Transcription
Hello everyone and welcome back. In this video, I want to talk about three stocks that I believe are undervalued right now and if you buy them today, I believe you can outperform the market. We are talking about extraordinary businesses, very well-run companies that have produced a lot of wealth in the past and now these stocks are down. So I think these are good opportunities to buy the dip at the current moment.
The first one we are going to talk about is Meta Platforms. Okay. So in this video, I want to talk about the numbers, talk about why these stocks are down, and uh what I believe are good prices to buy these stocks. In case this is your first video from this channel, welcome. My name is Kristoff N. I've been investing in the stock market for almost a decade now and I have achieved a performance of 25% per year and I've been following Meta Platforms since 2018. I've been a shareholder since 2018 and I am a shareholder. Okay, it's roughly 10% of my portfolio. So of course, take this with a pinch of salt. I am biased, obviously. This company is growing in full force, reaccelerating. We are part of the Magnificent Seven basket, but the stock has not done anything since January 2025. So more than one year of zero performance.
But what about the fundamentals? If you look at the fundamentals for Meta Platforms, you are in front of a dominant business model. Gross margins of 80%, operating margins of 40%. You have a growing revenue, a grow, look at this on the left here. Growing revenue in blue, up and to the right. Net income up and to the right. You have a business that doesn't have any debt problem. You have a growing free cash flow here. So what is happening? A few things are happening actually for Meta Platforms. The decline in stock price is not for nothing.
First of all, as you can see, the debt structure is changing. In the past, the company did not have any debt. So as you can see here, the green is the cash, the red is the debt. Now you are not net cash. You are net debt of zero. Net cash of zero. And in the future, because of this big capex super cycle, I believe the company will be net debt. You have some debt on the balance sheet, I'm aware of this. But I think the debt structure will continue to increase in the future. So first change, the business is changing, the balance sheet is no longer the same.
Second thing, the free cash flow they have, they are producing a lot of revenues, but they are also investing massively in capex. And I can show you what I mean by showing you the cash from operating activities. So the day-to-day operations of the business and the capex investments in new data centers, new facilities, etc., etc., etc. You can see that in the past, the blue line was much bigger than the orange line, and now it is no longer the case. The blue line is increasing, but the orange line is growing exponentially. And Meta just announced a guidance for 2026 that the capex line will increase meaningfully. There will not be any free cash flow for shareholders, or almost zero. The free cash flow is the blue minus the orange, right? And for 2026, they said expect the orange line to skyrocket. We are going to double the orange line. We are going to double the capex because we are seeing a lot of demand for AI and we don't want to miss the boat. Okay? So we don't want to miss the train. We are going to invest massively. If you invest massively, you will have more cost, and if you have more cost, margins will go down. I started this video saying you have gross margins of 80%, operating margins of 40%. Well, I am expecting the margins to go down.
Second thing that will change. First, it was the balance sheet. Now the company is net debt, will become net debt to big capex super investment, zero free cash flow, and margins will go down because of more R&D cost, etc., etc. Um, the third thing is, in the past, the company was doing some buybacks with excess free cash flow, as you can see here, and now the company is stopping the buybacks. Three things happening at the same time.
