Meta Platforms (META -1.22%) has been in red-hot form on the stock market in 2023. The stock has jumped 170% so far this year on upbeat investor sentiment about a turnaround in the company's fortunes based on cost controls and an improvement in advertisement spending.
What's more, Meta is going all-in on artificial intelligence (AI). The term 'AI' was mentioned 49 times on Meta's latest earnings conference call on July 26, which is not surprising as this technology has the potential to supercharge the company's long-term growth in multiple ways.
Let's take a closer look at Meta's quarterly performance and check how AI could help this tech stock join the $1 trillion market cap club.
Meta Platforms is stepping on the gas
Meta Platforms delivered Q2 revenue of $32 billion, up 11% year over year. Costs and expenses increased at a slower pace of 10%, and it enjoyed a 2-percentage-point decline in the effective tax rate during the quarter. As a result, Meta's earnings increased 21% year over year to $2.98 per share.
Analysts would have settled for just over $31 billion in revenue and $2.91 per share in earnings from the company. But Meta easily bested consensus estimates thanks to an increase in the number of users across its family of apps -- Facebook, Messenger, WhatsApp, Instagram, and now Threads -- as well as a solid increase in the number of ad impressions served across these apps. More specifically, the number of daily active people on Meta's family of apps increased 7% year over year to 3.07 billion. The number of monthly active people across its family of apps was up 6% over the prior-year period to 3.88 billion. Meta also delivered more ads during the quarter, which is evident from a 34% year-over-year increase in the ad impressions served by the company across its family of apps in Q2.
This strong growth in the company's ad impressions helped it offset the 16% year-over-year decline in the average price per ad. Even better, Meta's outlook suggests that its solid growth is here to stay. The company expects revenue to land at $33.25 billion in the third quarter at the midpoint of its guidance range. That's well ahead of the $31.25 billion consensus estimate and also suggests that Meta's revenue would jump an impressive 20% over the prior-year period.
What was even better about the report is that Meta seems built for more upside following its second-quarter 2023 results. Along with exceeding Q2 expectations, the social media giant also delivered better-than-expected guidance for the current quarter. This isn't surprising, given that the digital ad market is on track to grow at a relatively faster pace than last year. According to eMarketer, global digital ad spending is expected to accelerate by 9.5% in 2023, following an increase of 8.5% last year.
Meta Platforms' latest results and guidance tell us that it is likely to outgrow the market it operates in. This suggests an increase in the company's digital ad market share, which can be attributed to the launch of its new Threads app. This new app accelerated Meta's user growth and has the potential to significantly boost the company's revenue in the long run. Given that the digital ad market is expected to clock growth of almost 11% in 2024, Meta seems well-placed to sustain its growth.
How AI could become a key growth driver
The digital ad market isn't going to be the only growth catalyst for Meta. Meta CEO Mark Zuckerberg pointed out on the conference call that the company has "some groundbreaking AI products in the pipeline." Zuckerberg also explained how AI integration into the company's existing tools is driving growth.
For instance, content recommended by AI on Facebook feeds has led to a 7% jump in the time spent by users on the platform. Meta's short video format, known as Reels, has been a big beneficiary of AI. The company's AI-powered Discovery Engine has been serving more short-form video content to users from accounts they do not follow. As a result, the number of Reels played on Instagram and Facebook has accelerated, driving greater monetization for Meta. Zuckerberg says that Reels hit an annual revenue run rate of $10 billion, up from $3 billion in the fall of 2022.
Another way AI helps Meta's business is by automating the company's ad offerings. Almost all of Meta's advertisers now rely on AI to improve their ad performance. The company offers multiple tools to help advertisers harness the power of AI. For instance, Meta Lattice is an AI architecture that "learns to predict an ad's performance across a variety of datasets and optimization goals."
Other advertiser-focused AI tools help them create and optimize ad campaigns with the help of text-based prompts. The deployment of AI in digital marketing is expected to clock annual growth in the market of nearly 27% through 2030, according to Grand View Research.
Why a $1 trillion valuation is on the cards
So the stage seems set for Meta to sustain a healthy pace of long-term growth, which should get it back into the $1 trillion market cap club. Meta's market cap now sits at $834 billion. The stock needs to jump 20% from current levels for a $1 trillion market cap. Analysts' high-price target is $435 a share over the next 12-18 months, which it could achieve with the faster-than-expected growth it is delivering and if it taps into its AI potential. Hitting $435 a share would translate into a 33% jump from Meta's current stock price, more than enough to top a $1 trillion market cap.
Looking beyond price targets, it's worth noting that Meta's bottom line is expected to grow at almost 28% a year for the next five years. Following that growth rate, the company's EPS of $8.59 in 2022 could grow to almost $29.50 by the end of 2027. Multiplying that 2027 EPS by Meta's average five-year forward earnings multiple of 22 suggests a stock price of $649. That would be nearly double its current levels and would push Meta deep into the $1 trillion market cap club.
That's why investors should consider buying this AI stock to their portfolios, given the attractive multiple it is trading at.
