One of the biggest secular tailwinds to emerge over the past couple of years is artificial intelligence (AI). While AI has existed in some form for decades, more recent advances have turned the tech world on its head.
Evidence abounds. Indeed, the top four companies in the world -- when measured by market cap -- all share a common thread: They are all embracing the groundswell surrounding generative AI and are racing to profit from these cutting-edge algorithms. Topping that list is Microsoft, the only company that boasts a market cap of more than $3 trillion. Following closely behind are Apple, Nvidia, and Alphabet, with market caps of between $2.9 trillion and $2.1 trillion.
One company that seems destined to join the ranks of the $2 trillion club is Meta Platforms (META 1.18%). The social media titan has a treasure trove of data on its users and is parlaying its data cache into profits.
Let's look at Meta's place in the overall AI ecosystem and the drivers that could propel its stock to rarified heights, making it part of this prestigious group.
Image source: Getty Images.
Data is the new oil
In 2006, British mathematician Clive Humby famously said "data is the new oil." Put another way, data in its raw form needs to be refined in order for it to achieve its greatest potential. Recent advances in the field of generative AI have given new meaning to this often-quoted phrase.
AI models are trained on reams of data, which allows them to make more accurate predictions and improve their decision-making process. Therefore, companies with the most data can create the most effective AI systems.
That's what gives Meta Platforms an edge in the AI revolution. The company has a roster of social media platforms, including three of the four largest social media platforms on the planet (measured by monthly users), including Facebook, Instagram, and WhatsApp, among others. In the first quarter, more than 3.2 billion people logged into one of the company's family of apps. This gives the company access to a virtual treasure trove of data about its users, which is prime fuel for training AI models.
The fruit of those efforts is LLaMA (Large Language Model Meta AI), which underpins the company's flagship Meta AI. Just last month, the company unveiled LLaMA 3, making Meta AI "one of the world's leading AI assistants." This AI is free to users (resulting in more data), though Meta charges large cloud infrastructure providers a fee to include it in their offerings.
The generative AI opportunity
As the world's largest social media provider, it might seem counterintuitive that Meta Platforms would be interested in AI, yet it seems like too good an opportunity to pass up. By simply repurposing data it already has, Meta can generate an entirely new revenue stream, enriching shareholders along the way.
Estimates regarding the size of the AI opportunity are all over the map, so there's no definitive figure. However, one of the more conservative estimates suggests generative AI will be a $1.3 trillion market by 2032, according to data compiled by Bloomberg Intelligence. With an opportunity of that magnitude, it's easy to see why Meta has embarked along this path.
NASDAQ: META
Key Data Points
A track record of robust growth
Over the past decade, Meta's revenue has grown by 3,120% (as of this writing), while its net income has surged by 4,000%. While this hasn't been in a straight line, the company's performance has been consistent, driving dramatic growth in its stock price, which has surged 1,140%. These results have been fueled by Meta's digital advertising, which generates the lion's share of its revenue.
In the first quarter, Meta's growth was impressive. Revenue of $36.5 billion jumped 27% year over year, while its diluted earnings per share of $4.71 soared 114%. Visitors to its platforms grew by 7%, helping fuel its ad impressions, which grew by 20%, while the average price per ad increased by 6%. Driving the robust bottom line growth was slower increases in costs and expenses, which grew just 6%.
Meta has developed a host of generative AI features to help its advertisers better reach their target market. For example, users can create multiple backgrounds, adjust the size of the main image, and create variations on the original text, all of which can save advertisers time and money. That, combined with the ongoing recovery in the ad market, spells good news for Meta.
While there's a great deal of focus on AI, there are other potential growth drivers that could push Meta higher. Meta's Reality Labs, which includes the company's Quest virtual reality (VR) headsets and its metaverse ambitions, has thus far been a drag on Meta's results. However, CEO Mark Zuckerberg believes ongoing investments in Reality Labs will ultimately increase Meta's operating income, though that remains to be seen.
The path to $2 trillion
Meta currently boasts a market cap of roughly $1.22 trillion, which means it will only take stock price gains of roughly 65% to drive its value to $2 trillion. According to Wall Street, Meta is expected to generate revenue of $146.2 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 8. Assuming its P/S remains constant, Meta would have to grow its revenue to roughly $241 billion annually to support a $2 trillion market cap.
Wall Street is currently forecasting revenue growth of 28% annually for Meta over the coming five years. If the company achieves that benchmark, it could achieve a $2 trillion market cap as soon as 2027. It's worth noting that Meta has a history of outperforming analysts' expectations. If that's the case, it could cross that line sooner.
It's worth noting that the economy remains a wild card, and sentiment is still being driven by inflation and the potential for interest rate cuts. If macroeconomic conditions remain subdued or even turn south, advertising revenue could take a hit, and Meta could suffer.
That said, 27 times earnings is on par with the price-to-earnings ratio of the S&P 500 and a relative bargain considering Meta's track record of growth.
