Price Action Thesis
We follow our previous Meta Platforms, Inc. (NASDAQ: META) article with a detailed analysis of the price action. There have been significant developments in META’s price action over the past few years month.
Notably, the selling pressure broke his double bottom bear trap, which is considered a low probability event. These powerful bear traps are often early signals for a significant reversal in a stock’s bearish bias.
Nonetheless, we could attribute the culprit for breaking the META downside trap to last week’s 75bp bullish decision, which increased the likelihood of a recession. JP Morgan (JPM) recently pointed out that its gauge of recession increased to 85% (from the 70% of May). Therefore, we believe the market has attempted to price potentially higher macro risks into META stocks given the revised data points. Therefore, we often emphasize that price action is forward-looking since the market is looking ahead.
Our analysis of the price action indicates that the bearish momentum for META stock remains dominant, given the breach of its bearish trap. However, there is still a potential re-entry signal to revalidate his bear trap over the next four weeks. Therefore, we urge investors to continue to monitor its price action.
Our valuation analysis indicates that the valuation in META remains undemanding at current levels. However, despite its reasonable valuation, we are still trying to understand why the market has not attempted to re-rate META. Therefore, we used reverse cash flow valuation analysis to model the market’s perception of its valuation.
As such, we are revising our rating on Strong Buy to Buy’s META, given its weaker price action momentum. However, we believe its valuation remains undemanding at current levels.
A return to $230 seems increasingly difficult
META’s price action has been filled with a series of notable bull traps over the past seven months. The recent $230 bullish trap in April was significant, as it was the market’s first significant rejection of buying momentum since its March low.
However, the bull trap appeared to be resolved in META’s late April bottom, which formed a validated double bottom bear trap. However, a quick rally again encountered strong resistance at the $230 level, causing it to consolidate near its short-term resistance (previously its short-term support). Nonetheless, we were confident that META could maintain its double bottom, given the constructive consolidation in the price action.
However, last week’s release from the Fed sent another round of rapid selloffs, which broke its double bottom, as buyers fled the scene.
In particular, the title is trying to regain its short-term support. However, we have yet to observe a validated re-entry bear trap signal. As a result, price action has weakened and remains tentative at this time.
Nonetheless, we believe the market has provided investors with a clear signal that the recovery from $230 will be extremely difficult. Therefore, investors should consider retaking the $185 resistance level as a near-term priority. However, META must first overcome its bearish bias with a validated re-entry bear trap to help support its recovery. Otherwise, it might be stuck in an extended consolidation zone for a while (duration unknown at this time).
But the META rating is undemanding
|Current market capitalization||$449.86 billion|
|Hurdle Rate of Return (CAGR)||15%|
|FCF yield required in CQ2’26||5.5%|
|TTM FCF margin assumed in CQ2’26||23%|
|Implied TTM revenue by CQ2’26||$188.15 billion|
Reverse cash flow valuation model for META shares. Data source: S&P Cap IQ, author
By using an inverse cash flow model, we can better glean market dynamics from META’s valuation model. We used a hurdle rate close to the 5-year CAGR of the Invesco QQQ ETF (QQQ). Given Meta’s challenges, we believe this is the minimum requirement investors should consider when adding its stocks.
However, given the significant decline in its FCF margin estimates, we used a higher FCF return requirement. Additionally, META last traded at an FCF of 5.23% (vs. a 5-year average of 3.54%). Therefore, we believe the market is asking for a significantly higher yield to justify holding its stock, given its higher potential risks. Therefore, we used a slightly higher metric to model the market outlook.
Assuming a TTM FCF margin of 23%, modeled lower than consensus estimates, we have derived a TTM revenue requirement of $188.15 billion by CQ2’26. The revised Street Consensus indicates that Meta could post revenue of $167.68 billion in FY24. Therefore, our revenue target implies a revenue CAGR of 7.98%, which we believe to be achievable, not aggressive.
But why is the market still so hesitant on META? Given its metaverse ambitions, we think the market is analyzing the potential for volatility in its FCF profitability. Coupled with a tougher macro backdrop, investors are advised to use appropriate discounts when modeling Meta’s FCF margins.
Therefore, it is easy to see why Meta is unlikely to recover its $230 level soon. Using the metrics above, Meta is expected to generate $239.48 billion in TTM revenue by CQ2’26. It requires a revenue CAGR of 26.82% of FY24-CQ2’26, an unlikely scenario. Thus, investors who extrapolate META fair value estimates from $280 to $300 are, in our view, overly optimistic.
Is META Stock a buy, sell or hold?
We’re revising our rating on Strong Buy to Buy’s META stock, given the worsening price action dynamics. Additionally, we have yet to observe a re-entry signal that could revalidate his bear trap.
Our valuation analysis indicates that the META valuation remains undemanding at current levels. However, investors should position themselves to retake its $185 as a near-term priority. However, we believe the $230 level remains unlikely in the medium term. Therefore, investors should adjust their expectations when considering increasing their exposure.