Even after more than a year of a brutal bear market, there are still a number of businesses with a high enough valuation -- and strong growth prospects -- that could put them into the $1 trillion club in terms of market capitalization by the end of this decade. Currently, only five companies belong to this exclusive group: Apple, Microsoft, Saudi Aramco, Alphabet, and Amazon.
Three Fool.com contributors think more businesses will be joining the $1 trillion club by 2030 -- and that they're worth a buy for long-term investors right now. Here's why they think Meta Platforms (META -13.99%), Netflix (NFLX 0.05%), and Broadcom (AVGO 2.50%) are headed higher in the coming years.
Meta's rebound will come from recent strides in AI
Billy Duberstein (Meta Platforms): Meta Platforms, the company formerly known as Facebook, actually had its market cap briefly kiss the $1 trillion mark back in June 2021, but it hasn't been a fun ride for shareholders since. The social media and virtual reality giant saw its market cap plunge more than 70% at one point, reaching its recent lows last fall, before a vicious recovery this year to a $530 billion market cap today, about 50% below its highs.
Data by YCharts.
While the bounce off the lows has been nice, there's a good shot Meta can recover its all-time highs by 2030 -- and potentially much more.
The 2022 plunge was a reaction to Meta's heavy spending on the metaverse, even amid a big slowdown in its core social media ad rates. Competition from TikTok, ad targeting headwinds from iOS privacy changes, and over-hiring and spending all contributed to an increase in costs with a decline in revenue.
However, it appears the company's recovery is underway, and much of the credit lies with Meta's use of artificial intelligence (AI). In the midst of the company's downturn last year, CEO Mark Zuckerberg decided to double down on AI investments, quintupling the amount of GPU-powered servers even as revenue declined.
That investment is now yielding benefits. Meta's pivot from news feed to AI-recommended Reels has been successful, with engagement in the short-form video format more than doubling over the past year across Facebook and Instagram. That engagement has allayed some fears over the TikTok threat, and allowed Meta to continue growing daily active people across its apps, by about 5% last year.
Not only is the new AI recommendation engine helping engagement, it's also helping ad targeting. The iOS changes made in 2021 were estimated to shave a stunning $10 billion off Meta's revenue; however, a recent Financial Times article highlighted a new Meta tool for advertisers called Advantage+. With Advantage+, advertisers turn over creative control over their prospective ad to Meta. The Advantage+ AI engine then alters graphics and text, rapidly tests various versions of the ad, and picks the best one for broader viewing. Some advertisers have noted their return on ad spend has greatly increased as a result, nearly back to the ad returns seen prior to the iOS privacy changes.
Finally, Meta is also using AI to streamline costs, which were a key concern of investors last year. Zuckerberg noted in his March 14 letter to employees that AI is helping software engineers write "better code faster" and greatly increasing efficiency. Unfortunately for some employees, that is also enabling Meta to cut positions, as the company also noted it would be cutting another 10,000 jobs and closing 5,000 open hires. While not good news for those employees, Meta did over-hire in 2020 and 2021, and these cost cuts will help improve profits for shareholders.
Zuckerberg announced a new internal group within Meta that will focus on generative AI for text and image creation across the company's family of apps. Zuckerberg noted: "We're exploring experiences with text (like chat in WhatsApp and Messenger), with images (like creative Instagram filters and ad formats), and with video and multi-modal experiences. We have a lot of foundational work to do before getting to the really futuristic experiences, but I'm excited about all of the new things we'll build along the way."
The bottom line is that Meta's vast resources and improving proficiency with AI should unlock revenue, lower costs, and increase innovation. That's a recipe for Meta to regain the trillion-dollar mark, and potentially much more.
A trillion-dollar entertainment giant in the making?
Anders Bylund (Netflix): Yes, it's a bit of a stretch when I say that Netflix's market cap could be worth a cool $1 trillion by the end of 2030. With the video streaming veteran's market cap parked at a modest $133 billion today, I'm asking for a compound average growth rate (CAGR) of nearly 29% over a period of roughly eight years. And past performance does not guarantee future results, so Netflix's shareholder returns in the eight-year period after the Qwikster meltdown isn't relevant here. That was a different situation, as Netflix started from a minuscule market cap of less than $4 billion and built a whole new industry from scratch over the next decade.
But I still want to point out that Netflix absolutely crushed it during those formative years with a 58% CAGR:
Data by YCharts.
That's not a guaranteed pattern for future chart squiggles, but it does set a precedent. Overall, Netflix's market cap has been growing at an 11-year CAGR of 35.5% since the Qwikster debacle. The 29% growth rate it would need to reach $1 trillion by 2030 is actually a slowdown from the long-term historic growth rate.
And that's not all. This situation may not be as different as you think.
