Price Action Thesis
We follow up on our previous Meta Platforms, Inc. (NASDAQ: META) article with a detailed price action analysis. There have been some significant developments in META’s price action over the past month.
Notably, the selling pressure broke down its double bottom bear trap, which is considered a lower probability occurrence. Such potent bear traps are often early signals toward a significant reversal in a stock’s bearish bias.
Notwithstanding, we could attribute the culprit in breaking META’s bear trap to last week’s 75 bps hike decision, which increased the likelihood of a recession. JP Morgan (JPM) highlighted recently that its gauge of a recession has increased to 85% (from May’s 70%). Therefore, we believe that the market has attempted to price in potentially higher macro risks in META stock, given the revised data points. Consequently, we often highlight that price action is forward-looking since the market looks ahead.
Our price action analysis indicates that bearish momentum in META stock remains dominant, given the break in its bear trap. However, there’s still a potential re-entry signal to revalidate its bear trap over the next four weeks. Hence, we urge investors to continue monitoring its price action.
Our valuation analysis indicates that the valuation in META remains undemanding at the current levels. However, despite its reasonable valuation, we always try to understand why the market has not attempted to re-rate META. Therefore, we used a reverse cash flow valuation analysis to model the market’s perception of its valuation.
As such, we review our rating on META from Strong Buy to Buy, given its weaker price action dynamics. However, we believe its valuation remains undemanding at the current levels.
A Rally Back To $230 Looks Increasingly Challenging
META’s price action has been filled with a series of noteworthy bull traps over the past seven months. The recent $230 bull trap in April was significant, as it was the market’s first significant rejection of buying momentum from its March bottom.
However, the bull trap appeared to be resolved in META’s late April bottom, which formed a validated double bottom bear trap. However, a rapid recovery met with stiff resistance at the $230 level again, causing it to consolidate close to its near-term resistance (previously its near-term support). Nevertheless, we were confident that META could sustain its double bottom, given the constructive price action consolidation.
However, last week’s release by the Fed sent another round of rapid liquidation, which broke its double bottom, as buyers fled the scene.
Notably, the stock is attempting to regain its near-term support. However, we have yet to observe a validated re-entry bear trap signal. As a result, the price action has weakened, and it remains tentative for now.
Nevertheless, we believe the market has provided investors a clear signal that retaking $230 will be immensely challenging. Therefore, investors should consider retaking the $185 resistance level as the near-term priority. First, however, META needs to overcome its bearish bias with a validated re-entry bear trap to help sustain its recovery. Otherwise, it could be stuck in an extended consolidation zone for some time (duration unknown for now).
But META Valuation Is Undemanding
|Current market cap||$449.86B|
|Hurdle rate (CAGR)||fifteen%|
|Required FCF yield in CQ2’26||5.5%|
|Assumed TTM FCF margin in CQ2’26||23%|
|Implied TTM revenue by CQ2’26||$188.15B|
META stock reverse cash flow valuation model. Data source: S&P Cap IQ, author
Using a reverse cash flow model, we can better glean the market dynamics in modeling META’s valuation. We used a hurdle rate close to the Invesco QQQ ETF’s (QQQ) 5Y CAGR. Given Meta’s challenges, we believe it’s the minimum requirement that investors should consider in adding its stock.
However, given the significant drop in its FCF margins estimates, we used a higher FCF yield requirement. In addition, META last traded at an FCF of 5.23% (Vs. 5Y mean of 3.54%). Therefore, we believe the market is asking for a markedly higher yield to justify holding its stock, given its higher potential risks. Hence, we used a slightly higher metric to model the market’s perspective.
Assuming a TTM FCF margin of 23%, modeled lower than the consensus estimates, we derived a TTM revenue requirement of $188.15B by CQ2’26. The revised Street consensus indicates that Meta could post a topline of $167.68B in FY24. Therefore, our revenue target implies a revenue CAGR of 7.98%, which we think is achievable, and not aggressive.
But why is the market still so tentative over META? Given its metaverse ambitions, we believe the market is parsing the potential for volatility in its FCF profitability. Coupled with a more challenging macro backdrop, investors are urged to use appropriate discounts when modeling Meta’s FCF margins.
Therefore, it’s easy to see why Meta is unlikely to retake its $230 level soon. Using the above parameters, Meta would need to deliver a TTM revenue of $239.48B by CQ2’26. It requires a revenue CAGR of 26.82% from FY24-CQ2’26, an unlikely scenario. So, investors extrapolating META fair value estimates from $280-$300 are, in our opinion, overly optimistic.
Is META Stock A Buy, Sell, Or Hold?
We review our rating on META stock from Strong Buy to Buygiven worsening price action dynamics. Furthermore, we have yet to observe a re-entry signal that could revalidate its bear trap.
Our valuation analysis indicates that META valuation remains undemanding at the current levels. However, investors should position themselves for retaking its $185 as the near-term priority. However, we believe that the $230 level remains unlikely in the medium term. Hence, investors should adjust their expectations when considering adding exposure.