About a year ago, I ran Meta Platforms (Nasdaq: META) through my Value Meter screen.
My conclusion was that the stock was extremely undervalued.
For the first four-plus months afterward, my call looked terrible.
Between June and November, Meta’s stock was nearly cut in half, badly trailing the performance of the S&P 500.
But from there, Meta has been on an absolute tear.
From early November 2022 through today, Meta shares have gone from $90 to $286, as of this writing.
With this huge rebound, my call now looks pretty good…
Very good actually.
Meta’s share price is now up 68%, outperforming the S&P 500 by almost fivefold over the same period.
This once again shows how patience is perhaps the single most important attribute an investor can possess if they want to beat the market.
Despite the initial near-50% decline, Meta has been a big winner.
So how does Meta’s valuation look today?
Currently, the market is appraising Meta at $705 billion.
That’s a big number, but it’s still down from the peak valuation of more than $1 trillion that the stock hit in 2021.
For the current $705 billion market valuation, anyone buying shares of Meta today is getting a business that generated $23 billion in earnings last year.
From a valuation perspective, that equates to a 3.3% earnings yield ($23 billion / $705 billion = 3.3%).
That doesn’t look incredibly cheap to me.
In fact, it looks rather expensive.
But there’s something hidden in the numbers that we must consider…
Meta is aggressively spending on research and development through its Reality Labs subsidiary, which is focused on the metaverse.
Last year, Reality Labs lost $13.7 billion.
Without that, Meta would have earned more than $40 billion from its core Facebook business.
At some point, the aggressive spending and money losing through Reality Labs are going to stop.
In fact, the Reality Labs subsidiary might eventually make money. Perhaps a lot of it!
But I don’t know that it will.
And modeling how much money Reality Labs is going to burn through or eventually create is extremely difficult given how little we know about it. Though the analyst community has been working on it.
Currently, the consensus analyst estimate for Meta’s earnings per share for this year is $11.72. With Meta’s share price at $286, that equates to a price-to-earnings (P/E) ratio of 24.
For 2024, the consensus analyst earnings estimate jumps to $14.60 per share. That would be a P/E ratio of 20 times 2024 earnings.
Both of those numbers strike me as being a pretty fair valuation for this very good business.
When I gave Meta an “Extremely Undervalued” rating in June 2022, we were able to purchase shares of this company at almost half these valuations.
We’ve had a great run with Meta’s stock, but the value proposition here has changed.
Today, The Value Meter rates Meta Platforms as “Appropriately Valued.”
