Today, unusual volume in Meta Platforms Inc. (META) options highlights the underlying value of META stock. The company's strong free cash flow could lead to a higher stock price, at least one-third higher at $910 per share. This article will show why.

META is at $680.52 in midday trading on Wednesday, June 4. That is still below its February highs, but today's action in its call options shows that investors believe it could be worth more.

The Barchart Unusual Stock Options Activity Report today shows that over 6,200 put option contracts have traded in the stock for expiration on Friday, June 6. That is over 59x the prior number of contracts outstanding at the $677.50 strike price. That strike price is below today's trading price, which means it is “out-of-the-money” (OTM).

The put options premium is $5.30. That means that an investor who shorts these puts can make an immediate yield of almost 1% (i.e., $5.30/$677.50 = 0.78%).

This also means that short-sellers of these puts have a breakeven point of $672.20 ($677.50-$5.30), or 1.3% lower than today's price. Even if META falls to that point, the short-sellers have effectively set a lower buy-in price for an investment in META. 

This serves to highlight investors' enthusiasm for META stock's prospects.

META Stock Target Price

Meta released strong Q1 results on April 30, with higher operating cash flow (OCF) margins. I discussed Meta's stellar cash flow results and META stock's value in a May 9 Barchart article, “Meta Platforms' Capex Will Rise, Lowering FCF Forecasts - Is META Stock Worth Buying?” 

Since then, analysts have raised their revenue price targets. As a result, the average for the next two years is $200 billion (i.e., $187.34 billion for 2025 and $212.75 billion for 2026).

Therefore, using its 57% operating cash flow margin, and the midpoint capex spending from management's guidance ($68 billion):

  $200b x 0.57 = $114 OCF

  $114 OCF - $68b capex = $46 billion free cash flow (FCF)

This is 11% higher than the $41.3 billion run rate from Q1 (i.e., $10.33b FCF x 4). That means the stock is worth more.

One way to value META stock is to use a FCF yield metric. This assumes the market will give META stock a 2.0% dividend yield if 100% of its FCF is paid out as dividends.

As a result, we divide the FCF estimate by 2.0% to derive a future market cap estimate:

  $46b / 0.02 = $2,300 billion, or $2.3 trillion market cap

That is one-third higher than today's market cap of $1.72 trillion, according to Yahoo! Finance:

  $2,300b future mkt cap / $1,720b mkt cap today = 1.337 -1 = +33.7% upside

As a result, META stock is worth 33.7% more:

  $680.52 x 1.337 = $909.86 per share

The bottom line is that if META keeps generating 57% operating cash flow margins and its capex stays at the midpoint of management's guidance, it should generate $46 billion in FCF over the next 12 months. That could push META stock one-third higher, using a 2.0% FCF yield metric (i.e., a multiple of 50x FCF).

Analysts Agree

Yahoo! Finance reports that the average price target for 68 analysts is $712.76, and Barchart's mean survey price target is $697.27. The average of these two is $705.02, or +3.6% higher

However, AnaChart.com, which tracks analysts who have recently written on the stock, shows that the average of 54 analysts is $751.49. That is +10.4% higher than today's price.

The bottom line is that analysts still see upside in META stock. 

As a result, it makes sense to sell short (i.e., “Sell to Open”) put options that are below today's price, as shown in today's Barchart Unusual Stock Options Activity Report. 

That way, investors can get a lower buy-in price with good upside, and get paid while waiting to see if META stock falls to the strike price.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.