This has been a strong year for large-cap technology stocks, with the Nasdaq-100 index surging by 40% so far. While it's still down 8% from its all-time high following a steep drop in 2022, some individual stocks have recently marched to new heights anyway.
Shares of Nvidia have tripled in value this year, for example, propelling the company to a $1 trillion valuation. It places Nvidia in an exclusive club with just four other American tech giants. In 2018, Apple became the first corporation in the world to amass a $1 trillion market capitalization, with Microsoft, Amazon, and Google parent Alphabet following soon after.
Another stock is knocking on the door of that club. Share prices of Meta Platforms (META -0.55%) are up 144% so far in 2023 thanks to the company's focus on efficiency and its efforts related to artificial intelligence (AI). It's now valued at $778 billion, meaning a gain of just 28% from here will place it among its tech peers with a $1 trillion market cap. Here's why it's probably only a matter of time before it gets there.
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Meta's year of efficiency is paying off in a big way
In 2022, Meta stock recorded a low of $88 a share. Given it traded as high as $378 in 2021, that represented a decline of 76%. Clearly, investors were unhappy with the company. Sure, the whole tech sector struggled last year, so Meta stock wasn't the only one under pressure. But there were concerns about the company's excessive spending on the metaverse, which wasn't yielding any meaningful revenue.
Meanwhile, Chinese tech company ByteDance was disrupting the social media industry with its TikTok platform, which placed Meta's Facebook and Instagram at risk of losing relevance. Meta CEO Mark Zuckerberg needed a response quickly. He dubbed 2023 the "year of efficiency," refocusing the company on its family of social media apps and committing to managing costs. That involved 21,000 layoffs and (at least so far this year) a small reduction in spending on the metaverse.
2023 also marked an important pivot point for Meta: its focus switched to artificial intelligence as it relates to its social media assets. The company worked hard to develop an AI-powered recommendation engine, which learns what content users like to watch so it can boost engagement by feeding them more of it. This was initially applied to its Reels short-form video feature, which was designed to compete with TikTok, but Meta is now using AI to recommend all kinds of content.
AI recommendations are the secret behind TikTok's success, and Meta's efforts are finally bearing fruit. In the second quarter (ended June 30), the company said AI discovery resulted in a 7% increase year over year in the amount of time users spent on Facebook.
In the first quarter, it credited AI with a 30% improvement year over year in monetization efficiency on Instagram and 40% on Facebook. In other words, AI is figuring out what users like with increasing accuracy.
Those numbers could have profound long-term effects on Meta's financials. The longer a user spends on its social media apps, the more opportunities Meta has to push advertisements to them to generate revenue. And if AI helps Meta target users with ads more accurately, that will significantly boost monetization because businesses are likely to spend more.
Speaking of which, Meta's revenue has finally returned to growth
Meta entered 2023 on the back of three consecutive quarters of revenue declines year over year. The rapid rise in interest rates over the last 12 months is constraining consumer spending power. If consumers are spending less, businesses need to cut back on spending as well, and cutting down on marketing is one of the first places they do it. That has hurt Meta's revenue.
And while the company was still focusing on virtual reality and the metaverse, its Facebook and Instagram apps were losing ad dollars to new platforms like TikTok.
Zuckerberg's focus on AI and increasing the time users spend on Meta's social media apps started to pay off almost immediately in 2023. Revenue ticked higher by 2.6% year over year in the first quarter, and that growth accelerated to 11% in the second quarter.
That renewed growth combined with the company's cost cuts led to an even more impressive result at the bottom line. Meta's quarterly net income bottomed at $4.3 billion in the third quarter of 2022, and by the recent second quarter of 2023, it was up a whopping 77% from that low point to $7.7 billion.
Meta's growing profits are paving the way to a $1 trillion valuation
For a mature, profitable technology company like Meta, achieving a $1 trillion valuation is almost entirely predicated on the numbers. Sure, Meta might get some credit for the introduction of new platforms like its Twitter competitor, Threads, which became the fastest-growing app in history earlier this year. But in the end, investors will value the company primarily based on its earnings.
Meta's trailing 12-month earnings per share (EPS) is $8.58, and based on its current stock price of $305.60, it trades at a price-to-earnings (P/E) ratio of 35.6. That's more expensive than the broader tech sector represented by the Nasdaq-100 index, which trades at a P/E of 30.5.
On that basis, there isn't much scope for Meta stock to go higher. However, Wall Street analysts expect the company's EPS to surge in the second half of this year, and estimates suggest the full-year 2023 EPS could come in at $13.38.
If Wall Street is correct, that would place Meta stock at a P/E of just 22.8, implying that the stock will need to jump 33% between now and the end of the year just to trade in line with the Nasdaq-100 index.
Remember, Meta stock only needs a 28% gain to take the company's valuation to $1 trillion. Therefore, its entry into the market's most exclusive club alongside Apple, Microsoft, Amazon, Alphabet, and Nvidia appears likely sooner rather than later.
