Meta Platforms (META +0.22%) has made a roaring comeback on the stock market in 2023. This is thanks to favorable economic data points like cooling inflation and a reduction in the pace of interest rate hikes by the Federal Reserve. Meta's focus on reducing costs this year and better-than-expected results released earlier this month that easily exceeded Wall Street's expectations are also reasons for Meta's comeback.
These factors have led to an impressive 45% jump in shares of Meta so far this year. But will this social media and digital advertising giant be able to sustain its momentum for the remainder of the year and head higher in 2023? More importantly, should savvy investors consider buying Meta stock at its current valuation with the expectation of solid gains in the long run? Let's try to find out where Meta Platforms could be after three years to see if it's worth buying.
NASDAQ: META
Key Data Points
Why Meta Platforms' growth could accelerate
Digital advertising is Meta Platforms' largest source of revenue. Meta's advertising business produced $114.4 billion in revenue in 2022 out of its total revenue of $116.6 billion. However, the segment's revenue was down from 2021 levels of $115.6 billion, thanks to a marked deceleration in digital ad spending growth last year.
According to eMarketer, worldwide digital ad spending increased 8.6% in 2022 to $567 billion, following much faster growth of 29.5% in 2021. The market was negatively affected by inflation and fears of an economic slowdown in 2022, but a recovery is expected in 2023, with digital ad spending expected to increase to $627 billion. By 2026, the global digital ad market could hit nearly $836 billion in annual revenue, an increase of 33% from this year's levels.
This secular growth opportunity in the digital ad market should be a tailwind for Meta Platforms, given its daily active user base of 2.96 billion across its family of apps. It is also worth noting that Meta's 2022 advertising revenue was 20% of last year's worldwide digital ad spending (based on eMarketer's estimate). The company's huge user base and its efforts to expand it by moving into nascent markets could help maintain its advertising dominance after three years.
New catalysts could give Meta a shot in the arm
Meta's investments in the Reality Labs business have been a point of concern for investors, given the segment's massive losses. The tech giant has bet big on the metaverse -- virtual three-dimensional worlds where users can interact remotely with the help of virtual reality (VR) headsets to work, collaborate, socialize, or even attend virtual events such as concerts -- and poured a lot of money into this area to get a head start over rivals.
However, Meta's investments haven't paid off thus far, as the demand for VR headsets dwindled last year. IDC estimates that 9.52 million VR headsets were shipped in 2022, down 12.5% from the prior year. However, Meta was the dominant player in this space, with a share of almost 85%. The good news for Meta investors is that global VR headset shipments are expected to nearly triple over the next three years to 27.6 million units in 2026.
So, Meta's focus on strengthening its VR ecosystem with the help of new hardware -- such as the Quest Pro, which was released in October last year -- and a family of more than 200 VR apps should set it up for success in this nascent market. Additionally, Meta CEO Mark Zuckerberg is set to jump into the latest hot trend in technology -- generative artificial intelligence (AI) -- by launching "a number of different things this year."
Generative AI has hit the spotlight of late following the raging popularity of ChatGPT, an AI-enabled chatbot that interacts conversationally with users, answers questions, and even writes poems and essays. This market was reportedly worth an estimated $10 billion last year as per market research firm Imarc Group, but it could grow at more than 20% a year through 2028.
So, Meta's focus on the generative AI market could turn out to be another growth driver for the company over the next three years. The good part is that analysts already anticipate Meta's revenue to recover from 2023. They also anticipate it to sustain momentum through 2024 and 2025.
META Revenue Estimates for Current Fiscal Year data by YCharts
The chart above indicates that Meta's top line could increase at an annual rate of approximately 11% in 2024 and 2025. A similar top-line growth rate in 2026 could send its revenue to $167 billion. Multiplying the estimated revenue for 2026 by Meta's price-to-sales ratio of 4 would translate into a market capitalization of $668 billion in 2026, which would be a 48% jump over current levels.
However, don't be surprised to see Meta clock faster growth thanks to the emerging drivers discussed above. That's why savvy investors looking to buy and hold a tech stock for the next three years should consider going long on Meta. It is trading at 20 times trailing earnings even after its impressive rise in 2023, which is lower than the Nasdaq-100's multiple of 23.6.
