To The Moon

Meta Platforms$Meta Platforms, Inc.(FB)$ , formerly known as Facebook, has been treated harshly by the stock market lately. Three negative narratives drive this sentiment: Heavy investment in the metaverse, reduced ad spending, and tough competition from TikTok. Because of this, Meta Platforms stock is trading at an all-time low when valued from aprice-to-free cash flowstandpoint.

While these concerns are real, a ratio of 16 times free cash flow is far too low for a high-quality business like this. Investors must understand Meta Platforms' risks and know how these will affect the financials.

It's getting harder to grow revenue

CEO and founder Mark Zuckerberg's vision for the metaverse won't be cheap. However, he is committed to bringing about this change through the company's Reality Labs division, which provides "augmented and virtual reality related consumer hardware, software, and content." Meta broke out this division for the first time in the fourth quarter, and the results weren't pretty. In 2021, the division lost $10.2 billion on revenue of $2.3 billion. It's also not slowing down on expenses. In 2021, Meta spent $71 billion on operating expenses, but management is guiding for $90 billion to $95 billion in 2022.

Revenue is expected to be negatively affected by recent iOS privacy changes from Apple$Apple(AAPL)$ . This has caused Meta customers to see a lower return on investment (ROI) for their ad campaigns. Meta claimed in the Q4 conference callthat the changes disproportionately affect smaller businesses. With less successful advertisements, companies reduce their budgets and focus on other areas.Meta is also worried about ByteDance's TikTok social media app. While Facebook announced Reels to offer a similar product and effectively compete, TikTok is still capturing a large chunk of the social media market share. For the first time ever as a public company, Facebook's daily active users fell from the previous quarter.

With rising costs, revenue growth pressures, and a strong competitor, the future looks grim for Meta Platforms.

Valuations suggest this stock is a bargain

Are these concerns truly valid? After all, Meta Platforms is still the most dominant social media company and is highly profitable. Management also expects revenue growth of 3% to 11% for Q1, and investors will find out on April 27 if Meta hit that guidance.

If Meta can reach the top end of the revenue guidance and continue with 30% expense growth, the company will still be cheaply valued. In 2021, Meta Platforms produced $38.4 billion in free cash flow (FCF) on revenue of $118 billion, an impressive 33% margin. If sales grow 10% for the year and its FCF margin is affected by the $21.5 billion in increased operating costs, the company could generate $35.2 billion in free cash flow.

With no stock price appreciation, this would value the stock at 17.2 times 2022 free cash flow. This valuation is still lower than it's been at any time Meta's been a public company and is cheap compared to other companies in the market.

To add another factor to Meta's value proposition, it has been aggressively repurchasing shares. Doing this, it is making each share more valuable by retiring old shares. This catalyst will further decrease its valuation by reducing the number of shares outstanding. With Meta repurchasing more than $44 billion in stock last year, the company could repeat that program in 2022 and lower shares outstanding by about 7%.

When is the best time to buy?

Meta Platforms may be facing some headwinds, but the company is one of the most financially powerful in the world, with solid cash flow generation and more than $44 billion in cash with no debt on the balance sheet. The market doesn't leave bargains around like this very often, andinvestors should act accordingly. Alternatively, you could also wait until Q1 earnings are reported on April 27, but any positive news will likely send this stock soaring, as it has only experienced negative headlines recently.