Ten years ago, it was nearly inconceivable that an American company could have a trillion-dollar market cap. But in 2018, technology giant Apple became the first private organization in the world to amass a $1 trillion valuation on the back of its flagship iPhone.
Microsoft, Amazon, and Google parent Alphabet joined Apple in that exclusive club soon after. As did oil giant Saudi Aramco, which is the only non-American company to do so. But 2023 welcomed a new inductee, with semiconductor powerhouse Nvidia crossing the $1 trillion threshold for the first time.
I think 2024 could be an even busier year for the trillion-dollar club, because Meta Platforms (META 1.79%) and Tesla (TSLA +3.87%) are on the cusp of earning membership. Interestingly, both companies have briefly held $1 trillion valuations in the past, before a brutal stock market sell-off in 2022 sent their stock prices tumbling.
Here's how Meta and Tesla could return to their former glory next year.
Image source: Getty Images.
1. Mark Zuckerberg's 'year of efficiency' is paying off for Meta Platforms
Meta Platforms entered 2023 with its stock trading near a seven-year low point, following a 76% peak-to-trough collapse. The company -- led by CEO Mark Zuckerberg -- was betting heavily on virtual reality and the metaverse while its flagship social media platforms, Facebook and Instagram, were experiencing a decline in advertising revenue.
Investors became increasingly critical of Meta's strategy, so Zuckerberg quickly pivoted the company. He slashed over 21,000 jobs and prioritized more of its capital spending on technologies like artificial intelligence (AI) instead of the metaverse, which was generating negligible amounts of revenue. He dubbed 2023 the "year of efficiency."
NASDAQ: META
Key Data Points
The results have been remarkable. Meta's revenue has grown in every quarter of this year after shrinking throughout 2022, and it hit a record high of $34.1 billion in the recent third quarter. AI has been a major contributor, because it now learns what content users enjoy seeing and it feeds them more of it. This year alone, Zuckerberg says AI recommendations have driven a 7% increase in the time users spend on Facebook, and a 6% increase on Instagram.
More engagement means users see more ads, which leads to more revenue for Meta. On that note, the company is also making AI tools available to advertisers, who can now use them to craft text and images to make their content more appealing to potential customers.
Meta's increased revenue, combined with cost reductions across the board, have led to a boom in the company's bottom line. In the recent third quarter alone, Meta generated $11.5 billion in net income (profit) which was a whopping 163% increase from the same time last year.
Meta is currently valued at $877 billion, so its stock only has to gain another 14% to place the company in the $1 trillion club. Wall Street expects Meta to generate $15.89 in earnings per share during 2024, which means its stock currently trades at a forward price-to-earnings (P/E) ratio of just 21.5.
The Nasdaq-100 technology index, on the other hand, currently trades at a P/E ratio of 29.2. Assuming the Street's earnings estimates hold up, Meta stock will have to rise 35% just to trade in line with its peers in the tech sector. As a result, Meta is one of the most likely candidates for trillion-dollar glory next year.
2. Tesla is winning the electric vehicle price war
While Meta is experiencing a resurgence in its financial results this year, Tesla is going in the opposite direction. The largest pure-play electric vehicle (EV) company in the world hasn't been immune to broader economic challenges stemming from high inflation and rising interest rates, which have forced consumers to tighten their belts.
The company waged a price war against emerging competitors, from start-ups to legacy automakers like Ford Motor Company and General Motors who are entering the EV space. But Tesla has one major advantage: It consistently operates with the highest gross profit margin of any major car manufacturer. That gives the company room to cut prices and spur demand from customers, compared to its competitors who aren't selling enough cars to absorb the financial hit.
Between August 2022 and August 2023, the average price of a Tesla vehicle was down almost 20%. But that comes with a cost. In the recent third quarter of 2023, Tesla's gross margin was 17.9% (down from 25.1% a year ago). It meant less money flowed to the company's bottom line, and its earnings per share sank by 44% as a result. Plus, with each Tesla vehicle selling at a reduced price, the company only mustered revenue growth of 9% in the quarter.
NASDAQ: TSLA
Key Data Points
Here's the good news: Tesla hasn't altered its full-year expectations. It still plans to produce 1.8 million vehicles, which means the company believes the price cuts are working to buoy demand. But with Tesla's financial results sinking, how can its valuation continue to grow toward $1 trillion?
Tesla is currently valued at $733 billion, which means its stock has to rise 36% in 2024 to propel the company into the trillion-dollar club. Since coming public in 2010, Tesla stock has delivered a compound annual return of 50% -- if the trend continues, that alone will be enough.
But evidence is mounting that Tesla's price cuts are crushing its competitors, which means it could end up with a larger share of the EV market next year. Ford, for example, announced plans to scale back its plans for a $3.5 billion battery factory in Michigan, reducing its capacity by 43%. It cited lower demand for its EVs than it had anticipated, which is a problem considering it's losing about $36,000 on every car it builds.
But there's an even greater opportunity looming for Tesla. The company continues to develop its fully autonomous self-driving software, which it plans to sell on a subscription basis to its customers. Plus, CEO Elon Musk is also working on plans to launch a fully autonomous ride-hailing network for Tesla owners. Over the longer term, it could be the most lucrative business in the company's history.
