The U.S. economy has produced the world's most valuable companies for over a century. United States Steel became the first company to achieve a $1 billion valuation in 1901, and 117 years later, Apple became the first company to surpass a valuation of $1 trillion.
Apple was also the first company to cross the $2 trillion and $3 trillion thresholds. Only three other U.S. companies -- Microsoft, Nvidia, and Alphabet -- are valued at more than $2 trillion as of this writing, but I think one more is set to join them.
Meta Platforms (META +1.33%) is the parent company of popular social networks Facebook, Instagram, Messenger, Threads, and WhatsApp, but it's also becoming a serious contender in the artificial intelligence (AI) race. Meta is using AI to improve monetization on its social platforms, but it also developed the world's most advanced open-source large language model (LLM) called Llama.
Here's how Meta could achieve a $2 trillion valuation within three years, and if it does, investors who buy the stock today could earn a 67% return.
Image source: Getty Images.
AI is transforming Meta's core business
Meta serves over 3.2 billion people across its family of apps every single day. Social networks like Facebook and Instagram used to focus on connecting users with their friends and family, but they have transformed into entertainment platforms with AI-powered recommendation engines ensuring everybody sees the most relevant content, even if it wasn't posted by someone they know.
CEO Mark Zuckerberg says this shift is increasing the amount of time users spend on Meta's platforms, which means they view more ads and, therefore, become more valuable to the company. Speaking of which, Meta continues to develop AI tools for advertisers, too, which can help them create the most engaging content and target the most relevant audience.
Eventually, Zuckerberg says businesses will be able to tell Meta their objective and their budget, and its AI engine will autonomously handle the entire process for them -- from crafting the creative to selecting the target audience. That's a game changer, because it means even the smallest business with no marketing team can yield the best possible return from its ad dollars.
But it gets better. Meta released a chatbot called Meta AI last year that can answer questions on most topics and even generate images on demand. It paves the way for Business AI, which could be a substantial revenue driver in the future. Zuckerberg believes every business will have its own AI agent trained to handle incoming queries from customers on Messenger and WhatsApp, for example, and even process sales. That will facilitate around-the-clock service even when the business owner is unavailable.
Llama is the key to it all
Llama is the LLM that powers the exciting AI features I just mentioned. It's open-source, because Zuckerberg believes a widely deployed model used by thousands of developers will improve at a much faster rate than if Meta did all of the testing and troubleshooting alone.
Meta just released Llama 3.1, and with 405 billion parameters, it's the most advanced version so far. Zuckerberg says Llama 3 is already competitive with most leading models, but he's focused on developing Llama 4, which he believes will set the standard for the industry next year.
Training Llama 4 will require up to 10 times the data center compute capacity compared to Llama 3, which means it will likely cost tens of billions of dollars in new infrastructure. I'll talk more about the cost in a moment, but better LLMs will result in more advanced user-facing AI applications, so Meta will have to invest heavily if it wants to stay ahead of the pack.
Otherwise, users might spend more time on OpenAI's ChatGPT or Alphabet's Gemini instead of Meta AI, which could hurt the company's ability to generate revenue.
Meta's earnings continue to surge
Meta generated $39 billion in revenue during Q2, which was a 22% increase from the year-ago period. But the company's bottom line is the real story, because it continues to benefit from the cost-cutting measures enacted since late 2022. They involved 21,000 job cuts and a commitment from Zuckerberg to spend more cautiously on projects like the metaverse, which generate minimal revenue.
As a result, Meta's Q2 net income soared 73% year over year to $13.4 billion. That followed three straight quarters of triple-digit percentage growth.
The result was especially impressive when you consider the speed with which Meta is ramping up its capital expenditures for AI. It allocated $8.4 billion toward capex during Q2, which was up from the $6.3 billion it spent during the first quarter.
Meta CFO Susan Li told investors capex could hit $40 billion for the whole of 2024, so spending appears set to accelerate in the second half of the year. Plus, Li forecasts "significant" growth in capex in 2025.
Nearly all of that money will go toward data center infrastructure, servers, and chips to accelerate the development of LLMs like Llama 4, which will bring new user-facing AI applications to life.
NASDAQ: META
Key Data Points
Meta's path to the $2 trillion club within three years
Based on Meta's trailing-12-month earnings per share of $19.59 and its current stock price of around $488, it trades at a price-to-earnings (P/E) ratio of 24.9. That means it would have to rise 23% just to trade in line with the Nasdaq-100 index, which trades at a P/E ratio of 30.6. That alone would lift Meta's market cap to almost $1.5 trillion.
But Meta is even cheaper when measured against its future earnings. Wall Street expects the company to generate $23.93 in earnings per share during 2025, placing the stock at a forward P/E ratio of just 20.4. If that forecast is accurate and Meta's P/E ratio also rises to trade in line with the Nasdaq-100 by the end of next year, that will place its valuation at $1.8 trillion.
That implies Meta will only have to grow its earnings per share by 11% in 2026 to warrant a $2 trillion valuation. Considering the company grew its earnings at a compound annual rate of almost 30% in the decade between 2014 and 2023, I say there is a very good chance it delivers.
Plus, there is a strong possibility that AI is a more powerful tailwind for Meta than analysts expect right now. The company's growing portfolio of AI tools -- especially for businesses -- could drive up marketing spending and also pull ad dollars away from its competitors. There is no telling how big that opportunity might become.
Even if it doesn't get there within three years, I think Meta has a clear path to join the $2 trillion club eventually.
