This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Nvidia recently became the first company in history to reach a market capitalization of $4 trillion. Although shares have retreated a bit, Nvidia still remains the most valuable company in the world as of this writing (July 10).
While many of Nvidia's "Magnificent Seven" peers have massive upside, I see Meta Platforms (NASDAQ: META) as next in line to achieve a valuation milestone. With a market capitalization of $1.8 trillion, I think Meta will become the next $2 trillion company by year end.
Let's explore how Meta is investing in artificial intelligence (AI) to supercharge its social media empire and tech wearables business. From there, I'll detail how much growth is needed from a valuation perspective in order for Meta to join the likes of Amazon and Alphabet in the $2 trillion club.
Meta is not messing around
The graph illustrates Meta's capital expenditure (capex) trends over the last several years. Throughout the AI revolution, Meta has poured billions into developing its own custom chipsets, building an internal large language model (LLM), and doubling down on wearable tech.
META Capital Expenditures (Annual) data by YCharts
Per management's guidance during the company's first-quarter earnings call, capex is expected to reach up to $72 billion this year -- nearly double what Meta spent last year.
Two projects in particular that are worth pointing out include Meta's $14.3 billion investment in Scale AI, as well as the company's reported plans to plans to raise $29 billion for additional data center infrastructure. While the data center build-out is not yet set in stone, I see Meta's consideration of this build-out as a signal that the company intends to continue investing heavily in chips and other AI equipment to improve its existing infrastructure.
Scale AI offers sophisticated data labeling processes that Meta can integrate into its own algorithms to better target advertisements. By improving its recommendation models through AI, Meta has the opportunity to increase user engagement across its various social media platforms -- Facebook, Instagram, and WhatsApp -- while concurrently lowering costs per click and user acquisition. These dynamics could lead to a lucrative combination of accelerated revenue and widening profit margins for Meta.
What will it take for Meta to reach a $2 trillion valuation?
In 2024, Meta generated revenue of $164 billion and earnings per share (EPS) of $23.86. This represented growth of 22% and 60%, respectively.
The table illustrates Wall Street's consensus revenue and earnings estimates for Meta in 2025. With revenue and earnings figures forecast to grow by 15% and 7%, it may appear that Meta is headed for considerable deceleration.
META Revenue Estimates for Current Fiscal Year data by YCharts
I don't quite see it that way, though. As I pointed out, Meta has been on an aggressive spending spree this year. Smart investors understand that it takes time for these types of investments to generate accretive financials for the company.
META PS Ratio data by YCharts
Moreover, these trends show that Meta's price-to-earnings (P/E) and price-to-sales (P/S) ratios have largely been flat over the past 18 months or so. Only recently have each of these valuation multiples started to rise. As such, if Meta's P/E and P/S ratios expand by just 11% (reaching roughly 31 and 12, respectively), the company will achieve a $2 trillion valuation. I think this is reasonable, considering Meta's valuation multiples have been in this range before.
Right now, I think these current trends shown could suggest that investors are pricing Meta stock with a degree of caution. The company is investing in several different projects at the moment, and it remains to be seen how much of an impact AI will contribute to Meta's core advertising and metaverse businesses.
However, if Meta starts to show meaningful growth and while maintaining strong profitability throughout the second half of the year, the stock could be headed for a breakout.
Is Meta stock a buy now?
Regardless of whether Meta reaches the $2 trillion club this year, I still see the stock as a no-brainer. As I alluded to, the company is exploring a variety of areas to leverage AI to supercharge existing businesses, while also potentially identifying new sources of monetization. I am encouraged by the company's current capital allocation and am optimistic that AI will transform Meta's business for the better in the long run.
To me, Meta stock looks reasonably priced, and I think the company is well-positioned for robust growth in the coming years. For these reasons, I see Meta stock as a compelling buy right now.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
