The $1 trillion club is home to just five companies at the moment:
- Apple, which was the first entrant in 2018. The iPhone maker is now worth a whopping $3 trillion.
- Microsoft, the world's second-largest company behind Apple.
- Amazon, the world's largest e-commerce company.
- Alphabet, the parent company of Google and YouTube.
- Nvidia, the newest entrant. It produces some of the world's most powerful semiconductors, which are key to developing artificial intelligence (AI) applications.
And there's one company on the brink of rejoining them. Meta Platforms (META +2.48%) is the parent of popular social media applications Facebook, Instagram, WhatsApp, and the brand-new Threads. Meta was in the $1 trillion club in 2021, but last year's brutal sell-off in the tech sector wiped out more than 76% of its value from peak to trough.
2023 has been a different story, with the stock rocketing 145% so far, which now values the company at $786 billion. It's still trading below its all-time high, so it will need to rise another 27% or so to enter the $1 trillion club once again, and I think its new Threads platform combined with its recent initiatives in AI hold the keys to getting there. Here's why.
Image source: Getty Images.
AI and Threads are keys to Meta's future
The tech sell-off wasn't the only thing weighing on Meta stock last year. Investors were growing frustrated with the company's persistent spending on virtual reality and the metaverse, even though those initiatives continued to lose billions of dollars. After many of its most prominent investors became more vocal, CEO Mark Zuckerberg announced a pivot in the company's strategy.
He dubbed it "the year of efficiency" and slashed costs across the board, eliminating 21,000 jobs in the process. But perhaps the most significant shift involved a focus on AI, and integrating it with Facebook and Instagram to drive better content recommendations for users.
Instagram's short-form video feature, Reels, is a core part of this because it competes directly with ByteDance's TikTok, which has rapidly become one of the largest social media platforms of all time.
TikTok has mastered the art of using AI to learn what users like in order to feed them videos that will keep them engaged with the app for hours per day. Meta was initially behind the curve in this area, but in the first quarter of 2023 (ended March 31), Zuckerberg told investors that users were spending 24% more time on Instagram thanks to improvements in its AI-driven recommendations.
Meta also has a new growth catalyst. On July 6, it released a platform called Threads. In the past, the company expanded through the acquisition of Instagram and WhatsApp, so Threads is the first social media application it has built in-house since Facebook. Threads has an uncanny resemblance to Twitter, the short-form text platform acquired by Elon Musk in 2022 for $44 billion.
Twitter has been a bit of a disaster since Musk's acquisition, and he himself admitted it was just months away from bankruptcy shortly after the deal. Zuckerberg has a long-standing, very public rivalry with Musk, which almost culminated in a physical fight recently, and many pundits view Threads as his direct attempt to crush Twitter. It might be working, because Threads attracted over 100 million users in its first five days, the fastest any consumer platform has achieved that milestone in history.
Meta revenue has surged over the long term
Meta experienced a mild drop in revenue during 2022 because of the tough economy, which prompted businesses to pull back on their advertising budgets. Plus, TikTok was widely credited with sucking ad dollars away from its competitors, and with Zuckerberg still tinkering with the metaverse, Meta's eye simply wasn't on the ball.
But there's no ignoring the company's long-term trajectory. It generated just $272 million in revenue during 2008, and in 2023, analysts predict that figure will come in at $126.6 billion. That would be a whopping 46,444% increase over the 15-year period, for a compound annual rate of 50%.
Threads introduces a new way for Meta to attract advertisers, especially those left unsatisfied by Twitter's current free-for-all when it comes to content moderation (or the complete lack thereof) under Musk's leadership. Twitter generated $5 billion in revenue during 2021 -- the year before Musk's involvement -- with about 217 million daily active users.
It's too early to know how many people will be active on Threads daily, but Zuckerberg thinks the world needs a digital town square capable of serving more than 1 billion users. He says Twitter had an opportunity to achieve this but ultimately couldn't get it done.
If we extrapolate Twitter's $5 billion in 2021 revenue to a platform with 1 billion users (instead of 217 million), it's conceivable that Threads could eventually generate around $25 billion per year! And considering Meta has far more experience than Twitter at monetizing social media users through advertising, it could probably do even better than that.
Meta Platforms' path to a $1 trillion valuation
As I mentioned, Meta has a valuation of $786 billion right now, so its stock has to rise about 27% for the company to rejoin the $1 trillion club. Based on 2022 revenue of $116.6 billion, its stock currently trades at a price-to-sales (P/S) ratio of 6.7.
NASDAQ: META
Key Data Points
Assuming that P/S ratio remains constant, the company will have to grow its annual revenue by 27% to $148.5 billion to justify a $1 trillion valuation. Based on that equation alone, it's unlikely to get there in 2023 because Wall Street is predicting its revenue to come in at $126.6 billion, representing growth of just 8.3% compared to 2022.
When the economy begins to improve, however, it's likely Meta's revenue will start growing at a rate somewhat closer to its long-term average again. That becomes even more likely after factoring in the potential of Threads and the increasing user engagement on Instagram.
Not to mention, as stock market investors grow more confident about the broader environment, they often become willing to pay a higher valuation for good companies. It's a phenomenon called multiple expansion, and it could see Meta trade at a higher P/S, which ultimately translates into a higher stock price without any further revenue growth.
Considering Meta was in the $1 trillion club in 2021 with less revenue than it's expected to deliver in 2023 -- and without a defined AI strategy or Threads back then -- rejoining its tech peers Apple, Microsoft, Nvidia, Amazon, and Alphabet appears inevitable, given enough time.
