Meta Platforms (META) made $40 billion in free cash flow (FCF) last year. Its new first-ever quarterly dividend will cost just $5.1 billion annually. Based on analysts' higher sales forecasts and its 32% FCF margin, META could be worth over 18% more at $556 per share.

Last month, I wrote that META stock could be worth substantially more based on its FCF. The Barchart article on Jan 5, 2023, “Meta Platform's Huge Free Cash Flow Could Power META Stock 34% Higher to $473,” suggested that its FCF could power the stock much higher.

Now that META stock has moved substantially higher to $469 as of morning trading on Friday, Feb. 9, 2024, let's look at this more carefully.

Dividend Is Covered By FCF

Meta Platforms said that its Q4 revenue rose 25% YoY on Feb. 1, 2024, and its 2023 sales were up 16% to $134.9 billion. This was based on both growth in its user metrics as well as higher ad revenue.

More importantly, its free cash flow - the cash flow that is completely free of any obligations and can be used to pay dividends, buy back stock, and reduce debt - rose dramatically. It hit $11.5 billion in Q4 and $40.1 billion for all of 2023.

This represented a 117% rise over the $5.3 billion it made in Q4 2022. The $40.1 billion in 2023 FCF was also 117% over the $18.4 billion in FCF in 2022.

The chart from page 17 of its slide presentation shows that Meta's quarterly FCF has been consistently over $5 billion for the last 5 quarters. That is likely why Meta decided to pay a dividend.

For example, its new dividend will cost Meta about $5.1 billion annually or $1.275 quarterly (i.e., 2.5 billion shares outstanding x $2.00 dividend per share). So there is plenty of FCF to cover that dividend payment each quarter.

FCF Projections

That makes the stock worth more given this stable dividend and FCF. It has huge implications for the stock's value. That is also based on its FCF margin. 

For example, its $40.1 billion in FCF last year represented 32% of its $134.9 billion in sales. We can use that to project FCF going forward and then set a target price based on that figure.

Here is how. Analysts now project sales in 2024 will reach $158.22 billion in 2024 and $176.89 billion in 2025. That implies an average run-rate sales estimate for the next 12 months (NTM) of $167.6 billion.

So if we apply a 32% FCF margin to this NTM sales estimate, we get an FCF projection of $53.6 billion. In other words, FCF could rise by one-third sometime in the next 12 months, at least on a run rate (i.e., projected NTM) basis.

That number is useful for projecting a target price. Here is how.

Setting a Price Target for META Stock

Right now Meta stock has a 0.426% dividend yield (i.e., $2.00 annual dividend / $469 stock price). Now we estimate that the dividend will only cost about 10% of the NTM $53.6 billion in FCF.

Therefore, if 100% of the FCF was theoretically paid out to shareholders, the dividend yield would be 10 higher (i.e. given that only 10% of the FCF now is used for the dividend). That implies the market is valuing Meta's FCF at a 4.26% FCF yield (i.e., 10 x 0.426%).

So, if we divide the $53.6 billion in NTM FCF estimate by 4.26% we get a projected market cap of $1,258 billion (i.e., $53.6b/0.0426 = $1,426 billion). That is 7.3% over its present market cap of $1,172 billion (i.e., 2.5 b shares o/s x $469 per share).

Moreover, the market could eventually apply a 3.5% FCF yield (i.e., improve its valuation given Meta's consistent dividend and FCF). This means its market cap would be $1.53 trillion (i.e., $53.6b/0.035 = $1,340 billion). That is 30% higher than its present stock market value of $1,172 billion.

So the range for the stock's gain is 7.3% to 30% higher, or about 18.7% on average. That could push the stock's value to $556 per share.

Analysts See a Higher Price

Other analysts see higher price targets for Meta as well. For example, Yahoo! Finance reports that the average of 52 analysts is $490.71 per share. That implies a gain of just $20.71 or 4.4%.

But Anachart.com has a survey of 48 analysts which shows that the average price target is well over $500. Their price target average is $520.48, or 10.74% over yesterday's close of $470 per share.

That shows that there is a significant upside still left in META stock. So, whether you use an FCF target like my analysis shows, or just rely on other price targets from sell-side analysts, investors can expect to see Meta stock higher over the next 12 months.

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