Back in the summer of 2021, Meta Platforms (META 1.70%) -- then known as Facebook -- became a trillion-dollar company. But it dropped out of that elite club over the following two years as it grappled with Apple's (AAPL 2.35%) privacy changes on iOS, stiff competition from ByteDance's TikTok, and fierce macro headwinds.
Meta saw some recovery in 2023 and became a trillion-dollar company again in January 2024. With its 20% post-earnings stock price pop on Feb. 2, the company boosted its market cap to $1.2 trillion. Can it maintain that momentum and become a $2 trillion stock by 2025?
Meta Platforms CEO Mark Zuckerberg. Image source: Meta Platforms.
Why did the bulls rush back?
Meta's revenue rose 37% in 2021 but declined 1% in 2022 as the aforementioned challenges curbed the growth of its advertising business. As Meta's revenue growth cooled off, it remained committed to the expansion of its unprofitable Reality Labs segment, which housed its augmented reality and virtual reality products.
Its cooling sales and rising costs reduced its operating margin from 40% in 2021 to 25% in 2022. Its earnings per share, which had risen 36% in 2021, dropped by 38% in 2022. Those declines, along with rising interest rates, drove the bulls away from Meta. By Nov. 3, 2022, its stock had sunk to a seven-year low of $88.91 and reduced its market cap to $236 billion.
But in 2023, Meta's revenue and EPS rose 16% and 73%, respectively. Its year-over-year revenue growth accelerated through all four quarters of the year as its advertising business recovered. Its operating margin expanded again to 35%.
NASDAQ: META
Key Data Points
That recovery was driven by three catalysts. First, Chinese e-commerce and gaming companies ramped up their spending on Facebook and Instagram to reach more overseas customers. Those Chinese ad buyers accounted for 10% of Meta's revenue in 2023 and contributed five percentage points to its total revenue growth.
Second, Meta revamped its advertising algorithms to gather more first-party data and counter Apple's iOS changes. It also monetized its short video platform Reels more aggressively with AI-driven recommendations to keep pace with TikTok.
Lastly, Meta overcame a 9% decline in its average ad prices in 2023 with a 28% increase in its total ad impressions. That growth was buoyed by the ongoing expansion of its Family of Apps (Facebook, Messenger, Instagram, Threads, and WhatsApp), which grew its monthly active people by 6% to 3.98 billion globally for the full year.
Meta continued to expand its unprofitable Reality Labs business, but it more than doubled its free cash flow (FCF) to $43 billion for the full year as it laid off thousands of employees and executed other cost-cutting measures. That excess cash enabled it to expand its current buyback authorization by $50 billion and initiate its first-ever quarterly dividend of $0.50 per share. All of that good news brought back a stampede of bulls.
The mathematical path toward $2 trillion
From 2023 to 2026, analysts expect Meta's revenue to grow at a compound annual growth rate (CAGR) of 13% as its EPS rises at a CAGR of 22%. Based on those expectations, its stock still looks reasonably valued at 24 times forward earnings.
|
Metric |
2024 |
2025 |
2026 |
|---|---|---|---|
|
Estimated revenue growth |
17% |
11% |
12% |
|
Estimated EPS growth |
32% |
14% |
19% |
Analysts' estimates. Data source: Marketscreener.
Assuming Meta maintains that forward multiple and matches Wall Street's expectations, its stock could be trading at nearly $650 a share with a market cap of $1.65 trillion. But if the bulls get a little bit more excited and pay about 30 times forward earnings for Meta's stock by the end of 2025, it could be worth just over $2 trillion.
We should be skeptical of those long-term estimates since Meta could still face some unpredictable macro, competitive, and regulatory headwinds over the next three years. However, it clearly has a viable path toward becoming a $2 trillion stock by 2025 as it stabilizes its advertising business and expands its margins again. Its nascent metaverse business could also finally take off, expand its ecosystem beyond its core apps, and diversify its top line away from the advertising market.
