With only six companies valued at $1 trillion or greater, reaching this threshold is impressive. It's also intriguing thinking about which companies will be next to join the club, as Berkshire Hathaway, Meta Platforms (META -0.28%), and Tesla are all within striking distance as each is valued anywhere from $760 to $780 billion.
Of these three, one company that I think is a lock for reaching a $1 trillion valuation is Meta Platforms. While this business has had its fair share of problems, it's sorting them out and looking investable again. But should investors buy the stock? Let's find out.
Meta's primary division has returned to growth mode
Meta Platforms, formerly known as Facebook, is a bit of an oddity. In late 2021, the company changed its name to Meta, signaling its shift to focusing on the metaverse. This meant spending heavily on its Reality Labs division, but those investments haven't worked out. Since the fourth quarter of 2021, Reality Labs has generated $3.65 billion in sales but $18.14 billion in operating losses.
That's an abysmal operating profit margin, and there's no improvement in sight -- second-quarter 2022 revenue was only $276 million, the lowest amount on record for years investors have information on.
Fortunately, Meta's primary business is a profit-making machine. Its Family of Apps division is driven by advertising revenue from Facebook, Instagram, Messenger, WhatsApp, and the newly launched Threads. In Q2, this segment grew 12% year over year to $31.7 billion. It also posted an operating profit of $11.2 billion, easing the pain of the Reality Labs division.
But how will any of this propel Meta into a $1 trillion valuation? CEO Mark Zuckerberg is now focused on efficiency.
The Year of Efficiency has been impressive
At the beginning of the year, Zuckerberg declared 2023 the "Year of Efficiency" for Meta Platforms, and he has followed through by reducing the workforce and cutting funding for less-prioritized projects. As a result, Meta's operating margin has risen in the past few quarters from the bottom experienced in Q4 2022.
META Operating Margin (Quarterly) data by YCharts.
By improving its efficiency, Meta is increasing its profits, which will help propel it to a $1 trillion valuation. Over the past five years, Meta has traded at an average price-to-earnings (P/E) ratio of 25. We'll set this as our baseline valuation for when Meta reaches a $1 trillion valuation. As you can see from the chart below, it's well over that threshold. However, forward earnings (utilizing analyst projections) are just beneath it, indicating Meta has room for multiple expansions next year.
META PE Ratio data by YCharts.
In 2024, the average Wall Street analyst expects $15.25 in earnings per share (EPS), indicating that Meta is trading at 20 times 2024 earnings. If Meta would achieve $15.25 in EPS and finish the year at 25 times earnings, that would indicate a 25% upside from today's stock price.
Multiplying that by Meta's current market cap gives Meta a valuation of $981 billion by the end of 2024. While that's not a $1 trillion valuation, it sets the stage for Meta to reach that threshold handily by 2025.
Furthermore, with about a 25% upside from now until the end of 2024, Meta looks like a promising stock to take a position in. And who knows, maybe Meta's earnings surprise investors, or the stock garners a higher multiple. Meta could easily be worth $1 trillion in 2024 if that's the case.