The domestic streaming market has started to mature, inspiring sector giants such as Walt Disney and Warner Bros. Discovery to launch their own streaming services and grab a slice of the market pie that Netflix invented.
The growth story is far from finished in the U.S. but Netflix is exploring alternative growth tactics anyway. The company recently launched an ad-supported subscription plan, reaching out to more price-sensitive consumers. Netflix is also taking action to enforce its tale-as-old-as-time terms of service, where one subscription covers a single household and not a geographically dispersed clan. Next up, Netflix is building an impressive collection of cloud-based video games that could very well become the company's next high-octane growth fuel.
Finally, Netflix stock was cheap after the Qwikster launch because investors generally missed the point. Management just dropped the ball on introducing that radical strategy shift to a skeptical market, at the peak of Netflix's iconic DVD-by-mail video rentals. The Netflix we see today, with 231 million subscribers and $31.6 billion of annual sales, is the long-term evolution of the original Qwikster idea. The controversial streaming business just held on to the established Netflix brand instead of starting over with the newfangled Qwikster name.
Likewise, the company's focus recently shifted from maximum subscriber growth to a balanced goal of profitable revenue growth. Still, many investors continue to panic when Netflix loses a few subscribers -- even if the remaining customers generate more revenue and stronger bottom-line profits.
Netflix's business model is always evolving, often leaving critics and bears flat-footed as the company skates to where the entertainment industry's puck will be instead of where it is today. Netflix's stock looks spring-loaded to deliver tremendous growth in the next few years.
So the stock bounced back from last year's darkest trough only to lose traction again in recent weeks. You'd think Wall Street's value-oriented traditionalists would appreciate stronger profits and cash flows in exchange for slower growth in the nonstandard category of streaming subscribers. But the share price is down anyway. You can pick up Netflix shares at a 56% discount from the all-time highs of November, 2021. And the growth prospects from this long-lasting market dip are as bright as ever.
I can't guarantee that Netflix will reach that elusive $1 trillion market cap by the end of 2030, but it should get pretty darn close and I won't be terribly surprised if it actually happens.
In the meantime, Netflix stock is a no-brainer buy.
Chips are big business, and this giant will keep getting bigger
Nicholas Rossolillo (Broadcom): While it's certainly no household name like a typical mega-cap stock, Broadcom is indeed a prolific chip designer. If you're an Apple user, you're benefiting from Broadcom wireless connectivity hardware. The internet (from WiFi-enabled routers to the behind-the-scenes infrastructure data travels the world on) makes liberal use of Broadcom. And as the world has gone generative AI crazy -- with services like the viral ChatGPT that Microsoft has bet big on -- Broadcom's hardware is finding new use to help data centers handle these new AI systems.
Broadcom has been able to buck the current downturn in semiconductor sales thanks to its diversification. During its last quarter (which ended in January), revenue and free cash flow both jumped 16% higher versus the year-ago period to $8.9 billion and $3.9 billion, respectively. The outlook for the next quarter, one in which many of Broadcom's peers are forecasting year-over-year declines, was pretty good, too. Broadcom sees overall revenue increasing at a high-single-digit-percentage clip.
A couple years or so of strong growth aren't going to carry this chip titan across the $1 trillion market cap line. But recent results do speak to the financial consistency Broadcom has been able to stoke from its sprawling operations over the years. Acquisitions are often frowned upon, but Broadcom has made a pretty good go of it over the years via a string of semiconductor and software takeovers.
Data by YCharts.
Now, CEO Hock Tan is attempting to acquire cloud computing infrastructure company VMware, which would go down in the books as one of the largest takeovers ever if the deal passes regulator approval. Tan and company think it will, on the merits that it will introduce new choice versus the current slate of cloud computing options offered by Microsoft, Amazon, and Google. Adding VMware would also transform Broadcom into a half-semiconductor-half-software outfit, a unique investment offering.
As measured by today's market caps, Broadcom-plus-VMware would form a company with a market cap of over $300 billion. Assuming the deal goes through (investors should know by this October) and valuation stays about the same (low- to mid-teens trailing-12-month price to free cash flow), Broadcom-plus-VMware would need to grow its free cash flow to at least $66 billion a year by 2030 to reach the $1 trillion valuation mark.
The two companies independently generated free cash flow of nearly $21 billion in the last year ($16.9 billion for Broadcom, $3.9 billion for VMware). Going from $21 billion to $66 billion in about eight years represents an average compound annual growth rate of 15%. That would be a lofty goal, but not a ludicrous one for a company positioned to benefit from the growing semiconductor and cloud computing industries.
At any rate, I like Broadcom stock for the long haul. This has been a great growth and rising dividend stock over the years, and I think it will remain so over the next decade.
