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META Platforms, Inc. (NASD:META); My Fair Value Estimate:

Updated: Jan 6, 2023


·Abbreviations:

o My Estimate of Fair Value (MFV)

o Return on Invested Capital (ROIC)

o Operating Earnings (OI)

o Enterprise Value (EV)

o Price-to-earnings Ratio (PE)

o Liquidation Value = Tangible Book Value (TBV)

o Book Value (BV)


META is engaged in social media—Facebook is the flagship—and virtual reality products. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before we get to those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.


Pros:

·The % of shares short is <5%

o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company

·The company’s debt relative to its Market Cap is <25%

·The company is cheap using OI/EV (~.11), my preferred relative value measure

·The company’s balance sheet seems good, and BV has grown nicely over 5 years


Cons:

·The company has a tough year-over-year comparison in the upcoming quarter

·Operating Profit Margins are down sequentially and year-over-year


Those pros and cons and—more importantly—the company’s average ROIC (~17% over the last 10-years) make it seem likely that the company has durable competitive advantages. So, I deem the company good quantitatively. I am willing to assume—speculate—that durable competitive advantages will allow the company to grow earnings over time and therefore I value the company relative to $30.6b OI, my estimate of what the company can reasonably earn over an average year. Given the company’s seemingly good balance sheet and 5-yr average multiple of PE x 25.4**, I think OI x 10 is a reasonable fair value, which equates to MFV of $117.03.


At a recent price of $124.37, the differential between market value and MFV is 6%. Thus, I think shares are slightly overvalued.


Conclusion: META has basically always been too relatively expensive to meet my buying rules. I’m guessing at the recent nadir in price, the stock was the relatively cheapest it has ever been. And, it traded below MFV. Thus, I’m a new shareholder and expect to hold a base position unless and until it might become clear that META no longer has durable competitive advantages AND shares become significantly overvalued relative to MFV. The stock continued to decline after my initial purchase, so I added to my base position. If shares were to trade significantly above MFV (~50%), I might become a net-seller.


In the last quarter, OI was only $5.7b, so my $30.6b annual estimate may be too optimistic, and MFV may decline in coming quarters. This is why I draw a line in the sand and never pay more than 10x my OI projection (see notes below). If I am too optimistic on OI, I may still make money if the market assigns a higher multiple to the stock, which historically it has.


My positioning: I own shares and call options


For more information about how and why I designate companies good read here: (https://www.veriteventures.com/post/how-i-value-good-companies)


-V


*Post prepared using data as of 1/3/23

**I’m using the company’s historical PE multiple as a proxy for OI because PE multiples are more readily available from data providers and because I will never pay more than the lessor of 1) OI x 10, 2) OI x the company’s own historical multiple, or 3) the S&P 500’s current OI multiple, which lessens the risk of over overestimating the company’s historical multiple via the PE to OI conversion.

The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.

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