With that said, Mark Zuckerberg is a genius. Mark Zuckerberg, I would put him in the top five CEOs of the world. So he's flexible. He's nimble. The first thing they have made very clear is they will plan to fire some people. They will reduce the headcounts. So they will invest massively, cost go up, but at the same time, they reduce the headcount, number of employees. So cost go down. Second thing, you have this virtual reality headset segment from Meta Platforms, the Meta Quest. They have already cut some workforce in this segment and they are thinking of reducing the expenses. They announced publicly they were going to shut off the metaverse and then one day later they said, "No, no, just kidding. We are resuming the investments." It seems like they're thinking of completely reducing their cost for the metaverse stuff, the Meta Quest investments, and reallocating all these expenses to AI, data centers, capex. The business is nimble, is very profitable, you have very nice margins, so they can play around with some business operations and still be safe. So I don't think the business is as at risk because of AI. I think AI will actually improve the business model. If it doesn't improve the business model, the business will still be fine. And if AI is changing the world, Meta Platforms will improve meaningfully. And we are already seeing some signs that AI is improving Meta Platforms. Why? Because you can see that the revenue is reaccelerating. You can see here in blue, this is the revenue growth rate. It was flat and averaging 20%. And as you can see here, the revenue is reaccelerating, revenue growth rate of 24%, and the management team issued a guidance for 2026. They plan to grow revenue at 30%. In 2026, the last time we had the growth rate of 30% was in 2021. So you can expect this blue line to go up meaningfully. And this is only the beginning. What if in the future they grow 35% the revenue? So they have already said publicly, we are investing massively in AI, in more capex, but the revenue is reaccelerating. So it is kind of working. You will produce a zero free cash flow, but it's all about topline at this moment. So the investment phase of Meta Platforms is in full force. This is another layer of uncertainty and why the stock is down. The stock is down because you have more uncertainties. The business goes from asset-light, growing 20% per year with high margins and free cash flow, to now growing 30% per year, reaccelerating, but zero free cash flow. Zero free cash flow, and you don't know if AI will pay off, the AI investments will pay off in the future, for how long, etc., etc.
Now, about valuation for Meta Platforms, for this extraordinary business with this extraordinary CEO. What is the forward PE ratio of Meta Platforms? You have a forward PE ratio that has oscillated a lot for the past 20 years, from 25 to 30 to 20 to 30 to 20 to 30 to 20 to 30. In 2022, we reached 15, and then it went back to 30, and now we're back at 20. The average forward PE ratio for this business has been 23 for the past 10 years. The median has been even more than this, 20, let's say 23, 24. So we are below the 10-year average. We are below the 10-year median, and the business is telling you, we know what we are doing. We are flexible. We are nimble. We have a very good capital allocation decision, and we are reaccelerating. So for those who want to invest in Meta Platforms, don't expect any free cash flow. Don't expect any buybacks. Don't expect any dividends in the future. It will all be about capex and topline growth. And you have a forward PE ratio of 20. In other words, the valuation is the same as the overall market, the S&P 500, but the quality of the business is better than the overall market. And this is the thesis from Bill Ackman, the super investor. He just opened a position in Meta Platforms a few weeks ago, saying my points. We have a business, a stock, same valuation as the market, but it's a great quality business, better than the market. So you have a dislocation, you have a discrepancy here. This business should not be trading at a forward PE ratio of 20. But you know how markets work. Sometimes, uh, you have some crazy valuations, crazy moves. This is not the first time you have a decline. Look at this, July 2024, PE ratio of 20, and then it rebounds to 25, and then same thing in the past, 20, 25. It is not the first time it is happening. And one thing that is bad is I see no catalyst in the short term that would reverse this trend. The stock has not done anything for one year, and the only catalyst I would see in the future is massive layoffs. If they announce something big, they have made some plans to think of laying off up to 20% of the employees, but no clear number was given publicly. If tomorrow they came out and they say, we are increasing the guidance for growth, we are going to grow 35% per year, and at the same time, we are firing 11,000 people. Yeah, the stock would skyrocket, and this would be the bottom. This would be my guess. But in the meantime, we have no catalyst. So this is great. If you want to take exposure to this wonderful business available at a fair price, you have your chance. This is the first stock that I believe is undervalued and is a good buy today.
By the way, if you want to become a better investor and improve your performance, I have a coaching program. It gives you the exact method I've used to generate 25% per year for almost a decade. More on that at the end of the video.
