The chart above shows that Meta is forecast to make $52.9 billion in adj. FCF this year. That is works out to a 22.9% YoY growth rate over 2023.

Moreover, its FCF margin of 32.5% on projected sales of $162.7 billion is higher than last year's 31.9% margin, despite higher sales and higher capex spending.

Next year, Meta is forecast to have produce even stronger adj. FCF (+16.8% at $61.7 billion) Moreover, its adj. FCF margins will stay strong at 33.1%. This can be seen in the table below.

Source: Hake model

Capex Spending

Note this adj. FCF will be higher despite significantly higher capex spending.

Meta has raised its capex spending this quarter ($8.3 billion vs. $6.5 billion a year ago). It's planning even higher capex spending in Q4 and next year.

Management told analysts in the earnings call (page 7 of the transcript) that its capex spending will be in the range of $38-40 billion, updated from our prior range of $37-40 billion.

Moreover, for 2025, the company said we continue to expect significant capex growth in 2025. Management has consistently said this is to invest in its AI research and product development efforts.

As a result, this was incorporated into my Meta cash flow model.

Modeling Adj. Free Cash Flow

Here is how our Meta Platforms model works. The 2024 $162.7 billion 2024 revenue estimate implies that Q4 revenue will be $46.5 billion (i.e., $162.7b 2024 - $116.1b Q1-Q3).

Then let's assume Q4 would have a similar operating cash flow (OCF) margin as in Q3. The table below shows that in Q3 it was 60.9%, so to be conservative I used a 60% OCF margin for Q4.

This results in an OCF forecast of $91.3 billion for 2024 (i.e., a 55.8% for the year). For 2025 this same 55.8% OCF margin was used against analysts' revenue estimates of $186.3 billion, resulting in OCF of $104 billio.

Next, I assumed that capex spending will rise significantly in Q4 to $12.5 billion. This totals $35.3 billion for 2024, but incl. $3.05 billion in lease principal payments, the total deductions from OCF will be $38.39 billion. That is within the r38-$40 billion range that management mentioned. All of this can be seen in the table above.

I assumed that capex spending will rise by 10% in 2025. As a result, total capex and lease principal payments will be $42.23 billion.

The net result is that by 2025 Meta could generating $61.7 billion in adj. FCF, +16.8% over 2024 ($52.9 billion) and its FCF will rise to 33.1% - all despite significantly higher capex spending over 2023.

Price Targets

To set a price target, these FCF estimates are applied against a FCF yield metric.

This FCF yield metric assumes a 100% payout of its free cash flow in dividends. So, the value is set by using the company's historical FCF yield.

For example, in the last 12 months (LTM) ending Sept. 30, Meta generated $50.45 billion in adj. FCF.

Its dividend, which has a 0.355% yield, costs $5.05 billion, and represents 10.1% of its $50.45 billion in LTM adj. FCF.Therefore, taking the inverse of 10.1% (i.e., 1/0.101), or 10x, and multiplying it by the 0.35% dividend yield, this results in a 3.55% FCF yield:

In other words, FCF yield assumes a 100% dividend payout and this implies a 3.55% FCF yield, given that its 0.355% yield today represents only 10% of its historical LTM FCF.

Next, we apply this FCF yield metric against our forecast for FCF for the next two years. (Note I used a 3.50% FCF yield to round this metric down from 3.55%. But it is also the same, i.e., using an inverse, as multiplying FCF by 28.6x.):

This shows that this year META could rise to $599 per share (close to $600) assuming our forecasts for Q4 operating cash flow margins and capex spending come true. That is a 6.1% gain in the stock.

But by next year, assuming it achieves a similar OCF margin as in 2024, with even 10% higher capex spending, META stock could rise to $699 per share.

The average price of both of these target prices is $649 per share, or +15% or so higher than today's price of $564 per share.

Other Factors to Consider

This forecast could be too conservative. For one, I have not factored in the huge amount of share buybacks that the company is doing. For example, in the last 12 months (LTM) to Sept. 20, the company has spent over $48 billion on buybacks, or 95% of its FCF.

As a result, so far this year, the number of shares has fallen by 1.43%, according to my calculations. Over time, that adds up. This works to an annual rate of 1.9% decline in shares outstanding. So, over the next 2 years, that could approach 4%. In other words, the stock could have a 4% higher valuation with the same assumptions I have made in my model.

Secondly, the market could raise its valuation on META if free cash flow and FCF margins stay strong. This is despite the higher capex spending. In other words, the market might be willing to project that the company's huge AI spending will eventually pay off.

This is important since even a small change in the FCF yield metric can have a huge effect on the stock price. For example, using a lower 3.0% FCF yield metric (i.e., 14.2% lower than the 3.50% FCF yield in my model) results in a price target of $698 this year and $815 in 2025, or $757 on average.

That is 34% higher than today's price, or over twice my projected upside, for just a 14% change in the FCF metric.

Lastly, analysts also believe META stock is undervalued. For example, AnaChart.com, a new sell-side analyst tracking site, shows that the average price target of 46 analysts today is $629.04 per share.That is 11.5% above today's price and close to my $649 target price.

The bottom line is that Meta is too cheap here. Stick with this strong free cash gusher for the long term.

This article first appeared on GuruFocus.