Meta Platforms (META) reported higher operating cash flow for Q1 Y/Y last week, but lower free cash flow (FCF) due to higher capex spending. Moreover, on April 30, management raised its capex spending forecast for 2025, lowering future FCF forecasts. META stock has dropped as a result, but is it a buy here?

The answer is that META is fairly valued today, but worth +116% more at $693 over the next 12 months. This article will show why, including an analysis of its future free cash flow and related valuation, as well as analysts' price targets.

META is down today to $597.15 per share, well off its high of $599.27 on May 5, and its 6-month peak of $736.67 on Feb. 14.

Free Cash Flow Prospects

On April 30, Meta Platforms reported that its Q1 2025 revenue rose 16% to $42.3 billion, although this was 12.5% lower than the $48.385 billion in Q4 2024 sales.

However, its free cash flow (FCF) came in lower than last year and also compared to Q4 2024, as seen on page 9 of the earnings release. (I discussed last quarter's results in a March 3 Barchart article.)

The table above shows that although operating margins were almost 57% in Q1 vs. 52.8% a year ago, due to a doubling in capex spending, Meta's FCF margin fell to 24.4% from 34.4%.

Moreover, as seen in Q4, the FCF margin previously was 27.2%, even after a 90% hike in capex spend and leases to $14.8 billion. The $13.69 billion spent in Q1 (capex and leases) was 7.5% lower, but management said its capex spending going forward will rise by about $5 billion up 8.8% to $68 billion at the midpoint of the range:

“We anticipate our full year 2025 capital expenditures, including principal payments on finance leases, will be in the range of $64-72 billion, increased from our prior outlook of $60-65 billion. This updated outlook reflects additional data center investments to support our AI efforts as well as an increase in the expected cost of infrastructure hardware. The majority of our capex in 2025 will continue to be directed to our core business.”

In other words, we can forecast the 2025 FCF by using the operating cash flow margin (OCF) and deducting the higher capex spending forecast provided by management. Here is how that works.

Revenue estimates. Seeking Alpha's survey of analysts shows revenue this year is forecasted to be $186.88 billion, up +13.6% from $164.5 billion in 2024. (That is slightly lower than in my last article, when analysts were projecting $188.48 billion for 2025). 

Moreover, for 2026, they now project $211.68 billion, down from a prior estimate of $214.33 billion.

Operating Cash Flow estimates. If we assume that full-year OCF margins stay level with Q1 at 24.4%, here is the projection for FCF:

   $186.88 billion (2025 sales est.) x 0.5678 = $106.3 billion 2025 OCF

   $211.68 b (2026 sales est.) x 0.5678 = $120.2 billion 2026 OCF

Free Cash Flow estimates: Assuming that capex spending comes in at $68 billion at the midpoint of the range, here are the FCF projections:

  $106.3b (2025 OCF) - $68b capex = $38.3 billion FCF (2025 est.), or 20.5% of sales (FCF margin)

  $120.2b (2026 OCF) -$68b capex = $52.2 billion FCF (2026), or 24.7% of sales (FCF margin)

Last year, Meta generated $52.1 billion in FCF or 31.7% of sales after spending $39 billion on capex and principal lease payments, as I showed in my last article. In other words, Meta may eventually make as much FCF by 2026, even after a 74% hike in its capex spending.

We can use that to value META stock using a FCF yield metric.

Meta Stock Price Targets

For example, if we assume the market will eventually value META with a 2.50% FCF yield (i.e., the same as 40x FCF), its market cap will be worth:

  $38.3 b FCF 2025 / 0.03 =  $1,532 billion market cap

That is about +2.1% higher than today's market value of $1.5 trillion. In other words, at 40x FCF for 2025, META stock is worth $609.69:

  $597.15. x 1.021 = $609.69

Moreover, assuming a lower 3.0% FCF yield metric for 2026 (or 33.33x FCF), its value is worth 16% more at $693 per share:

  $52.2 b 2026 FCF / 0.031 = $1,740 billion, i.e., + 16.0%

  $597.15 x 1.16 = $692.69

Moreover, analysts seem to agree with this price target. For example, Yahoo! Finance reports that the average of 68 analysts is $703.41 per share. However, that is down from $763.15 last month, as seen in my prior article. Similarly, Barchart's mean survey is now $695.75, down from $747.70 last month, and AnaChart's survey shows 54 analysts have a price target average of $681.45, down from $733.97.

The point is that META stock still looks undervalued here, although less so compared to last month. This is based on the company's higher capex projections, which lowers its FCF prospects.

Shorting OTM Puts and Calls (or Strangles)

One way to play this is to short out-of-the-money puts and calls, or even a strangle strategy (doing both). This works if META stays in a trading range over a short period. The investor can pick up extra income and potentially have a lower buy-in price.

For example, look at the June 6 expiration period, which is 28 days to expiry (DTE). It shows that the $570 out-of-the-money put strike price has a $10.08 midpoint premium. That provides the short seller an immediate yield of 1.768% (i.e., $10.08/$570) for a potential buy-in price that is about 5% below today's trading price. The breakeven point is even lower.

Moreover, the $630.00 call option, about 5.6% over the stock price, has a $9.77 premium, providing a 1.638% covered call yield over the next month.

In addition, if the investor does both of these trades, i.e., a strangle, they stand to make $10.08 +$9.77, or $19.85 in total. So, for 1 put contract and 1 call contract, the income would be $1,985.00.

Based on capital requirements of $57,000 on the put side and $59,731 on the call side, the investment or collateral required by the brokerage firm would be $115,731. So, the $1,985 in income represents a total return of 1.715% (i.e., $1,985/$115,731) over the next month.

That is a very good return, as long as META stays in a range of $570 to $630.00. Even if it doesn't, the investor could “Buy to Close” each of these trades to recover a portion of the total income and not have to have any of the options exercised.

Either way, the breakeven points, after including the income received from each side, are lower (on the put side) and higher (on the call side). This helps ensure that there won't potentially be either an unrealized capital loss on the short-put side (or an opportunity cost on the short-call side).

Investors can study the risks associated with strangles at the Barchart Learn center tabs.

The bottom line is that META looks undervalued here over the next year or so. One way to trade the stock is to sell short out-of-the-money puts and calls, as long as META stays in a trading range. That way, the investor can make extra income and potentially set a lower buy-in target price.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.