Meta Platforms, the powerhouse behind Facebook, WhatsApp, and Instagram, has been on a relentless ascent. This surge has elevated the prices of its put options to dizzying heights. Yet, this situation presents a lucrative opportunity for savvy investors who choose to short them. What’s more, despite the soaring numbers, META stock seems strangely undervalued in the current marketplace, particularly given its robust and steady free cash flow.
The narrative of Meta Platforms tells a compelling tale of prosperity, marked by its impressive cash flow performance. For instance, in the previous year, the company amassed a staggering $43 billion in free cash flow, a figure equivalent to nearly 32% of its total revenue of $134.9 billion.
Thus, it should come as no surprise that the future outlook for META stock appears exceedingly optimistic, with tremendous growth potential waiting to be unlocked. In my estimation, the price target for META stock stands at over 20% above its current value.
Unlocking Potential: META Stock on the Rise
Delving deeper into this concept, my recent piece for GuruFocus published on April 8 delves into the theme of “Meta Platforms is Still Cheap Based on Its Powerful FCF.” This insightful analysis posits that META stock could potentially reach a price of $627.24 per share this year, based on an in-depth examination of its robust free cash flow projections. This projection signifies an upward climb of over $107 from today’s price of $520.35, translating to a growth rate of +20.6%.
Looking further ahead, my forecast for next year hovers around $719 per share, indicating a substantial 38% escalation from the current rates. The crux of the matter remains clear: holding on to META stock at this juncture promises to be a profitable endeavor for existing stockholders.
Additionally, it would behoove these stakeholders to consider the option of shorting out-of-the-money (OTM) put options to augment their earnings. This strategic move allows them to capitalize on the prevalent market conditions.
Capitalizing on Market Dynamics with Shorted OTM Puts
A detailed analysis outlined in my prior article for Barchart on March 17, titled “Meta Platforms Put Options Have High Premiums – Ideal to Short as an Income Play,” proposes an effective strategy for shorting OTM puts as a means of generating additional income. Astute investors who heeded this advice earlier found themselves on the winning side.
For instance, the narrative highlights the case of shorting put options with strike prices of $460 and $465, scheduled to expire three weeks later on April 5. Much to the delight of these investors, META stock concluded the period at $527.34 per share, rendering both put options – if shorted – devoid of value.
Consequently, these investors who pocketed premiums of $4.95 and $6.20, respectively, enjoyed bountiful returns with no obligation to procure the stock. The put yield for the $460 strike price, positioned 5% below the spot price, stood at 1.076%, while the $465 strike price, sitting 4% OTM, boasted a yield of 1.333%.
A glimpse into the current scenario reveals an avenue for similar gains. For instance, examining the expiration period of April 26, set 18 days from now, the $490 strike price – positioned 6.5% below the current price – commands a bid price of $11.90, offering a 2.42% yield for short-put investors.
Moreover, the presence of over 4300 contracts at this strike price hints at a potential tug of war to keep META stock from dipping below these levels.
For the risk-averse investors in the audience, a prudent consideration would be the $480 strike price, lying 8% out-of-the-money. The bid price stands at $9.10, translating to a 1.89% yield for the short seller at the $480 strike price. This figures into a breakeven price of $470.90 (i.e., $480-$9.10), a value 9.72% beneath today’s price. This setup furnishes a substantial cushion against potential downsides while offering a tantalizing yield prospect.
Essentially, the scenario implies that should the stock plummet to these strike prices, short investors in these puts would be compelled to procure the shares. This necessitates the readiness to acquire cash reserves corresponding to 100 shares per shorted put contract. As an illustration, for the short play involving the $490 strike price, the investor must muster $49,000 in cash and/or margin, and $48,000 for the short-put play at the $480 strike price.
However, this expended capital would prove to be a prudent investment should it translate into META shares. The underlying rationale stands on our demonstrated belief that the stock’s intrinsic value far exceeds the current rates. Consequently, the investor could opt to retain the stock or even venture into selling covered calls at out-of-the-money strike prices.
All in all, the prevailing conditions suggest that META stock presents an alluring proposition. Investors stand to benefit from the elevated put prices by engaging in short selling to amplify their income streams and potentially expand their stock portfolios in the event of a downturn.
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At the time of publication, Mark R. Hake, CFA, did not hold any positions (directly or indirectly) in the securities discussed in this article. The information and data presented herein serve solely for informational purposes. For further details, kindly refer to the Barchart Disclosure Policy.
The opinions expressed in this article are solely those of the author and do not necessarily mirror the viewpoints of Nasdaq, Inc.
