A business with excess cash on its books can return value to shareholders in various ways. One of them is distributing the surplus among shareholders as dividends. However, they are more tax-efficient ways to reward existing shareholders with delayed gratification.
A business can choose to reinvest its earnings into its own business or acquire other businesses to upgrade or expand its operations organically or inorganically to increase its future earnings and consequentially increase the intrinsic value of each of its outstanding shares.
Alternatively, the business may choose to decrease the number of outstanding shares, making each share worth a greater percentage of the corporation. All else being equal, this increases the earnings attributable to each share almost immediately. This method of allocating excess capital is called a buyback.
Buybacks are initiated through tender offers or open market transactions when the management of an organization feels that its shares are undervalued. In addition to signaling financial health and increased confidence in their own prospects, businesses also repurchase their own shares to reduce supply and dilution by shrinking the float to prevent other shareholders from taking a controlling stake.
In a nutshell, a buyback is a way for a business to get its skin deeper in the game with the hope of rewarding investors who choose to keep supporting it.
Can Meta Platforms Be a Good Investment Given Its Buyback Program?
On February 1, Meta Platforms, Inc. (META) announced that it had repurchased $6.91 billion and $27.93 billion of its Class A common stock in the fourth quarter and full year of 2022, respectively.
It also announced a $40 billion increase in its share repurchase authorization, in addition to the $10.87 billion available and authorized for repurchases as of December 31, 2022.
As the parent company of world-renowned social networking platforms, such as Facebook and Instagram, META builds technologies that help people find communities and grow businesses through mobile devices, personal computers, virtual reality (VR) headsets, wearables, and in-home devices. The company operates through two segments: Family of Apps (FoA) and Reality Labs (RL).
According to META founder and CEO Mark Zuckerberg, 2023 is the ‘Year of Efficiency’ for the company. To this end, the business has lightened its headcount by about 11,000 while pivoting towards a next-generation data center design, including the cancellation of multiple data center projects. It has also sought to consolidate its capital structure and allocate more efficiently by doubling its share repurchase.
Driven by positive sentiments, the stock has gained 46.7{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} over the past month to close the last trading session at $186.06.
META is trading above its 50-day and 200-day moving averages of $128.44 and $151.81, respectively, indicating an uptrend.
Here is what may help the stock maintain its performance in the near term.
Solid Track Record
Over the past three years, META’s revenue has exhibited an 18.2{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} CAGR, while its EBITDA has grown at a 6.8{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} CAGR.
During the same period, the company has increased its net income at 7.9{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} CAGR, while its EPS has grown at a 10.1{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} CAGR due to its expanded buyback program, which began in 2017.
Robust Financials
During the fourth quarter and entire fiscal year, which ended December 31, 2022, META’s revenue came in at $32.17 billion and $116.61 billion, representing 1.5{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} and 3.9{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} year-over-year increases, respectively, on a constant currency basis.
The company’s income from operations for the quarter came in at $6.40 billion, while its net income came in at $4.65 million, or $1.76 per share.
META’s total assets stood at $185.73 billion as of December 31, 2022, compared to $165.99 billion as of December 31, 2021. Daily Active People (DAP) and Monthly Active People (MAP) across its family increased 5{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} year-over-year to 2.96 billion on average for December 2022 and 3.74 billion as of December 31, 2022.
Premium Valuation
Given its increasing usage statistics and a renewed focus on consolidation and efficiency, META is currently commanding a premium compared to its peers. In terms of forward P/E, META is currently trading at 20.04x compared to the industry average of 17.47x.
Moreover, META’s forward EV/Sales and Price/Sales multiples of 3.84 and 3.95 are also higher than the respective industry averages of 2.06 and 1.36.
Favorable Analyst Estimates for Next Year
META’s steady growth and increasing efficiency have led analysts to expect its revenue and EPS to increase 5{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} to $122.40 billion and $9.02, respectively, for the fiscal year ending December 31, 2023.
Revenue and EPS are expected to increase 11.6{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} and 23.6{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} during the next fiscal year to $136.65 and $11.15, respectively.
Technical Indicators Look Promising
MarketClub’s Trade Triangles show that META has been trending UP for each of the three time horizons. The long-term trend has been UP since January 23, 2023, while the intermediate-term and short-term trends have been UP since December 1, 2022, and January 20, 2023, respectively.
The Trade Triangles are our proprietary indicators, comprised of weighted factors that include (but are not necessarily limited to) price change, percentage change, moving averages, and new highs/lows. The Trade Triangles point in the direction of short-term, intermediate, and long-term trends, looking for periods of alignment and, therefore, strong swings in price.
In terms of the Chart Analysis Score, another MarketClub proprietary tool, META scored +90 on a scale from -100 (strong downtrend) to +100 (strong uptrend), indicating that the uptrend will likely continue. While META is showing intraday weakness, it remains in the confines of a bullish trend. Traders should use caution and utilize a stop order.
The Chart Analysis Score measures trend strength and direction based on five different timing thresholds. This tool takes into account intraday price action, new daily, weekly, and monthly highs and lows, and moving averages.
Click here to see the latest Score and Signals for META.
What’s Next for Meta Platforms, Inc. (META)?
Remember, the markets move fast and things may quickly change for this stock. Our MarketClub members have access to entry and exit signals so they’ll know when the trend starts to reverse.
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Best,
The MarketClub Team
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