This article first appeared on our U.S. website and was written by Anthony Di Pizio.
The U.S. economy has a storied history of producing the world’s most valuable companies. In 1901, United States Steel became the first company to reach a $1 billion valuation, and 117 years later, in 2018, Apple became the first to cross the $1 trillion threshold.
The iPhone maker also became the first company to surpass $2 trillion in market capitalization. It has since been joined by Nvidia, Microsoft, and Alphabet in that ultra-exclusive club.
I think one more company could soon earn membership. Meta Platforms (NASDAQ: META) continues to deliver strong earnings growth, and it has an incredible opportunity in the artificial intelligence (AI) industry. Its stock is currently trading near an all-time high, valuing the company at $1.2 trillion.
Here’s how it could reach the $2 trillion milestone within three years, and if it does, investors who buy Meta stock today could capture a handsome gain.
Source: Getty Images
AI is transforming the social media industry
Meta is the parent company of social media platforms Facebook, Instagram, and WhatsApp, which attract more than 3.2 billion users every day. Facebook and Instagram surged to prominence as social networks where users primarily interacted with their friends and family, but they have been transformed into something else entirely over the last few years.
For example, half of the content appearing in users’ Instagram feeds isn’t posted by anybody they know. Instead, Meta developed AI algorithms to learn what users like to see the most, in order to show them more of it to keep them engaged — even if that content comes from a creator, brand, or another user they have never interacted with before.
In essence, Facebook and Instagram shifted from social networks to social entertainment platforms, especially through the Reels short-form video feature. It appears to be working well, because CEO Mark Zuckerberg told investors AI-curated content feeds were responsible for increased engagement on both Facebook and Instagram last year. The more time users spend on those platforms, the more revenue the company can generate from advertising.
Meta’s foray into AI is just heating up
Meta’s AI strategy extends beyond its content feeds. The company developed the world’s most popular open-source large language models (LLMs) called Llama, which continue to improve with each iteration. Llama 3 was just released, and the next generation is now in training.
Meta’s progress will soon accelerate after the recent purchase of 350,000 H100 graphics processing units (GPUs) from Nvidia. These are among the most powerful chips for training AI models, and this deal cost Meta an estimated $9 billion.
Llama 3 is already powering Meta AI, which is a new chatbot users can access through Facebook, Instagram, WhatsApp, and Messenger. It can instantly generate text and images on command, answer complex questions, and even join group chats to offer suggestions on a range of topics.
Soon, every brand will have its own AI representative on Meta’s platforms, which will be available around the clock to handle incoming queries. It could save human social media managers an incredible amount of time, while potentially creating a new source of revenue once the company determines the best way to monetize the service.
Revenue and earnings growth are accelerating
During the first quarter of 2024 (ended March 31), Meta experienced a 20% year-over-year increase in ad impressions, helped by a steady increase in users and engagement. It drove Meta’s revenue to $36.4 billion during the quarter, representing an increase of 27%, which was the fastest pace of growth in more than two years.
Meta’s bottom line also benefited from cost cuts throughout 2023, which included 21,000 layoffs and a commitment by Zuckerberg to spend more cautiously on initiatives like the metaverse. As a result, Meta’s first-quarter net income soared 117% to $12.4 billion.
Meta’s (mathematical) path to the $2 trillion club in three years
Meta intends to invest heavily in AI. Chief Financial Officer Susan Li recently told investors the company plans $35 billion to $40 billion in capital expenditures (capex) in 2024, which was a noteworthy increase from her prior forecast of $30 billion to $37 billion. Considering how much Meta just spent on GPUs, the revision isn’t surprising.
If AI-curated content feeds continue to get better at boosting engagement on Facebook and Instagram, the company will easily recoup its additional capex in advertising revenue alone. Plus, Meta has a stellar track record of monetizing new features, so Meta AI could become a substantial contributor.
Meta stock is already cheap as things stand today. Wall Street estimates the company will generate $20.18 in earnings per share during 2024, which places Meta stock at a forward price-to-earnings (P/E) ratio of 23.4. In other words, the stock will have to rise 34% by the end of this year just to trade in line with the Nasdaq-100 technology index, which has a P/E of 31.4 as of this writing.
So if the Street’s forecast holds up, the Nasdaq-100 maintains its current P/E, and Meta stock rises 34%, that alone will take the company’s market cap to $1.6 trillion. Then, if the company delivers $23.08 in earnings in 2025, as Wall Street expects, that could warrant a further 14.4% increase in its stock price, taking its market cap to $1.84 trillion.
From there, Meta will only require earnings growth of 8.7% in 2026 to enter the $2 trillion club — again, assuming it trades in line with the current P/E of the Nasdaq-100 index.
But even if this doesn’t happen within a three-year time frame, I think AI gives Meta a clear path to a $2 trillion valuation.
