We came across a bearish thesis on Meta Platforms, Inc. (META) on Kroker Equity Research’s Substack by Kroker Equity Research. In this article we will summarize the bulls’ thesis on META. META Technologies, Inc. share was trading at $524.62 as of Sept 13th.

Meta App 3D sign

Meta Platforms Inc., formerly known as Facebook, remains a dominant player in the technology sector, focusing on social media and virtual reality. The company's key platforms include Facebook, Instagram, WhatsApp, and Messenger, which are used by over 3.27 billion people worldwide. With its 2021 rebranding, Meta highlighted its ambition to lead the development of the "metaverse," a series of virtual worlds facilitated by its Meta Quest hardware. This virtual reality push aligns with Meta’s strategy to innovate beyond social media, but remains speculative and uncertain in terms of future returns.

The bulk of Meta's revenue comes from digital advertising, driven by its unparalleled user data, enabling highly targeted ads. This advertising dominance supports Meta's core business, with substantial profitability despite its ambitious investments in unprofitable ventures like the metaverse and evolving AI projects. Over the past five years, Meta's financial performance has been remarkable, with a 19.1% compound annual growth rate (CAGR) in revenue and a 27% CAGR in earnings per share (EPS). The company is also debt-free and continues to generate strong free cash flow, balancing growth with large-scale share buybacks and dividends. Since 2019, Meta has repurchased $141 billion in shares, reducing its outstanding shares by 11%. This strong capital return strategy, combined with its first dividend payment in Q1 2024, makes Meta attractive to both income-focused and growth investors.

However, Meta's stock price has surged over 300% since late 2022, raising concerns about its current valuation. Using a discounted cash flow (DCF) model, Meta's fair value per share is estimated at $407, significantly below its latest stock price of $524. Even under optimistic growth scenarios, the stock appears overvalued. Meta's forward P/E and EV/EBIT ratios, which stand at 23.21x and 19.39x respectively, further support the notion that the stock is trading at elevated levels.

In conclusion, while Meta remains a high-quality company with substantial cash flow and leading social media platforms, its stock is currently overvalued. The company’s heavy investments in the metaverse and AI are yet to demonstrate meaningful returns.

META Platforms, Inc. is on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 219 hedge fund portfolios held META at the end of the second quarter which was 246 in the previous quarter. While we acknowledge the risk and potential of META as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than META but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.