The last 18 months have been quite an adventure for many of the actions of the “Magnificent Seven”. And no Mag Seven stock has attracted as much attention as the AI chipmaker Nvidiawhich has surged more than 900% since October 1, 2022, to reach a market capitalization of $2.7 trillion.
But for now, this other Magnificent Seven title seems to be the best value of the bunch. Additionally, its novel AI insights could propel it into the $2 trillion club, nearly doubling its current value of $1.1 trillion.
Meta’s big investments spark anger but could pay off big
Metaplatforms (NASDAQ:META) saw its shares sell off after releasing its first quarter results. But the sell-off may be due more to inflated expectations than anything else. After all, the stock had jumped 40% over the year, even before the first quarter was released.
Even though revenue and earnings per share beat expectations, investors were apparently disconcerted by a sharp increase in the company’s capital spending outlook. Management now expects capital spending of $35 billion to $40 billion this year, up from previous guidance of $30 billion to $37 billion. Additionally, 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 research and development efforts of products in AI”.
While short-term oriented investors might have cringed at a new spending spree from Meta, long-term investors should rejoice. After all, Meta has historically gone through investment cycles, and those investments have usually ended up paying off.
Meta’s AI ambitions benefit its core platforms now and in the future.
It is worth noting that Meta has already benefited greatly from artificial intelligence (AI). Its investments in graphics processing units (GPUs) since 2022 have helped increase engagement, maintaining user growth in the mid-to-high single digits – no small feat, given Meta’s whopping 3.24. billion global user base.
Additionally, its AI offerings have increased engagement for new products, like Reels, which fended off formidable competitor TikTok. AI has also enabled advertisers to not only create and test ads without having to go through a studio, but also to target those ads more precisely. Solid 7% user growth and improved monetization resulted in an impressive 27% revenue growth last quarter.
Last week, Meta even announced that young people were returning to the Facebook platform. In recent years, young people have flocked to Meta’s Instagram or its competitor TikTok, with the Facebook platform now seen as one aimed at an older generation.
However, Meta said Friday that Facebook’s core platform saw five quarters of healthy growth in its 18-29 age cohort and that more than 40 million 18-29 year-olds now use Facebook in the United States. and in Canada, the highest total. in three years. The US and Canada are the highest revenue regions for Meta, so seeing the younger generation returning to the main Facebook app in droves is a big positive and proof that engagement investments fueled by Facebook AI works.
But Meta’s AI ambitions go beyond its platforms
Meta is one of the few technology companies that can afford to invest in creating generative AI models, and Meta management is seizing this opportunity with its Llama line of models. Unlike its competitors, Llama differentiates itself by being open source, meaning outside developers can contribute, perhaps giving Llama a leg up on the competition. Additionally, Meta can obviously use its troves of user data to support its models, perfecting Llama in ways that its competitors might not be able to match.
In a recent conference call with analysts, CEO Mark Zuckerberg noted that Llama’s 8 and 70 billion parameter models achieved best-in-class performance for their scale. A new 400 billion parameter model is on the way, which should go hand-in-hand with OpenAI’s ChatGPT and other large language models (LLMs).
Zuckerberg also discussed how the Llama model and Meta AI services could be monetized in the future, citing business messaging (essentially replacing customer service representatives), introducing ads into AI interactions (right across the aisle of Meta) or direct billing for access to Meta’s most advanced features. Llama models and computing power.
Even if Meta doesn’t make much from Llama today, Zuckerberg urged investors to think long term:
We have historically seen a lot of volatility in our stocks during this phase of our product strategy – where we are investing in scaling a new product but not yet monetizing it. We’ve seen it with Reels, Stories, as News Feed has moved to mobile and more. And I also expect a multi-year investment cycle before we have fully scaled meta-AI, commercial AIs and more to the profitable services that I also expect. Historically, investing in creating these new experiences at scale in our apps has been a very good long-term investment for us and for the investors who are loyal to us.
And don’t forget Reality Labs
Of course, Meta is not satisfied with just one big investment with no profit today. He has two. While the AI conversation has sucked a lot of oxygen out of the room, Meta also continues to invest aggressively in the Metaverse offerings it launched several years ago.
Zuckerberg still believes that Meta’s pioneering status in the Metaverse will reap benefits, but perhaps not until the end of this decade as the technology improves. But today, the company makes very little revenue from the Reality Labs Metaverse segment while losing billions each quarter. Last quarter, Reality Labs lost a whopping $3.85 billion.
How Meta Could Reach $2 Trillion
When evaluating Meta, I try to look only at its current core platform, removing losses from the Metaverse. Over the past four quarters, the core application family generated a whopping $69.3 billion in operating profit. Applying a 20% tax rate, the core business currently generates a net profit of approximately $55 billion.
And keep in mind that the core business is no slouch when it comes to growth, as earnings before interest and tax (EBIT) increased 57% over the past year. Although the previous year was a “down” year amid tough economic conditions, it is not far-fetched to think that Meta can grow the app family’s revenue at a rate of 10-20% in the mid-range. term.
A $2 trillion valuation would only be 36 times the current core business run rate. That’s not cheap, but it’s certainly not a crazy valuation for a wide-moat company with such growth prospects. In fact, this is the valuation of Mag Seven’s counterpart Microsoftwhich grew revenue 17% last quarter and currently trades at 36 times earnings.
In fact, the current core business alone could theoretically be valued at $2 trillion. And if we assume that Reality Labs has future activities that give it a breakeven net present value, which is conservative and would essentially amount to failure, that leaves Meta AI services that are not yet monetized.
Given the enormous potential of AI services and the promising development of Llama, it is quite easy to see how future meta-AI services could become a huge business valued in the hundreds of billions. This alone could propel Meta’s valuation well beyond $2 trillion, making Meta the Mag Seven’s best bet today.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Billy Duberstein and his clients hold positions in Meta Platforms and Microsoft. The Motley Fool holds positions and recommends meta-platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
This Undervalued Stock Could Join Nvidia in the $2 Trillion Club was originally published by The Motley Fool