The second stock I want to talk about is Fair Isaac, FICO. A stock that I have covered many times on my channel. You have a monopoly in the scoring system in the US. A beautiful margin profile, gross margin of of uh 88%. And the business is reaccelerating right now. Revenue is up and to the right and reaccelerating. Net income is up and to the right and we're accelerating. Free cash flow is up and to the right and we're accelerating. The difference with Meta Platforms is zero capex. All the cash they produce is going to buybacks, repurchasing their own shares. So the mindset, the philosophy of these two businesses are drastically different. Meta Platforms cannot afford to miss out on the train, and Meta Platforms, um, the business is forced to invest in more capex. FICO doesn't care about AI. FICO doesn't care about the capex. They have zero capex. They have zero dividends. They have zero acquisitions. They don't care. They stay in their lane. They squeeze all the juice. They increase their prices. They increase their margins. They increase their buybacks. That's it. That's the end of the business model. And now the stock is dropping 60%. The valuation was extremely high in the past, and now the forward PE ratio is also very low. I can do the same exercise for FICO. Forward PE ratio. In the past, you had a forward PE ratio of 80. So extremely, extremely expensive. And now we are back to 22. Depending on analyst estimates, sometimes they say 22, sometimes 26, sometimes 30. My point is, we're in front of a monopoly, extraordinary pricing power, margin profile, clear capital allocation, available at a fair price. So I am buying Fair Isaac right now. I just bought this week. So walking the talk here. I have Meta Platforms in my portfolio. I am buying Fair Isaac, and I want to continue to buy more. I want to buy more FICO as it drops. If the stock price, look at this, I'm recording this video. The stock price just broke below $1,000, and I bought today. Okay. If the stock price continues to go down, I will be very happy to buy more and make it a core position in my portfolio. Full disclosure, it's 5.5% of my portfolio right now. Okay? And I want to make it 10%. So I would welcome stock price drops. If it drops, I buy more. If it rebounds from there, so be it. It will be six, seven, six, 8% of my portfolio. So it's fine. Okay.
So I think uh FICO is uh in a monopolistic position, and all the worries we see are short-term, more regulation, more competitors. I have seen the same worries in 2021, and I also bought the dip in 2021. Okay. So I am seeing the same arguments five years uh after the first uh round, and this is round two of the same problems. At the same time, at the time in 2021, you had some worries from VantageScore. You have some worries from the DOJ. You have DOJ. You have some worries about antitrust. You have some worries about Upstart, a new competitor that is coming and about to disrupt FICO. Guess what? Upstart was profitable for one year, disrupting FICO for one year, and then they crashed, being unprofitable. Uh, at the time in 2021, people said that machine learning from banks would allow banks to have their own scoring system. Now, guess what? With AI, you just replace machine learning with AI. People say exactly the same thing for banks. Now, I have, I've seen the short reports, the short seller reports. I, I've read all of them. They, they say the banks are going to use AI to have their own scoring system and to understand the consumer behaviors depending on their purchases in the past. So you can have their own scoring system for each bank. I don't think it will work. So I'm taking the other side of the of the coin, the other side of the bet with a great smile. Maybe I will be right, maybe I will be wrong. So be it. I just take position here and see uh in the next three years what happens.
The third company I want to talk about is Mastercard. Very boring, very boring, but it works. You all know Mastercard. You have a duopoly in the payment network, Visa and Mastercard. You don't have a lot of differences between the two companies, Visa and Mastercard. Mastercard is more focused on international markets. Visa is more domestic in the US. Mastercard is more focused on growth. Visa is most, most focused on margins and profitability. Mastercard is more focused on value-added services segment, so data segment, and Visa is most focused on cards and payment networks. Okay. So three small differences between Visa and Mastercard, but it doesn't make any changes. If you had invested in Mastercard and Visa five years ago, you would have had the same stock performance. So no, no meaningful difference in your analysis. Don't think too much. My point being, the fundamentals are improving, the revenue is improving, the net income is improving, the margins are improving, the free cash flow is improving, but the stock is down. The stock is down to $500 right now, the same price we had in October 2024. And every time you had this discrepancy between business fundamentals and the stock price, it was a great buying opportunity. You cannot break Visa and Mastercard. Gross margins of 80%. Operating margins of 60%. Look at this. The revenue, beautiful up and to the right. Net income here in in green, up and to the right, and reaccelerating right now. They don't have a debt problem. They are using all their free cash flow that is up and to the right to do buybacks every year. The business model is very simple. They are, there are some worries that Mastercard will get disrupted because of stable coins. Guess what? They just acquired a stable coin company a few days ago. So I don't think the worries are justified.
