The U.S. economy has always been the world's leading value creator. United States Steel became the world's first $1 billion company in 1901. Then, in 1955, General Motors dominated the automotive industry to amass the world's first $10 billion valuation.
Industrial conglomerate General Electric beat every other company to a $100 billion valuation in 1995 by selling everything from aircraft engines to household appliances. But in 2018, tech giant Apple crossed perhaps the most important milestone in stock market history when its market capitalization crossed $1 trillion.
Apple is worth more than $3 trillion today, and it's still the world's largest company by market cap. But four other tech giants have since joined Apple with valuations of more than $1 trillion. The latest entrant into that exclusive club, earlier this year, was Nvidia, thanks to its dominant presence in artificial intelligence (AI).
But another company isn't far behind. Meta Platforms (META -1.88%) just announced its financial results for the second quarter of 2023; investors immediately sent its stock price 7% higher, which took its valuation to $817 billion. Here's why I think Meta will join Nvidia in the $1 trillion club's class of 2023.
Image source: Getty Images.
AI, Reels, Threads, and more
Virtual reality (VR) and the metaverse used to be front-of-mind for Meta Platforms and its CEO Mark Zuckerberg. That was until last year, when investors expressed their discontent with the amount of money the company was spending on such projects despite their yielding very small amounts of revenue. But more on that later, because the speed with which Meta has pivoted its focus is incredible for a company of its size.
Zuckerberg dubbed 2023 the "year of efficiency." He shrank Meta's workforce by 21,000 jobs and told investors the company would be focusing more on its core platforms -- Facebook, Instagram, and WhatsApp. But Meta surprised everybody by launching a Twitter competitor called Threads in July, and it became the fastest-growing social media platform in history by reaching 100 million users in just five days. The new platform won't be monetized for a while yet, but it could be an important growth driver.
The most important feature on Facebook and Instagram today is Reels, which is designed to compete with ByteDance's short-form video platform TikTok. And Reels' most important feature is AI, which powers its discovery engine behind the scenes. AI learns what each user likes to watch, and feeds them more of that content to increase engagement.
You see, social networks have become less social lately, and more about bite-sized doses of entertainment. Meta has made swift progress in this area, crediting its AI discovery engine for a 7% increase in the amount of time users were spending on Facebook in Q2 compared to the same period last year.
But AI is also powering new features for advertisers. Meta has released an AI tool capable of generating text and cropping images to deliver the most effective ads. It has also provided predictive AI tools to help businesses understand how ads might perform. These will be key for the future of monetization, because the better an ad performs, the more money a business is likely to spend with Meta.
Meta topped Wall Street's expectations in Q2
As mentioned, Meta has reduced its focus on VR and the metaverse this year. Its Reality Labs segment, which is responsible for developing those projects, lost $3.7 billion in Q2, marking the second consecutive sequential decline. In fact, Meta's capital expenditures across the entire business were down 18% overall for the quarter (year over year), reflecting the company's focus on efficiency.
Here's why that's important. Meta delivered $32 billion in revenue in Q2, for 11% year-over-year growth, marking an acceleration over its Q1 growth rate of 2.6%. When a company has more money coming in while spending less, that leads to more profit. As a result, Meta's earnings per share surged 21% for the quarter to $2.98.
Both the revenue and earnings results were comfortably above Wall Street's expectations.
Monetization of the Reels feature appears to be one of the fastest-growing components of Meta's revenue. Zuckerberg told investors that it was tracking for over $10 billion in annual revenue, which is more than triple the $3 billion annual revenue run rate at the same time last year. That's a great sign that Meta's investments in AI are paying off.
Meta is on its way back to the $1 trillion club
Meta is no stranger to the stock market's most exclusive club, because it was a member in 2021. But it was metaphorically kicked out in 2022 amid the tough economic climate, after investors sent its stock plunging because of its hyperfocus on the metaverse. But Meta is back on track; with a valuation of $817 billion as of this writing, its stock only has to climb 22.4% to rejoin its tech peers with a $1 trillion valuation.
Wall Street analysts predict the company will generate $13 in earnings per share this year, and based on a stock price of $325, Meta trades at a forward price to earnings (P/E) ratio of 26 right now.
By comparison, the Nasdaq-100 technology index trades at a P/E of 35 today, implying that Meta is still cheap when measured against its big-tech peers. But it gets even better: Analysts expect Meta's earnings to grow by roughly 26% in 2024. There's a great chance that investors will start pricing that result into the stock later this year.
Assuming the company stays on track to meet Wall Street's estimates, there's a mathematical case for it to become the second company (behind Nvidia) to join the $1 trillion club before 2023 is over.
