Investors often look for the next big thing, and wonder which stock will become the next trillion-dollar company. But social media conglomerate Meta Platforms (META -1.70%) has already reached that mountaintop. Unfortunately, the stock's staggering downfall has valued the company at roughly $240 billion today.
So can Meta Platforms regain its mojo and bounce back to a trillion-dollar market valuation by 2025? It's hard seeing any stock rising four-fold any time soon in this market, but Meta's potential recovery isn't as farfetched as it sounds once you dig into the numbers. Here is what investors need to know.
Falling from grace
Sometimes you need to look backward before moving forward. Investors should understand Meta's sharp decline, because it goes beyond today's bear market. Meta's struggles come primarily from Wall Street's worries over Meta's aggressive investments in Reality Labs. CEO Mark Zuckerberg believes in the metaverse, and sees a big opportunity for Meta when (or if) it becomes mainstream.
You can see below just how much Meta's spending has increased. The money spent on Reality Labs hasn't yet produced any returns for shareholders -- in fact, the business segment has lost $9.4 billion year-to-date. Zuckerberg signaled during the company's earnings call that spending would increase in 2023.
META Capital Expenditures (TTM) data by YCharts
Add in a downcycle in advertising spending spurred by recession fears, and Wall Street is seemingly more negative on Meta Platforms than possibly at any time in the company's history. That sentiment is reflected in Meta's valuation, which at a price-to-earnings ratio (P/E) of 8.6 is its lowest ever.
The journey to $1 trillion
So how do you go from a beaten-down stock that nobody likes to a trillion-dollar company by 2025? First, remember that a company's share price doesn't necessarily reflect the quality of the business. Yes, Meta's dealing with challenges right now, but Wall Street believes that Meta's profits will still grow over time. A consensus of analyst estimates calls for Meta's earnings-per-share (EPS) to increase a total of 33% over the next several years and hit $12 by 2025.
One would hope that Meta's business will right itself by then; the advertising industry is cyclical, and should rebound with the economy. Reality Labs could look a lot different by then versus today, and perhaps Wall Street will again love Meta Platforms.
Meta needs a share price of approximately $379 to hit a $1 trillion market capitalization using the current number of outstanding shares. The company routinely repurchases shares, but let's assume that analysts factored that into their EPS estimates. Hypothetically, if Meta did earn $12 per share and traded at its median P/E over the past decade of 34 P/E, the resulting share price would be $408, enough to reach the target $1 trillion market value.
Remember this
Successfully achieving this would mean investors got a four-fold return on their investment if they bought shares today. That's an excellent return, probably beating the market over those years.
But this exercise isn't necessarily to split hairs about whether Meta will or won't be worth a certain amount by a specific year. Instead, it's a thought exercise that shows you just how attractive Meta's stock has become. If it hits analyst EPS estimates, the stock could maintain its current bottom-of-the-barrel P/E and still return 33% over three years. I would argue that a lot has gone wrong if sentiment (reflected by P/E) doesn't budge an inch higher over the next three years.
The most likely outcome seems that Meta's ad business eventually picks back up, and Zuckerberg extracts at least some value out of Reality Labs. The bar is pretty low here, which is why Meta's stock is so compelling at these prices. You don't need a home run; hitting a single to first base can still be a very successful investment, and anything beyond that is icing on the cake.
