Meta Platforms (NASDAQ:META) Stock: Likely Overvalued in the Near Term

I am neutral on Meta Platforms (NASDAQ:META) stock, one of the world’s most prominent social media and large tech companies, right now. I think it’s probably overvalued because of the market’s enthusiasm for Meta’s new focus on efficiency and profitability.

While I believe management’s tighter focus on profitability gives the company strength going forward, it will likely still face revenue growth challenges, which will significantly impact its ability to grow net income. As a result, I think the stock could face downside volatility in the near term based on its lofty valuation.

META shares are up 161% over the past five years.

Year of efficiency gains comes to an end

Meta shares are up 78.5% over the past 12 months. This is largely due to strong results following Meta’s “year of efficiency.” For example, the company’s Q4 2023 net income increased 204% compared to Q4 2022. However, these results are largely the result of short-term cost savings, including 20,000 layoffs, as opposed to long-term growth drivers. These efficiency gains can’t be sustained forever, despite the promise of AI and automation.

Due to the nature of these recent gains, Meta’s valuation may be too high in my opinion. Historical growth rates in GAAP earnings and free cash flow are unlikely to be sustained. Management delivered GAAP earnings growth of 73.11% and revenue growth of 39.11% over the past year as a result of the efficiency year. However, revenue growth for Meta over the next five years and beyond is unlikely to increase significantly from the historical five-year average of 22% in my opinion.

AI & Automation Factors

As I mentioned, AI and automation are a big part of what Meta is investing in going forward. The company will likely be able to sustain its revenue growth through AI-driven advertising and generative AI (like the LLama 3 large language model and the Meta AI assistant). Still, this is a double-edged sword in the short term, as the company is spending up to $40 billion on AI by 2024.

These investments are undoubtedly crucial for the company to remain competitive, but in the short term, the effects on the company’s cash flow and profitability will likely impact the stock price. Furthermore, remaining competitive in AI will be very capital intensive in the long term, which will likely reduce both profitability and revenue opportunities in the near future until AI infrastructures have a more reliable moat.

Potentially overvalued

Despite Meta’s strong long-term growth trajectory, I believe there is likely to be a correction in the price in the near term as growth rates normalize and market expectations become more moderate over the medium term. Currently, the stock has a price-to-sales ratio of 9.15x, which is 23.60% higher than the five-year average of 7.40x. Moreover, the GAAP price-to-earnings ratio is 29.36x, which is 11.37% higher than the five-year average of 26.36x.

I think some caution is warranted given the current valuation. If the price were lower, Meta would seem to me to be an excellent long-term investment. But with the current high price-to-sales ratio, I am skeptical about allocating capital, as the valuation significantly reduces the long-term returns I am likely to achieve.

Since the company’s revenue is unlikely to continue to grow as it has historically, I believe the price-to-sales ratio will likely shrink over the next decade. If the ratio is around 7x in 2034 and revenue grows at 12.5% ​​per year over that period, the share price would be around $1,260, implying a price CAGR of around 8.8% given that the current revenue per share is $55.67 and the current share price is $540.

Is Meta Stock a Bargain, According to Analysts?

Looking at Wall Street, Meta has a Strong Buy consensus rating based on 37 Buys, three Holds and two Sells assigned over the last three months. At $527.68, the average Meta stock price target implies 2.3% downside potential over the next 12 months.

In my opinion, the potential for negative returns over the period has been underestimated by analysts. Since I am looking for at least 10%+ returns over 12 months, Meta stock seems to me to deserve a neutral rating.

The conclusion: Meta has a valuation risk

The long-term outlook for Meta remains strong as management continues to build a moat in AI infrastructure. The potential to automate more advanced business tasks also opens up room for earnings growth. Additionally, the company’s recent dividend issuance is a benefit to long-term shareholders.

However, in my opinion, valuation risk is high at this point. As a value investor, I want to buy quality growth stocks at a reasonable price. I find it unlikely that Meta stock is fairly valued and certainly not undervalued at current levels based on my analysis and research.


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