Key insights
- An analyst's valuation exercise on Meta highlights concerns about rising capital expenditures impacting free cash flow. The analysis projects declining FCF/Net Income ratios through 2028 due to increased capex, then recovery. Using various EPS estimates and a 9% discount rate, the analyst calculates a range of fair values, suggesting potential downside risk if capex continues to rise beyond current expectations.
(This is a reminder post to myself on valuing Meta)
- I use adjusted EPS as a proxy to Free Cash Flow. Tne reason is simple, everydone use earnings for reporting, estimating and forecasting. 2. It should be adjusted for one time items, where possible. In a stable stage, depreciation would be the same as maintenance capex. 3. As a safeguard, i make sure FCF / Net Income is > 80% overlong periods. 4. So, how does one value Meta, where the capex has been rising steadily since 2024, and jumped in 2025, and will increase again in 2026? During last week's concall, the CFO let slip that costs is coming higher than anticipated, and 2026 won't be the only year of elevated capex. Several analysts asked about 2027, and she said that all will be revealed in good time as the nos are currently dynamic. 5. Here is my first stab at valuing meta:
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a. During Meta's mature phase, 2016–2023, the overall FCF/NI was > 0.90 with investment years of 2018, 2020, 2022.
b. In 2025 this ratio dropped to 0.57, and this year 2026, the capex will be higher (and ratio will be smaller) as alluded by management. Lucy Diamonds, my personal AI thinks that 2027 will be higher and it will continue to 2028.
c. So i am going to model a somewhat pessimistic scenanario:
Years 2025a 2026 2027 2028 2029 2030 FCF/NI 0.57 0.5 0.4 0.5 1 1
the logic is, if i can find the EPS estimates for meta, i could apply the ratio, and come up with a EPS' and then use it as a basis for my NPV calculation.
Here are some forward estimates i found for EPS for the next 5 or 6 years:
YEAR 2025a 2026e 2027e 2028e 2029e 2030e A.MSNR/MSERR 29.68 35.85 38.26 46.67 55.09 63.53 B.SA 29.68 30.91 36.69 41.60 50.19 57.22 55.35 C.DCF 29.68 32.05 34.90 40.01 48.35 57.07
Applying the ratio, and doing a NPV of the future cash flows, with the assumption of 9% discount rate and 3% terminal growth, with duration as either 5 or 6 years, here are some of the fair value estimates:
|Scenario|Fair Value today| |:-|:-| |A.MSNR/MSERR|$853.39| |B. SA|$731.82| |C.DCF|$766.90|
Morningstar currently gives Meta a fair value of $850.00 while CFRA has Meta at $668.42
d. You can you download the simple NPV calculation of three scenarios here.
Anyway, like i said, this is a first attempt, other things that was not explored but could affect the fair value will include: Share dilution, duration of 10 years instead of just 5 or 6 years here.