Meta Platforms - Massive FCF Gusher - Shorting OTM Puts Works Best

Meta Platforms (META) is a huge free cash flow generator whose stock price looks cheap here. Moreover, shorting put options expiring with 2 weeks in out-of-the-money (OTM) strike prices yields 1.2% - i.e., set a buy-in price and get paid while waiting.

META is at $554.86 midday on Tuesday, slightly down from before its Oct. 30 Q3 earnings release ($563.69 on Oct. 23). This presents a great income opportunity for short sellers of near-term expiry puts in OTM strike prices.

I discussed the company's huge free cash flow generation and price targets in a new article in GuruFocus today, “Stick with Meta Platforms Stock – a Free Cash Flow Gusher.”

Strong Free Cash Flow Generation

In the article, I show how META stock could be worth as much as $648.59 on average over the next two years—i.e., +17% over today's price. This is based on a projection of $52.9 billion in adj. FCF this year, despite heavy capex spending on its AI initiatives.

Moreover, next year the company's adj. Based on analysts ' revenue forecasts, FCF could rise to $61.7 billion, with a 55.8% operating cash flow (OCF) margin: i.e., $104 billion OCF in 2025.

After deducting 10% higher capex spending of $42.23 billion, its adj. FCF will work out to $61.7 billion next year. 

That also represents a huge 33.1% FCF margin on sales and +16.7% higher than $52.9 billion FCF projected for 2024.

As a result, we can set a price target using a 3.50% FCF yield metric. The article goes on to show how that works. The bottom line is that META stock is worth $1,637 billion, i.e., $1.637 trillion. That is 17% higher than its $1.396 trillion market cap today.

In other words, META is worth 17% more or $649 per share. One way to play this, assuming it takes a while for META to rise, is to short out-of-the-money (OTM) put options. That way you can get paid while waiting for the stock to fall to a lower strike price, allowing you to buy in at a lower price.

Shorting OTM Puts

For example, look at the Dec. 6 expiration period, just over 2 weeks away from now. It shows that the $540 strike price put option has a bid-side premium of $6.45 per put contract.

That provides an immediate short-put yield of 1.194% to short-sellers of these OTM puts (note that the strike price is almost 3% below today's trading price).

This means that the investor who secures $54,000 in cash and/or buying power with their brokerage firm can enter an order to “Sell to Open” 1 put contract at $540.  The account will then immediately receive $645.00 - hence, the 1.20% yield.

Moreover, if the investor can repeat this every two weeks for a quarter, the expected return is about 7.16 (i.e., 1.194% x 6 = 0.07164). So, if META stock trades flat over the next quarter, or at least half that period, the investor stands to make good income.

Downside Risks and Hedging Strategy

In addition, if META stock falls to this strike price in say a month and a half - i.e., after accumulating 3.6% in income, the investor's breakeven price will be much lower. For example, let's say the investor can collect $15 in income shorting puts in a month and and half. If the strike price is exercised, the investor must buy 100 shares (using the collateral).

But the breakeven price will be $540-$15, or $525 per share, due to the short-put income already received. That is 5.13% below today's price - i.e., a great hedge against a falling META stock price. That may help defray any potential unrealized loss from the exercise of the strike price if META falls.

The bottom line is that Meta Platforms stock looks very cheap here given its huge FCF generation. Shorting OTM puts consistently over the next several months is one way to get paid while setting a lower buy-in target.