Meta Platforms Inc (META)

[DiscoverGold]

Meta (META) Stock Could Be 30% Undervalued - Shorting OTM Puts Is a Good Income Strategy
By: Barchart | November 27, 2023

Meta (META) is producing massive amounts of free cash flow (FCF). As a result, META stock could be at least 30% undervalued based on a valuation using its 40% FCF margins and a 5% FCF yield metric. A good income strategy to take advantage of this is to short near-term OTM put options.

I discussed this in my Oct. 29 Barchart article, “Meta's Massive Free Cash Flow Could Push the Stock Well Over $400.” I discussed why META stock could rise to over $400 based on its powerful free cash flow as well as an option play.

For example, I suggested shorting the Nov. 17 $275.00 strike price put option that sold for $3.45. That produced an immediate income of 1.25% (i.e., $3.45/$275) to the short seller of those puts. The stock closed at $335.04 on Nov. 17 so there was no exercise of the option.

I will discuss another put option play below. But first, let's recap why META stock is so undervalued.

Meta's FCF Could Push The Stock Higher

Last quarter the company generated $13.6 billion in free cash flow on $34.1 billion in revenue. That works out to a 40% FCF margin.

Using that margin we can estimate how much FCF it will generate next year. For example, analysts project it will make $133.3 billion in revenue this year and $150.6 billion in 2024.

So, applying a 40% margin, implies that Meta's FCF could range between $53.3 billion and $60.2 billion over the next year. That averages out to $56.8 billion in FCF - a truly massive amount.

The market will value META stock appropriately. For example, using a conservative 5% FCF yield metric, Meta could have a $1.135 trillion market cap (i.e., $56.77b/0.05). This is the same as a market value of $1,135 billion.

That represents a 30.5% rise over today's market cap of $870.1 billion. In other words, META stock could be worth 30.5% more than its price today of $338.91. That means its target price is $442.27.

So, it makes sense for META investors to hold the stock long-term.

However, Meta does not pay a dividend. One way to conservatively create income without any risk of having to sell your shares is to sell short out-of-the-money (OTM) put options. This works best in near-term expiration periods, as I described in my last article.

Shorting OTM Near-Term Puts For Income

For example, look at the expiration period ending Dec. 22, about 3 weeks away. It shows that the $325 strike price puts, which are over 4% out-of-the-money (OTM) (i.e., below today's price), trade for $3.55 on the bid side.

That represents an immediate income yield of 1.09% to the short seller of those puts (i.e., $3.55/$325.00). Moreover, if this trade can be repeated every month for a year, the expected return is over 13% annually.


META Puts expiring Dec. 22 - Barchart - As of Nov. 27, 2023

Here is what this means on a practical level. First, the investor secures $32,500 in cash and/or margin with their brokerage firm. Then they enter an order to “Sell to Open” 1 put contract at the $325 strike price for expiration on Dec. 22.

The account will then immediately receive $355 (i.e., $3.55 x 100, since each contract represents 100 shares). So, that $355 represents over 1% of the $32,500 invested in the play.

As long as META stock stays above $325 over the next 25 days, the investor's $32,500 won't be automatically used to buy 100 shares at $325 per share. But, even if that happens, the investor still keeps the $325 already earned. That means that the breakeven price is $325-$3.55, or $321.45. So the investor has good downside protection, over 5% below today's price.

The bottom line is that META stock is worth at least 30% more. Existing shareholders can wait patiently for this to happen by shorting OTM puts for extra income.

Read Full Story »»»

DiscoverGold