Finance
This undervalued stock could join Nvidia in the $2 Trillion Club
The past 18 months have been quite a ride for many of them “Magnificent Seven” shares. And no Mag Seven stock has attracted as much attention as the AI chipmaker Nvidiawhich has increased by more than 900% since October 1, 2022, to a Market capitalization of $2.7 trillion.
But right now, this other Magnificent Seven stock looks like the best value of the bunch. Moreover, its unheralded AI prospects could catapult it into the $2 trillion club, nearly doubling its current value of $1.1 trillion.
Meta’s large investments provoke anger, but can yield big returns
Metaplatforms (NASDAQ: META) saw its shares sell off after its first-quarter earnings report. But the sell-off may be due more to excessive expectations than anything else. After all, shares were up 40% this year, even before the first quarter release.
Although revenue and earnings per share exceeded expectations, investors were apparently nervous about the big jump in the company’s capital spending prospects. Management now expects $35 billion to $40 billion in capital expenditures this year, up from its previous guidance of $30 billion to $37 billion. Not only that, management also stated in the press release that “we expect capital expenditures to continue to increase next year as we invest aggressively to support our ambitious AI research and product development efforts.”
While short-term-oriented investors may have cringed when Meta went on another spending binge, long-term investors should cheer. After all, Meta has historically gone through investment cycles, and those investments have usually paid off in the end.
Meta’s AI ambitions benefit its core platforms now and in the future
It should be noted that Meta has already benefited significantly from artificial intelligence (AI). The graphics processing unit (GPU) investments since 2022 helped boost engagement, keeping user growth in the mid to high single digits – no mean feat considering Meta’s massive 3.24. billion global user base.
Additionally, AI offerings have increased engagement with new products such as Reels, which has fended off formidable competitor TikTok. AI has also allowed advertisers to create and test ads without the need for a studio, as well as target them more precisely. Solid user growth of 7% and better monetization resulted in impressive revenue growth of 27% last quarter.
Last week, Meta even announced that it is seeing younger people flocking back to the Facebook platform. In recent years, young people have flocked to Meta’s Instagram or rival TikTok, as the Facebook platform was seen as a platform for an older generation.
On Friday, however, Meta said that Facebook’s core platform had seen five quarters of healthy growth in the 18 to 29 age group and that more than 40 million 18 to 29 year olds now use Facebook in the US and Canada, the highest total. in three years. The US and Canada are Meta’s highest revenue regions, so seeing the younger generation returning to Facebook’s core app in droves is a big positive and proof point that Facebook’s AI-powered engagement investments are working.
But Meta’s AI ambitions extend beyond just the platforms
Meta is one of the few tech companies that can afford to invest in building generative AI models, and Meta management is seizing the opportunity with its Llama model line. Unlike competitors, Llama differs in that it is open-source, meaning third-party developers can contribute to it, perhaps giving Llama a competitive edge. Furthermore, Meta can obviously use its wealth of user data to inform its models, and hone Llama in ways that competitors may not be able to match.
During a recent conference call with analysts, CEO Mark Zuckerberg noted that Llama’s 8 billion and 70 billion parameter models had achieved “best-in-class” performance for their size. A newer 400B parameter model is on the way, which should work closely with OpenAI’s ChatGPT and other major large language models (LLMs).
Zuckerberg also explained how to monetize the Llama model and Meta AI services in the future, citing business messaging (which essentially replaces customer service representatives), introducing advertising into AI interactions (precisely in street of Meta), or charges directly for access to Meta’s most advanced Llama models and computing power.
Although Meta isn’t making much money at all from Llama today, Zuckerberg urged investors to think long term:
Historically, we have seen a lot of volatility in our stock during this phase of our product playbook, where we are investing in scaling a new product but not yet monetizing it. We saw this with Reels, Stories, when the News Feed moved to mobile and more. And I also expect a multi-year investment cycle before we fully scale Meta AI, business AIs and more into the profitable services I also expect. Historically, investing in building these new, scaled experiences in our apps has been a very good long-term investment for us and for investors who have stayed with us.
And don’t forget Reality Labs
Of course, Meta doesn’t just have one big, profitable investment today. It has two. While the AI conversation has sucked a lot of the oxygen out of the room, Meta is also still aggressively investing in the Metaverse offering it started several years ago.
Zuckerberg still believes Meta’s status as a pioneer in the Metaverse will reap rewards, but perhaps not until the end of this decade as technology improves. But today, the company earns very little revenue from the Reality Labs Metaverse segment while losing billions every quarter. Last quarter, Reality Labs lost a whopping $3.85 billion.
How Meta Could Rise to $2 Trillion
When valuing Meta, I try to look only at the current core platform, taking away Metaverse’s losses. Over the past four quarters, the core family of apps generated a whopping $69.3 billion in operating revenue. If you implement a 20% tax rate, the core business is currently running at a net profit rate of about $55 billion.
And keep in mind that the core business is no slouch when it comes to growth, with earnings before interest and taxes (EBIT) up a whopping 57% over the past year. While the previous year was a “bad” year amid a tough economy, it’s not a stretch to think Meta can grow Family of Apps revenues by 10% to 20% in the medium term.
A $2 trillion valuation would be just 36 times the current run rate of the core business. That’s not cheap, but certainly not a crazy valuation for a company with a wide moat and this kind of growth prospects. In fact, that is the rating of Mag Seven peer Microsoftwhich grew revenue 17% last quarter and currently trades at 36 times earnings.
So basically, the current core business itself could theoretically be valued at $2 trillion. And if you assume that Reality Labs has a future business that gives it a breakeven net present value, which is conservative and essentially amounts to failure, that leaves the Meta AI services that are not yet monetized.
Given the huge potential for AI services and the promising development of Llama, it is quite easy to see how future Meta AI services could become a huge business worth hundreds of billions. That alone could catapult Meta’s valuation well above $2 trillion, making Meta look like the Mag Seven’s best bet today.
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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Billy Duberstein and his clients have positions in Meta Platforms and Microsoft. The Motley Fool holds positions in and recommends Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy.
This undervalued stock could join Nvidia in the $2 Trillion Club was originally published by The Motley Fool
