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Meta Stock Surges Despite Market Downturn
- Authors
- Name
- Solo FIRE
META stock surged 6% after reporting stronger than expected Q2 earnings, with a revenue of $39 billion and EPS of $5.16, growing 22% and 73% respectively. I believe these growth rates are very high and may not be sustainable, so I will project a maximum of 15% growth rate in my DCF calculation to stay conservative.
The estimated fair value of the stock is $524, with the following assumptions:
- Latest TTM FCF $48.75 Billion
- FCF growth rate of 15% (5YR AVG 25.71%)
- Share repurchase of 1.76% per year (5YR AVG 1.76%)
- Future Price/FCF ratio of 20 (5YR AVG 25.85)
- Discount rate of 10%
Here are what I liked about this report:
- Outstanding revenue and EPS growth despite lapsing demand from Chinese advertisers (mentioned in the earnings call). This indicates Meta’s earnings are well diversified and does not depend on any specific region.
- Family daily active people grew by another 7%, to a massive 3.27 billion people on the family of apps, indicating the network effect is still going strong
- Continue to open source the latest Llama AI model. I believe this will continuously bring long term value to the company as the global AI community continues to use it, improve it and build tools around it, allowing the company to benefit from community built tools and improvements at very low cost. This will also create a pool of talents who are already familiar with the Llama and its AI “ecosystem”, enabling Meta to hire top talents without too much training required.
- Continue to invest heavily into AI and next generation AR/VR product while still growing its family of app business. Given the company’s high historical ROIC (23% 10 year average), I believe these investments will bring high returns in the future.
Here are what I don’t like about this report:
- Share based compensation increased 13% to $4.6 billion, almost half of the free cash flow. This is a lot and I hope they can reduce this going forward.
Overall I think this is a great quarter for Meta and the stock looks fairly valued. I will personally continue to hold the stock.
If you are interested in how I value stocks using the DCF model, make sure to check out this video I recently made to walk you through this method step-by-step: https://youtu.be/flzfqXZBxNg
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DISCLAIMER: Solofire is not a registered financial advisor. This post contains author's personal opinion only and it should NOT be considered financial advice.