This Impressive AI Stock Could Reach a $2 Trillion Valuation in Three Years

The increasing use of artificial intelligence (AI) in digital advertising is expected to enable a certain social media giant to experience significant growth in earnings and stock value over the next three years.

AI has emerged as a powerful force for companies, driving advancements across various sectors, including cloud computing, factory automation, retail, and advertising. Importantly, this technology is still in the early stages of growth.

According to Bloomberg Intelligence, generative AI could evolve into a $1.3 trillion industry by 2032, up from just $40 billion in 2022, representing an annual growth rate of 42%. The adoption of AI in advertising is predicted to grow even more rapidly, with generative AI-driven ad spending forecast to increase at an astonishing rate of 125% per year until 2032, ultimately yielding $192 billion in annual revenue compared to only $57 million in 2022.

This swift integration of generative AI within the advertising realm is pivotal to driving substantial growth for Meta Platforms (META -0.40%), which is currently valued as the seventh-largest company in the world with a market capitalization of $1.43 trillion. Here, we will explore how this social media leader is leveraging AI for long-term advancement and its trajectory towards a potential $2 trillion valuation.

Meta Platforms Reaps the Rewards of AI Integration

Meta Platforms recently unveiled its third-quarter results for 2024 on October 30. The company's revenue saw a 10% year-over-year increase, reaching $40.6 billion, while its non-GAAP earnings per share surged by 37% to $6.03 per share, significantly surpassing Wall Street’s expectations of $5.25 on revenue of $40.3 billion.

The remarkable year-on-year growth for this prominent stock was a result of a notable rise in ad impressions and a hike in average ad pricing. Specifically, Meta saw a 7% growth in ad impressions compared to the same period last year, while the average price for ads climbed by 11%. The strong growth in earnings can also be attributed to cost increases remaining relatively modest at 14% year over year, totaling $23.2 billion.

Despite delivering encouraging financial results, Meta’s stock dipped by 4% after the earnings report, primarily due to management's guidance indicating a rise in capital spending. The 2024 budget for capital expenditures was raised from an earlier range of $37 billion to $40 billion, to an updated forecast between $38 billion and $40 billion.

Management also indicated that investors should anticipate substantial growth in capital spending in 2025. This new forecast points to a significant 39% increase from last year's spending of $28 billion, which has likely raised concerns among investors regarding the implications of this aggressive spending strategy on the company’s profits.

However, it is crucial to maintain perspective. Meta is increasing its spending budget to fortify its AI infrastructure. CEO Mark Zuckerberg emphasized during the earnings call that "our AI investments continue to require serious infrastructure," expressing confidence that the new opportunities presented by AI will "accelerate our core business that should yield strong returns on investment in the coming years."

Encouragingly, Zuckerberg noted that AI is positively impacting Meta's primary business, which is advertising. For example, AI-generated content has resulted in an 8% increase in time users spend on Facebook and a 6% increase on Instagram. This positions Meta to capture a larger portion of advertisers' budgets, thus enhancing the volume of ad impressions served and the average ad price.

Moreover, many advertisers have begun using Meta's AI tools for ad creation. In October, Meta reported that over 1 million advertisers utilized its generative AI resources, generating more than 15 million ads. Notably, businesses leveraging AI-based image tools reported a 7% improvement in conversion rates.

With a substantial daily active user base of 3.29 billion in September 2024—an increase of 5% compared to the previous year—it is evident why advertisers are drawn to Meta's platform to engage their target audiences. AI is proving effective in helping them connect with users more efficiently.

For instance, advertisers utilizing Meta's AI-enhanced tools, such as Advantage+ shopping campaigns, are experiencing a remarkable 32% uptick in return on ad spending. This platform offers comprehensive automation, optimizing audience targeting, ad placements, creative elements, and budget management.

The continued growth of AI adoption in advertising is emerging as a crucial advantage for Meta, and this trend is expected to persist long-term, given the immense market potential.

Strong Earnings Growth Could Propel Meta into the $2 Trillion League

Despite projections for increased capital spending in 2025, analysts have raised their earnings outlook for Meta. This is illustrated by recent estimates regarding EPS (earnings per share) expectations for the company.

The firm is forecasted to achieve double-digit earnings growth in the upcoming years, although even larger increases are not unexpected. Enhanced returns for advertisers through AI tools could allow Meta to boost both ad impressions and pricing significantly.

Even at an estimated $28.66 per share in earnings by 2026, if Meta trades at 30 times its future earnings—aligning with the Nasdaq-100 index, which is a benchmark for tech stocks—its share price could reach $860. This represents a potential price increase of 53% from present levels, which would facilitate Meta Platforms in reaching a $2 trillion market valuation within three years.

Considering that Meta is currently valued at 27 times earnings, investors may find this AI stock to be an appealing opportunity, given the potential gains anticipated over the next three years.

Randi Zuckerberg, a former director of market development and spokesperson for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Harsh Chauhan holds no positions in the aforementioned stocks. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.

AI, Meta, Growth