The list of $1 trillion companies is thin, as only five U.S. companies are currently above that threshold. But there are also a few companies within striking distance of being worth $1 trillion.
One of those is Meta Platforms (META -0.65%), the company formerly known as Facebook. At around a $770 billion valuation, it must gain about 30% more to join the exclusive club. But does that make Meta Platforms a buy?
Advertising is funding metaverse investments
Meta Platforms splits its business into two primary segments: a family of apps and reality labs. The family of apps division generates revenue from advertising on Facebook, Instagram, Messenger, WhatsApp, and the newly launched Threads app. Reality labs is the metaverse wing, but also includes hardware like the mixed-reality Meta Quest Pro headset.
The differences between these two divisions couldn't be more stark; the family of apps division is highly profitable and growing, while reality labs is losing an incredible amount of money and shrinking. Fortunately, the better-performing division makes up the majority of Meta's revenue.
In the second quarter, family of apps revenue rose 12% year over year to $31.7 billion. From that revenue, it generated an operating income of $13.1 billion -- a 42% operating profit. Those are impressive results, and it shows what a powerhouse Meta is when its metaverse aspirations do not sidetrack it, as reality labs only brought in $276 million in revenue, down 39%. To make matters worse, reality labs posted an operating loss of $3.7 billion, indicating an operating loss margin of 1,355%.
That's an atrocious margin, but Meta's operating margin improved for three consecutive quarters, not because it's generating more revenue but because it's spending less on this division. While I would love to see Meta focus solely on its family of apps, that's not the vision of CEO and founder Mark Zuckerberg. Fortunately, he has recognized this and moved toward a more efficient operating model, but improvements still need to be made.
While Zuckerberg dubbed 2023 the "year of efficiency," 2024 will not be the same case. Because Meta sees opportunities in artificial intelligence, it sees the need to build out its data center infrastructure and increase its payroll because it is focusing on more technical roles. Still, the third quarter is supposed to be a massive report for Meta, as revenue is expected to increase around 20%.
With Meta's revenue growth increasing again, the company has leeway to pursue other goals. But is it enough to push it past the $1 trillion threshold?
The stock is ripe for more gains
Meta is within striking distance, with only a 30% rise needed to cross into the $1 trillion club. But an extra 30% on top of its 150% rise this year is a tall order. That said, much of that rise came from Meta's undervaluation entering the year.
META PE Ratio data by YCharts
Clearly, Meta didn't deserve to trade at the levels it did, but now the company has reached higher-than-average levels, so the stock's trajectory toward a $1 trillion valuation may have a bit of a headwind due to being valued at a premium level. However, that doesn't factor in future earnings growth. Meta's forward price-to-earnings (P/E) ratio, which utilizes analyst projections over the next 12 months, is a mere 22, which indicates massive earnings growth over the next year.
While 35 times earnings may be expensive, 22 times forward earnings is not nearly as bad, so Meta Platforms isn't overvalued by any means.
Because Meta's revenue is expected to grow by 20% in Q3 thanks to a recovering advertising market, I'd expect similar guidance for the fourth quarter. As a result, I think Meta's stock could see more growth in the upcoming months, which should help it cross the $1 trillion threshold in 2024. Meta has been a stellar stock in 2023, but with the business growing strongly, it won't shock me to see this strong performance continue.
