Is Meta now a value stock?

On Friday, when Meta’s META, -3.28% stock rose 20% after the company announced a 25% increase in revenue and a tripling of profit from the year-earlier quarter, investors obviously saw the type of growth they wanted and felt the shares had been bargain-priced as of Thursday’s close.

Here’s coverage of an amazing Friday for Meta and its CEO:

So what are we to think of Meta’s stock now? Can Meta be considered a value stock, or a bargain? Let’s look ahead and then take a look back at how the company has grown, to answer that question.

What may lie ahead for Meta

Let’s begin with a look at Meta’s forward price-to-earnings ratio, which is based on Friday’s closing price (following the 20% pop), and updated consensus estimates for earnings per share for the next 12 months among analysts polled by FactSet.

Meta is one of the “Magnificent Seven,” a group of very large U.S. companies that dominated the 2023 rally for the S&P 500 SPX. The other companies in the group are Microsoft Corp. MSFT, -1.35%, Apple Inc. AAPL, +0.98%, Amazon.com Inc. AMZN, -0.87%, Alphabet Inc. GOOGL, +0.91%, Nvidia Corp. NVDA, +4.79% and Tesla Inc. TSLA, -3.65%.

We can broaden our list to the largest 10 companies in the S&P 500 by market capitalization. Leaving the group sorted by market cap, here are forward P/E ratios with comparisons to their rolling 5-year and 10-year averages (based on rolling 12-month EPS estimates). Weighted aggregates for the full index are at the bottom:

Company or index Ticker Market cap. ($bil) Forward P/E 5-year average forward P/E 10-year average forward P/E Microsoft Corp. MSFT, -1.35% $3,056 32.6 28.5 23.9 Apple Inc. AAPL, +0.98% $2,874 27.4 24.4 18.9 Amazon.com Inc. AMZN, -0.87% $1,775 41.0 63.1 117.8 Alphabet Inc. Class A GOOGL, +0.91% $1,653 20.7 23.6 22.8 Nvidia Corp. NVDA, +4.79% $1,634 31.2 39.9 34.9 Meta Platforms Inc. Class A META, -3.28% $1,054 23.9 21.1 26.1 Eli Lilly and Co. LLY, +5.77% $634 51.9 29.5 24.8 Tesla Inc. TSLA, -3.65% $598 58.9 96.1 129.2 Broadcom Inc. AVGO, +1.53% $573 25.0 15.1 14.3 Berkshire Hathaway Inc. Class B BRK.B, +0.00% $511 21.8 20.9 20.3 S&P 500 SPX 20.2 19.3 18.0 Source: FactSet

Meta is the second-cheapest by forward P/E among the largest 10 stocks in the S&P 500. To underline the importance of this group, the Magnificent Seven have a 29% portfolio weighting in the SPDR S&P 500 ETF Trust SPY, while these 10 stocks make up more than 33% of the fund.

Meta’s forward P/E of 24 is above its five-year average, but below its 10-year average. Six of 10 stocks trade above their five year averages, while five trade above their 10-year averages. The index’s forward P/E is above both of its averages.

Leaving the group in the same order, let’s take a look at expected compound annual growth rates (CAGR) for sales, EPS and free cash flow per share for the group and the index, through 2025, based on consensus estimates among analysts polled by FactSet. We are using estimates for calendar years because Microsoft, Nvidia, Apple and Broadcom have fiscal years that don’t match the calendar.

Company Ticker 2-year estimated sales per share CAGR through 2025 2-year estimated EPS CAGR through 2025 2-year estimated FCF CAGR through 2025 Forward P/E Microsoft Corp. MSFT, -1.35% 14.7% 16.7% 19.7% 32.6 Apple Inc. AAPL, +0.98% 4.4% 8.2% 11.0% 27.4 Amazon.com Inc. AMZN, -0.87% 11.7% 35.7% 36.4% 41.0 Alphabet Inc. Class A GOOGL, +0.91% 11.1% 16.1% 21.5% 20.7 Nvidia Corp. NVDA, +4.79% 38.6% 43.8% 52.4% 31.2 Meta Platforms Inc. Class A META, -3.28% 14.3% 24.1% 11.2% 23.9 Eli Lilly and Co. LLY, +5.77% 18.9% 66.8% 32.5% 51.9 Tesla Inc. TSLA, -3.65% 18.2% 16.5% 42.5% 58.9 Broadcom Inc. AVGO, +1.53% 20.8% 14.8% 20.0% 25.0 Berkshire Hathaway Inc. Class B BRK.B, +0.00% 10.1% 4.6% N/A 21.8 S&P 500 SPX 5.3% 12.2% 15.0% 20.2 Source: FactSet

For this table we included the forward P/E ratios again, to the right.

Meta stands in contrast to Apple, with a lower P/E but much higher expected two-year CAGR for sales and earnings.

