This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
There is a small, elite group of companies with a market cap above $1 trillion. The number of corporations that have cracked the $3 trillion cap is even more exclusive. Meta Platforms (NASDAQ: META), a social media specialist, belongs to the former group; its market cap is $1.8 trillion as of this writing. However, there is an excellent chance that the tech leader will join the latter group by 2030. It needs a compound annual growth rate (CAGR) of 10.8% over the next five years to achieve this. Read on to find out why Meta Platforms has what it takes.
Here is what could go wrong
Let's start by discussing the challenges Meta Platforms could encounter in the next five years that could lead to poor performances. First, an economic downturn would affect the company's financial results. When the going gets rough, consumers tighten their purse strings and businesses decrease ad spending. That's Meta Platforms' primary source of revenue. A slowdown in the ad market -- like the one it experienced a few years ago -- might sink Meta's share price. Some fear that President Trump's aggressive tariff policies could, eventually, lead to a recession.
Even if it doesn't, the current administration's policies have affected Meta Platforms' results in other ways. Ad demand from Asia-based businesses decreased on the company's websites and apps after the administration ended the de minimis exemption that allowed low-cost packages from China to come into the U.S. duty free. Beyond marketwide issues, Meta Platforms could face some company-specific problems that might slow its growth in the next five years.
For example, Meta Platforms' forward price-to-earnings multiple currently tops 28.4, well above the average for the communication services sector of 19.9. Richly valued growth stocks can see their shares plummet if they fail to live up to the market's expectations. That's something else to keep in mind. But despite these potential problems, Meta Platforms' prospects through 2030 (and beyond) still look attractive. Here's why.
The artificial intelligence tailwind
Meta Platforms remains the leading social media company. It ended the first quarter with 3.43 billion daily active users across its websites and apps, an increase of 6% compared to the year-ago period. So long as Meta Platforms boasts such a massive ecosystem, it will be an attractive hub for advertisers to target potential customers. The tech giant's top and bottom lines should grow accordingly. In Q1, Meta Platforms' revenue increased by 16% year over year to $42.3 billion, while its net earnings per share came in at $6.43, 37% higher than the year-ago period.
Though a recession might indeed harm the company's financial results, Meta Platforms' artificial intelligence (AI)-powered initiatives should have the opposite effect: It will increase demand for advertising space within its ecosystem. To be clear, Meta Platforms would see growing revenue and earnings thanks to the increased popularity of digital advertising even without AI, but the technology should help the company reach new heights by making the ad-launch process more efficient for businesses.
Meta Platforms plans to automate every aspect of it by the end of 2026, from defining a company's target audience to creating pictures, videos, text, and more. Meta Platforms is investing heavily in AI infrastructure to support its ambitions, which extend beyond helping businesses optimize their advertising campaigns. Meta has successfully increased engagement on its apps in the past couple of years thanks to AI-based recommendation algorithms that keep its users glued to their screens longer.
This aspect also helps attract advertisers. Meta Platforms' AI work should yield strong financial results over the next five years even in the event of an economic slowdown. That's before we bring up other growth avenues, such as the company's paid messaging on WhatsApp. A 10.8% return is above the broader market's historical performance. However, Meta Platforms' lucrative underlying business and strong prospects -- which also justify the stock's premium -- should allow the company to deliver the performance it needs through 2030 to become a $3 trillion company.
Expect Meta Platforms to perform well even beyond that. The company has been firing on all cylinders lately, and there is plenty more where that came from. Long-term investors can safely add this stock to their portfolios.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
