The $3 trillion club is an exclusive group. Since Apple’s entry in early 2022, only Microsoft and Nvidia have gained admittance. Currently, Apple remains the sole member with a market capitalization exceeding $3 trillion. However, Apple’s exclusivity may be short-lived. Both Microsoft and Nvidia are likely to see their stock prices rise high enough to rejoin the ranks. Moreover, several other corporations are vying for inclusion. A common thread among these companies is their connection to artificial intelligence (AI).
The largest tech companies are making substantial investments in AI infrastructure and development, benefiting Nvidia significantly, to propel their businesses into the $3 trillion club. Nonetheless, one company stands out as poised to experience massive impact across its products and services due to advancements in AI, and it’s investing heavily to achieve exactly that. That company is Meta Platforms (META). It may well join the $3 trillion club as early as 2028.
How Generative AI Can Elevate Meta
Meta is planning a major increase in its AI investments this year. Ahead of the fourth-quarter earnings report in January, CEO Mark Zuckerberg announced plans to allocate between $60 billion and $65 billion for capital expenditures this year. This represents a 59% rise from the previous year at the midpoint. There are good reasons for Meta to spend so heavily on AI. First, the company is already seeing remarkable results.
Meta applied its learnings from developing its large language models to its core recommendation algorithm, enabling a more generalized algorithm. This has resulted in better content recommendations, which leads to increased engagement on Facebook and Instagram, and more ad impressions. In addition, Meta is realizing improvements in the value of its ads. Not only are they more relevant due to the improved recommendation algorithm, but Meta’s AI tools are making it easier for marketers to create better, higher-converting ads. By the end of January, over 4 million advertisers were using Meta’s generative AI ad creation tools. Furthermore, while serving more ads to users during the last quarter, average ad prices rose by 14%.
Meta is just beginning to integrate AI into its products and services. Zuckerberg anticipates an AI agent capable of acting as a marketing director for a business on the company’s platforms. During the second-quarter earnings call last year, he said,
Advertisers will basically just be able to tell us a business objective and a budget, and we’re going to go do the rest for them.
This could involve creating hundreds of personalized advertisements and targeting niche groups with unique messages to boost conversions. The company may implement this strategy for user-generated content as well. Creators could extend their content’s reach with AI-generated translations dubbed over their videos, and Meta could help creators increase engagement by tweaking small parts of their images. AI could significantly impact the company’s efforts to monetize WhatsApp and Messenger. A beta version for Business AIs allows small businesses to create AI chatbots for customer service and sales on those messaging services. According to William Blair analyst Ralph Schackart, these AI agents’ advancement and Meta’s facilitation of their creation could become a $100 billion opportunity.
Meta is also working on other AI applications, including the Meta AI chatbot and its Ray-Ban smart sunglasses. Growing adoption of those products offers the opportunity to monetize user engagement in the future.
A Massive Growth Opportunity with a Bargain Stock
Meta’s AI advancements position it for rapid top-line growth over the next few years. However, massive spending on data centers will begin to weigh on earnings when depreciation starts appearing on its income statement. However, the company is also likely to exhibit robust earnings growth as AI innovations and new products drive revenue up faster than expense increases. The implications of AI on its core business, the introduction of more agentic AI across its ad creation tools, and on WhatsApp and Messenger all provide significant opportunities worthy of the cost.
In addition, the AI chatbot is rapidly approaching management’s goal of 1 billion users, a point at which Meta has historically looked to monetize a product. Importantly, its Reality Labs business also remains a significant opportunity to improve profits. Because it represented a $17.7 billion drag on operating income last year, just getting that business to break-even could push Meta’s total operating margin above 50% from the 42% last year. If Meta produces average revenue growth of about 12% per year over the next five years and can expand its operating margin to just 44%, operating income will surge by 84% over that period. If Meta maintains its tax rate, and investors continue to value it at 26 times forward earnings, that places its value close to $3 trillion by the end of 2028. However, at 26 times forward earnings, Meta is arguably trading at a relative bargain. Other AI stocks command significantly higher earnings multiples. That provides quite a bit of wiggle room in the estimates for Meta to reach $3 trillion.
Investors might be able to absorb either a higher tax rate or slower margin expansion if Meta demonstrates strong top-line growth and returns from its massive AI spending, which instills confidence that by 2028, the company will indeed join the $3 trillion club, even if the path has its ups and downs.
