Key Takeaways:
- The 2-Minute Valuation Model values Meta at $727/share in 2 years.
- This implies that the stock has nearly 20% upside from its current share price.
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Meta stock has led investors to see a 30.1% annualized return over the past 12 years. Very few companies have delivered this kind of performance for investors.
Today, Meta dominates social media and is a leader in digital advertising. The company could have a promising future with its ventures into AI and the metaverse.
What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
The 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized earnings per share, or EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why Meta Looks Undervalued
Forecast
On Meta’s Analyst Estimates tab shown below, you can see analysts expect the company to grow revenue at a 12.5% compound annual growth rate over the next 3 years, with normalized earnings per share, or EPS, expected to grow slightly faster at 13.2% due to expected share buybacks:
View Meta’s full analyst estimates >>>
For context, over the past 5 years, Meta’s revenue grew at an 18.2% CAGR, while normalized EPS grew at 21.5% annually.
Valuation Multiple
Meta stock currently trades at around $620 per share, which means the stock trades at around 8 and a half times next year’s expected revenue and just over 25 times next year’s expected earnings.
Meta has averaged a 22.6x forward P/E multiple over the past 5 years:
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We’ll use a 22x forward P/E ratio in our valuation.
Fair Value
3 years from now, Meta is expected to reach about $32.86 in normalized EPS. At a 22x NTM P/E multiple, that values Meta stock in 2 years at $723/share.
We can tack on an extra $4 per share for the dividends that Meta is expected to pay over the next 2 years, bringing the final fair value to $727 per share.
The NTM P/E multiple uses the next twelve months’ expected earnings, so a 2-year valuation uses 3-year EPS forecast figures.
With the stock trading at about $620 today, this implies that Meta stock could rise 8.3% per year over the next 2 years, or 17% in total, to reach this fair value:
The market has averaged about 10% annual returns over the long run, so Meta’s 8.3% expected annualized returns doesn’t look particularly interesting.
Still, Meta dominates social media, and is one of the biggest companies in the digital advertising space. Big Tech will likely continue winning, and Meta is investing heavily in the future.
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Analysts’ Price Target
The consensus analyst price target for Meta today is about $649 per share, which means analysts think the stock has nearly 5% upside from its current price.
Meta’s risen over 80% in the past year, so it looks like the stock has already captured most of the upside that it used to offer.
You can see that analysts thought Meta was undervalued in 2022. Interestingly, it looks like analysts lowered their estimates in 2023.
It’s clear that analysts didn’t expect that Meta would see a 400%+ return in the past 2 years because they didn’t think the stock had anything more than a 25% upside after 2022:
Analysts’ price targets can suffer from many biases and aren’t always accurate.
Still, looking at analysts’ consensus price targets can be a great way to get a “second opinion” on your own stock valuation.
TIKR Takeaway
Based on the 2-Minute Valuation Model, it looks like Meta stock is just about fairly valued today, and the stock could go up nearly 20% in the next 2 years.
Don’t take our word for it—try it out for yourself! Analyze Meta or any stock you’re interested in on TIKR today!
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
