It seems like every few years the capital markets become enamored with a new buzzword. A couple of years ago, the term "metaverse" captured the attention of investors looking to understand the applications of the virtual world.
Perhaps the biggest foray into the metaverse was made when social media company Facebook changed its name to Meta Platforms (META 0.43%) in late 2021. What followed was a miscalculated multibillion investment in 2022, eventually culminating in deteriorating revenue growth, shrinking profit, and a cratering share price.
After dropping over 60% in 2022, Meta stock rewarded those who bought the dip and held on for the near-200% surge last year. With Meta closing in on a $1 trillion market cap club, let's explore why 2024 could be another great year for this "Magnificent Seven" member.
Meta was the comeback kid of 2023...
After months of aggressive hiring and new product development, Meta's expenses ballooned while its core advertising revenue faltered. By the end of 2022, Meta found itself in a predicament as many doubted the company could rebound. In October 2022, venture capitalist Brad Gerstner published an open letter to Meta's executive leadership encouraging the company to "get fit."
Thankfully for shareholders, Meta took the advice and spent much of 2023 undergoing significant operational changes. On the expense side, the company resorted to a series of layoffs to help curb costs. On the revenue side of the house, Meta doubled down on advertising and returned to impressive top-line growth. The combination of accelerating revenue and lower expenses helped fuel soaring cash flow.
Through the first nine months of 2023, Meta's free cash flow increased 140% year over year to $31.5 billion. This doesn't even include Q4 figures, which I think will see a nice bump thanks to holiday shopping trends.
But while 2023 was an encouraging year for Meta, I think 2024 carries a lot of subtle catalysts.
Image Source: Getty Images
...but 2024 could be even better
According to industry research, Meta-owned Facebook and Instagram are both in the top 10 most visited websites in the world. Given the amount of people flocking to Meta's social media ecosystem, it's not surprising to see that the company has such a huge influence on the advertising industry.
But one thing investors should understand about advertising is that it is very cyclical. And even though inflation is beginning to cool, and many economists believe that the Federal Reserve will begin to trim interest rates this year, the overall state of the economy is still a little cloudy.
Although this might seem like Meta's prospects this year are equally enigmatic, keep in mind that 2024 marks the inception of a new election cycle. Marketing company AdImpact is projecting that roughly $10 billion will be spent on political ad campaigns this year. Not only would this be a record, but the company's research suggests that over $1 billion will be allocated toward digital platforms. I see this as a major tailwind for Meta's already-growing advertising behemoth. Given the company's broad reach, Meta should be able to command premium pricing power for political advertisements, which should only help fuel further revenue and operating margin gains.
Is Meta headed to $1 trillion?
META Market Cap data by YCharts
The chart above shows that Meta's market cap increased 188% in 2023.
While I am bullish on Meta's prospects this year, I do not see another near-200% gain. But the good news is that Meta does not need that order of magnitude in order to reach a $1 trillion market cap.
The way I see things, Meta stock bounced back in 2023 thanks to the company's commitment to cut costs and reignite the advertising cash cow. But like its big tech cohorts, Meta is also aggressively pursuing applications in artificial intelligence (AI) -- technology that can make an impact on both its ad business and its virtual reality metaverse ambitions.
Yet despite these explorations in AI, I think that many view Meta as just an advertising business competing with the likes of Alphabet. Since the stock's current price-to-earnings (P/E) ratio of 31 pales in comparison to its long-term average of 43, Meta looks like an absolute bargain right now. Seen in this way, investors can buy Meta's AI business for free.
I think Meta will handily attain a $1 trillion market cap this year, fueled by a combination of increased advertising spending by brands and politicians alike, and supplemented by progress in AI.
