Meta Platforms Stock Looks Cheap - Short OTM Puts for a 2% One-Month Yield

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16 hours ago

Meta Platforms (META) stock is near its recent peak, but strong free cash flow (FCF) projections could push it higher. This article will show how it could be worth more using FCF margin and FCF yield metrics.
Nevertheless, in the near term, it might falter after the upcoming Q2 results. As a result, selling short out-of-the-money (OTM) META put options here might work. That way, an investor can set a lower buy-in target price and get paid a 2.0% monthly yield doing so.
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META closed at $719.01 on Wednesday, July 3, near its recent $738.09 on June 30. But it could be worth over+18.8% more at $854 per share, based on my free cash flow margin and FCF yield analysis.
In my May 9 Barchart article, I showed that Meta Platforms generated a strong 57% operating cash flow (OCF) margin in Q1. However, its free cash flow (FCF) margin, after higher capex spending on AI-driven activities and investments, was just 24.4%.
Moreover, Meta has raised its capex spending outlook. The range is between $64 and 72 billion, or $68 billion on average for this year. That could potentially lower its FCF margin next year. Let's look at that.
First, let's project revenue and OCF margins for 2026. Analysts have been raising their revenue projections. In my last article, I showed that analysts had projected $211.68 billion for 2026. But now, Yahoo! Finance reports that 64 analysts are projecting $213.41 billion.
Here is how that affects projections for operating cash flow (OCF). Let's assume that its OCF margin rises slightly to 57.5%:
57.5% x $213.41 billion 2026 revenue est. = $122.71 billion in operating cash flow (OCF)
So, if Meta Platforms spends $70 billion on capex (higher than the $68 billion midpoint expected for 2025):
$122.71b - $70b capex = $52.71 billion in free cash flow (FCF)
That is close to the $52.311 billion in FCF it generated in the trailing 12 months (TTM) (as shown by Stock Analysis.com), after spending just $43.7 billion on capex during that period.
So, to summarize, if we slightly increase Meta's operating cash flow margin from 57% to 57.5%, but significantly increase its TTM capex spending from $43.7 billion to $70 billion, Meta Platforms should still generate the same amount of FCF next year.
That means any improvement in its revenue and/or OCF margins, or a lower or stable capex spending, despite its huge AI-driven initiatives, could push META stock higher.
For example, if revenue rises to $215 billion and its OCF margins rise to 58%, FCF could be almost $55 billion:
$215b x 0.58 = $124.7 OCF - $70b capex = $54.7 billion FCF
That could lead to a much higher price target for META stock.
One way to value Meta stock is to use a FCF yield metric. For example, let's assume that the market will give META stock a 2.50% yield if Meta Platforms paid out 100% of its FCF. Here's how that works:
$54.7b FCF 2026 / 0.025 = $2,188 billion market cap (i.e., $2.188 trillion)
That is 21% higher than its closing market cap on July 3 of $1.808 trillion, according to Yahoo! Finance.
In other words, META could be worth 21% or $870 over the next 12 months:
$719.01 p/sh x 1.21 = $870 per share
However, even using the lower $52.7 billion FCF estimate, META is still worth 16.6% more:
$52.7b FCF / 0.025 = $2,108 b mkt cap
$2,108b est. 2026 mkt cap / $1,808b mkt today = 1.166 -1 = +16.6%
1.166 x $719.01 p/ sh = $838.37 per share
So, using analysts' revenue estimate and a 57.5% OCF margin, the price target is $838.37, and using a slightly higher revenue and OCF margin, it's $870. The average of these two is $854.19, or +18.8% higher than today:
$854.19 / $719.01 = 1.188 -1 = +18.8%
Analysts surveyed by Yahoo! Finance now have an average price target of $729.37, up from $703.41 as seen in my last Barchart article two months ago. Similarly, Barchart's mean survey price is now $724.98, higher than the prior target of $685.75.
Moreover, AnaChart.com, which tracks sell-side analysts' price targets, shows that 54 analysts have an average price target of $801.36. That is much closer to my FCF-based target price of $838.37 shown above. It's also higher than the prior average of $681.45.
The bottom line is that sell-side analysts agree that META stock still looks significantly undervalued.
The only problem is that the stock is near its peak. It could falter after earnings come out, as many stocks do on a 'sell-on-the-news' type reaction.
Therefore, one way for new investors in META stock to play this is to set a lower potential buy-in price. This can be done by selling short out-of-the-money (OTM) put options.
For example, look at the August 1, 2025, expiration period, 29 days from now, and after Meta's upcoming July 30, 2025, Q2 earnings release date.
It shows that a 6% lower put option strike price at $675.00 has a midpoint premium of $13.55 per put contract.
That means that an investor who enters an order to 'Sell to Open' this put contract, makes an immediate 2.0% yield (i.e., $13.55/$675.00 = 0.020). That means the investor's secured cash investment of $67,500 per put contract sold short makes immediate income of $1,355. So, $1,355/$67,500 = 2.0% yield over the next 29 days.
So, there is room here for META stock to fall, and the investor can still make a profit. For example, the breakeven point is 8% lower than today's price:
$675-$13.55 = $661.45 breakeven point
$661.45 / $719.01 price July 3 -1 = -.08 = 8% downside protection
Moreover, note that the delta ratio for the strike price (as seen in the table above) is just -26%. That means that there is only a 26% chance that META stock will fall to this strike price in the next month. That is based on prior trading volatility patterns.
This means that existing investors can short these puts and generate extra income without much concern that their account will be assigned to buy more shares at $675.00.
That could lead to an expected return of 6% in the next 3 months, if the investor can repeat this trade every month.
The bottom line here is this: (1) META stock still looks cheap today. This is based on its FCF outlook and analysts' price targets, and (2) One way to set a lower buy-in target price and get paid 2.0% every month is to short 6% out-of-the-money puts one month out in expiration.
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. This article was originally published on Barchart.com