And if you look at the valuation for Mastercard, you can do the same exercise. I would say free cash flow is a better indicator of valuation for them compared to PE ratio, but it will not make any difference. The forward price of cash flow of Mastercard is 25. So you have a low point here. I'm not saying it's cheap, but I'm not saying it's expensive. So you have the same worries in 2022. The forward price of cash flow went down to 24 and then rebounded. It was, it rebounded, and it was a great buying opportunity. And now again, we went from a forward price of cash flow of 35, which is a lot actually, the stock was expensive, to now 25, and I think we have reached fair value. I'm not saying it's the bottom, it can go down. In the past, we went to 20 or to 15 back in the days, 15 years ago. I'm just saying relatively to the past and given the growth, [snorts] given the good fundamentals they have right now, I think it makes some sense to buy the dip on Mastercard, and I bought the dip very recently. I accumulated some shares, u, not this week, but in a few weeks, like in the, I think last month, I bought more Mastercard. It's roughly 10, 12% of my portfolio, full disclosure.
So I think these three companies, Meta Platforms, Fair Isaac, Mastercard, are great places right now because they are not sexy. They are being doubted right now. You have many uncertainties for Mastercard. People worry about disruption. People worry about the new laws, the interest rate cap or the fees that will get dislodged, that will get changed. You have some Illinois fees, Illinois act that passed actually. You can no longer have a lot of fees on tips for the state of Illinois. That's it. And if this setback is um escalating to other states in the US, maybe Mastercard will get more fees. But I made the calculation. I made the formulas that even if you have a bad scenario for fees and you have bad implementation, less fees for Mastercard, it will only affect up to 3% of the revenue of Mastercard. So I don't think this is relevant at all. And the value-added services segment, the VA segment will grow immensely in the future. Last quarter, the fundamentals of uh Mastercard actually improved. You can go to the Q4 of 2025. I can put full screen here so you see better. And you can see that the revenue of Mastercard went up 18%. Depending if you want to adjust it or currency neutral, be my guest. It's the same thing. The margins went up from 56% to 57%, and the earnings per share went up 20%. So the business is in great shape. The management team is not worried at all. They will just continue to play offense to acquire potential competitors to grow. You will have more network in the future. And Mastercard is a great inflation hedge. If you think inflation is here to stay, Mastercard is an asset. Mastercard doesn't have any capex. Mastercard is uh very profitable, and if the prices of the world are going down, are going up, sorry, with inflation, Mastercard will just take a small fee, a percentage fee. So if your purchase is $10 or $1,000, the percentage is the same, but the amount is not the same. So Mastercard to some extent is an inflation hedge, and I believe inflation is here to stay. This is my opinion. Maybe I'm wrong, but I believe inflation is here to stay.
So yeah, this was, these were three stocks that I believe are pretty good value right now to buy. Meta Platforms, Fair Isaac, and Mastercard. If you like this content and you want to go deeper, I have a coaching program. In this program, you will learn my strategy to generate 25% annual returns. You will learn how to find winning opportunities. You will learn how to properly value any stock, when to buy, when to sell, so that you can build a strong portfolio filled with great companies. Additionally, inside this coaching program, you will have access to an exclusive community of like-minded investors and also you will have my personalized guidance to reach your investing goals. Click the first link in the description to get more information. You will get a video that explains how everything works completely for free. No need for your email address.