A company’s free cash flow (FCF) is its remaining cash flow after capital expenditures. This is money that can be used to fund expansion or to increase dividends, buy back shares (which can lower the share count and boost EPS) or for other corporate purposes. The relatively low expected FCF CAGR for Meta reflects the company’s plans to increase hiring and spending on various initiatives, including hardware to support artificial intelligence, data centers and product development.

Looking back

Here’s the group again, this time showing five-year CAGR for sales, EPS and FCF and earnings through 2023, with adjustments and estimates by FactSet for companies whose fiscal years don’t match the calendar:

Company Ticker 5-year sales CAGR through 2023 5-year EPS CAGR through 2023 5-year FCF CAGR through 2023 Microsoft Corp. MSFT, -1.35% 14.0% 19.8% 15.6% Apple Inc. AAPL, +0.98% 8.0% 15.5% 15.3% Amazon.com Inc. AMZN, -0.87% 19.8% 23.5% 18.3% Alphabet Inc. Class A GOOGL, +0.91% 17.5% 21.6% 27.0% Nvidia Corp. NVDA, +4.79% 36.3% 46.3% 49.1% Meta Platforms Inc. Class A META, -3.28% 19.3% 14.5% 24.2% Eli Lilly and Co. LLY, +5.77% 9.4% 15.4% 10.5% Tesla Inc. TSLA, -3.65% 35.2% N/A N/A Broadcom Inc. AVGO, +1.53% 12.5% 17.3% 15.3% Berkshire Hathaway Inc. Class B BRK.B, +0.00% 4.9% 60.3% N/A S&P 500 SPX 8.8% 9.0% 5.1% Source: FactSet

Meta has put up good five-year growth numbers.

Let’s take one last look at these 10 companies, this time focusing on returns on invested capital.

According to FactSet, a company’s return on invested capital, or ROIC, is its profit divided by the sum of the carrying value of its common stock, preferred stock, long-term debt and capitalized lease obligations.

ROIC is an annualized figure that highlights how efficiently a management team has used the money invested to fund its business. It isn’t a perfect tool to measure performance, in part because different industries are naturally more capital-intensive than others.

Note that the carrying value of a company’s stock may be much lower than its current market capitalization. The company may have issued most of its shares many years ago at a price much lower than today’s price. If a company has issued a relatively large amount of newer shares recently, or at high prices, its ROIC will be lower. If a company has low debt, its ROIC is higher. If a company is being forced to increase borrowings, especially as interest rates are rising, its ROIC will go down.

FactSet measures ROIC by rolling 12-month periods through companies’ most recently reported fiscal quarters. So we looked back at the past 10 12-month periods for the 10 companies. Here are average, minimum and maximum ROIC for five and 10 years:

Company Ticker 5-year average ROIC 5-year min ROIC 5-year max ROIC 10-year average ROIC 10-year min ROIC 10-year max ROIC Microsoft Corp. MSFT, -1.35% 28.0% 24.5% 32.6% 21.5% 9.7% 32.6% Apple Inc. AAPL, +0.98% 48.4% 28.7% 62.0% 37.5% 22.5% 62.0% Amazon.com Inc. AMZN, -0.87% 9.9% -1.0% 15.4% 7.8% -1.3% 15.4% Alphabet Inc. Class A GOOGL, +0.91% 22.0% 17.3% 28.9% 17.9% 8.5% 28.9% Nvidia Corp. NVDA, +4.79% 27.5% 17.7% 50.6% 25.9% 10.4% 50.6% Meta Platforms Inc. Class A META, -3.28% 22.0% 16.0% 28.5% 20.2% 9.1% 28.5% Eli Lilly and Co. LLY, +5.77% 24.0% 18.7% 28.8% 16.3% 1.5% 28.8% Tesla Inc. TSLA, -3.65% 13.7% -4.9% 29.4% -0.4% -29.0% 29.4% Broadcom Inc. AVGO, +1.53% 12.3% 4.9% 22.7% 11.0% -8.0% 30.0% Berkshire Hathaway Inc. Class B BRK.B, +0.00% 8.1% -0.2% 15.6% 8.0% -0.2% 15.6%

Click on the tickers for more about each company, ETF or index.

Meta ranks sixth out of the 10 companies by average five-year ROIC and minimum ROIC for that period. The company ranked fourth for 10 years.

Apple ranks highest for both periods, in part reflecting so many years of strong performance and free cash flow to fund its expansion. But Meta’s solid long-term record — including the fourth-highest minimum ROIC for the 10-year period — provides comfort to support its relatively low P/E valuation, especially after Friday’s surge for the shares.

In conclusion, one can and should call Meta a growth stock. But it also seems to represent a good value at these levels, based on expectations for rapid growth of sales and earnings through 2025, the look back and the overall valuation of the S&P 500.

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