Meta Platforms: A Growth and Value Powerhouse

Meta Platforms (META) has recently reached a remarkable milestone, surpassing a market value of $1.5 trillion for the first time. The company's stock has surged by an impressive 66% in 2024 and an astonishing 387% since the beginning of 2023. As it stands, Meta is now the sixth-most-valuable company in the United States, closely following Amazon and Alphabet, which have market capitalizations of approximately $1.96 trillion and $2.06 trillion, respectively.

Investors might want to consider why Meta could exceed the valuations of these competitors by 2026 and why, despite its significant recent gains, it's still a stock worth buying.

Meta's Growth Potential

The essence of investing revolves around identifying companies capable of generating greater profits in the future. Some companies reward shareholders through dividends and buybacks, while others focus on growth potential, even if they aren't currently profitable.

Large tech companies like Meta, Amazon, and Alphabet find themselves in a unique position, balancing substantial cash flows with promising growth prospects. Among them, Meta appears to have the clearest path for increasing future earnings.

Instagram, owned by Meta, integrates the best aspects of entertainment and social media, positioning itself as a profitable powerhouse. Unlike YouTube, which is owned by Alphabet, Instagram is designed primarily for mobile use and excels when users engage in creating and sharing content.

The introduction of features such as Instagram Stories, Instagram Live, and Instagram Reels has shifted the platform into a dynamic video-centric space. User engagement has skyrocketed as users can tailor their feeds with short clips based on individual preferences. This transformation has made Instagram a prime location for advertisers who can leverage targeted marketing and swift mobile payment transactions.

Additionally, Meta benefits from user-generated content, meaning it doesn't have to invest heavily in creating content, unlike media giants like Netflix, which must produce engaging materials to keep subscribers satisfied.

The Impact of Artificial Intelligence

Meta stands as a prime example of a company benefitting from artificial intelligence (AI). It is actively investing in AI to facilitate connections between advertisers and consumers. Users may not always appreciate advertisements; however, more relevant ads can enhance user experience and engagement.

Through AI, Meta is refining its content recommendations, which elevates the quality of its applications. As users spend more time interacting with these apps, they are exposed to more advertisements, essentially enhancing both user engagement and advertising effectiveness.

In contrast, AI poses mixed challenges for Alphabet. Emerging tools like SearchGPT and ChatGPT are threatening Google's dominant position in the search engine market. While Alphabet has introduced features like AI Overview to summarize answers, the company's ability to compete with these rival tools remains uncertain.

In the realm of cloud services, both Amazon Web Services (AWS) and Google Cloud are anticipated to experience growth driven by AI. However, Google Cloud trails behind AWS and Microsoft Azure in market share, while Amazon's performance outside of its cloud operations is inconsistent in terms of growth and profitability. This positions Meta as potentially the most advantageous investment regarding AI among the three tech giants.

Valuation Expansion Potential

A compelling reason Meta Platforms may continue to outpace Amazon and Alphabet lies in its valuation. Among the so-called "Magnificent Seven" tech companies, Meta boasts one of the lowest forward price-to-earnings (P/E) ratios. However, it also exhibits the highest free cash flow (FCF) yield.

The FCF yield, calculated as free cash flow per share divided by the share price, indicates how much free cash flow a company generates relative to its market value. Despite its impressive 400% rise in stock value since early 2023, Meta remains relatively affordable. As its earnings growth potentially outstrips its stock price, there's a chance of substantial valuation expansion.

Valuation expansion occurs when a company earns a higher earnings multiple because its earnings quality has improved or investors anticipate accelerated earnings growth. A prime example of this is Apple, which has transitioned from a median P/E of 19.8 over the last decade to a current P/E of 34.5, largely due to its enhanced business operations.

Meta may similarly command a P/E ratio of 30 to 40 due to its remarkable earnings and cash flow. If it weren't for the significant investment in its Reality Labs division, which reported an $8.33 billion operating loss in the first half of the year, Meta's profitability could look even more impressive. Nonetheless, investors remain tolerant of the Reality Labs losses, with optimism surrounding the potential future contributions from this division, which focuses on the metaverse and virtual reality innovations.

Future Earnings Growth

The projections for Meta's earnings suggest that there is significant room for growth in the coming years. Analysts estimate earnings of $21.29 per share for 2024, with expectations rising to $24.21 for 2025. While the company's significant investments in AI might impact earnings in 2025, a reduction in share count due to buybacks could result in impressive EPS growth by 2026.

If the earnings per share for 2026 reaches around $28—a modest increase from the 2025 estimate—there's potential for the stock price to soar, possibly reaching $1,000 with a P/E ratio around 35.

In conclusion, Meta Platforms possesses a strong likelihood of doubling its market value within the next three to five years. In contrast, the outlook for its tech counterparts, Amazon and Alphabet, appears less certain.

Meta, Growth, Valuation