 billion mkt value;
$1,972b / $1,700 b today = 1.16 = +16%
1.16 x $668.71 price = $775.70
This is why 65 analysts surveyed by Yahoo! Finance have an average price target of $763.15 per share and Barchart's survey shows a mean price target of $747.70. Moreover, AnaChart.com shows that the average of 53 analysts who've recently written on META stock have an average price target of $733.97.
The bottom line is that META still looks undervalued, despite projections of significantly higher capex spending this year. So, how should investors play this?
Shorting OTM Puts
One strategy is to set a lower buy-in price target by selling short out-of-the-money (OTM) puts in nearby expiry periods. For example, look at the March 28 expiration period.
It shows that the $650 put option strike price, about 3% below today's trading price, has a premium of $15.13 in the midpoint. That represents a 2.33% yield to the short-seller of these puts (i.e., $15.13/$650.00 - 0.023276 = 2.33%) over the next three weeks.
The reason is that an investor must first secure $65,000 in cash or buying power with their brokerage firm to do this short sale. Then they can enter an order to “Sell to Open” 1 put contract at the $650.00 put option strike price. The account will then receive $1,513 immediately representing 2.33% of the $65K invested over the three-week period of this cash-secured short-put option play.
Note that this allows the investor to set a lower buy-in target price and get paid to wait if the stock falls to this exercise price. If it does, the investor's breakeven point is actually lower since they already received the income. For example, $650 - $15.13 income received = $634.87, or 5.14% below the trading price today of $699.25.
The bottom line here is that META looks undervalued. Given the company's strong FCF, analysts' estimates, and price targets and using an out-of-the-money short-put strategy, investors can set a lower buy-in price that has a good potential upside.
