Artificial intelligence (AI) has proven to be a great enabler for many businesses, thanks to its increasing adoption across multiple industries ranging from cloud computing to factory automation, from retail to advertising. The great thing is that the technology is currently in the early stages of growth.
Bloomberg Intelligence predicts that generative AI could become a $1.3 trillion industry by 2032 (compared to just $40 billion in 2022), with an annual growth rate of 42%. It is worth noting that AI adoption within the advertising industry is expected to grow more rapidly during this period. More specifically, generative AI advertising spend is expected to grow 125% annually through 2032, generating $192 billion in annual revenue, up from just $57 million in 2022.
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The rapid adoption of generative AI within the advertising market is playing a key role in driving impressive growth Metaplatforms(NASDAQ: META)the seventh largest company in the world, with a market capitalization of $1.43 trillion. Let’s take a closer look at how this social media giant is using AI to set itself up for long-term growth, and why it seems on track to become a $2 trillion company.
Meta Platforms announced its third quarter 2024 results on October 30. The company’s revenue rose 10% year over year to $40.6 billion, while non-GAAP earnings per share rose faster, 37% to $6.03 per share. Wall Street would have settled for Meta’s $5.25 per share in earnings on $40.3 billion in revenue.
Magnificent Seven’s robust year-over-year share growth was driven by a combination of an increase in ad impressions served and an increase in the average price per ad. More specifically, Meta’s ad impressions increased 7% compared to the same period last year, while the average price per ad increased 11% year over year. The company’s stronger earnings growth can be attributed to the fact that costs and expenses increased at a slower pace of 14% year-over-year to $23.2 billion.
However, Meta stock fell 4% after the quarterly report despite better-than-expected numbers. This was due to management’s directives on increasing capital expenditure. Meta has increased its 2024 capital budget from the previous range of $37 billion to $40 billion to an updated range of $38 billion to $40 billion.
Additionally, management noted during the last earnings conference call that investors “can continue to expect significant capital expenditure growth through 2025.” Given that Meta’s 2024 investment forecast points to a big jump of 39% from last year’s $28 billion spend, investors and analysts are likely concerned about the potential impact of the company’s aggressive spending on the bottom line .
However, it would be wise to look at the bigger picture. Meta has increased its investment budget to build AI infrastructure. CEO Mark Zuckerberg noted on the earnings call that “our AI investments continue to require serious infrastructure,” and he is confident that the new opportunities AI presents “will accelerate our core businesses, which should have strong ROI in the coming years .”
The good part is that Zuckerberg points out that AI is already having a positive impact on Meta’s core business (advertising) and monetization efforts. For example, AI-driven content has led to an 8% increase in the time users spend on Facebook, along with a 6% increase in time spent on Instagram. This explains why Meta can potentially capture a larger share of advertisers’ wallets, leading to an increase in the number of ad impressions served and the average price per ad.
Even marketers are using the company’s AI tools to create ads. For example, in October, Meta claims that more than 1 million advertisers used the company’s generative AI tools to create more than 15 million ads. More importantly, Meta says that businesses using its AI-based image generation tools have witnessed a 7% increase in conversions.
With Meta boasting a massive daily active user base of 3.29 billion people as of September 2024, up 5% from the prior year period, it’s easy to see why advertisers are flocking to the platform to connect with their audiences. reaches. AI seems to help them reach their target audience in a more efficient way.
For example, Meta says advertisers using its AI-powered advertising tools, such as Advantage+ shopping campaigns, are witnessing a 32% increase in return on ad spend. Advantage+ Shopping is a platform that provides advertisers with end-to-end automation to optimize various aspects of their campaigns, ranging from audience targeting to ad placements, creative and budget.
So, the growing adoption of AI in the advertising space is already acting as a tailwind for the company. This trend is likely to continue in the long term, given the size of this market.
Although Meta predicts higher capital expenditures for 2025, analysts have raised their earnings expectations for the company. This is evident from the graph below.
META EPS estimates for the current fiscal year
The company is expected to deliver double-digit earnings growth in the coming years, but don’t be surprised if it delivers bigger increases. After all, stronger returns for advertisers using AI tools could help Meta increase the number of impressions it delivers and also benefit from a stronger price per ad.
But even if the company manages to achieve earnings of $28.66 per share in 2026 and is trading at 30 times forward earnings at that point, in line with Nasdaq-100 index (using the index as a proxy for technology stocks), the stock price could rise to $860. That points to a potential 53% increase in share price from current levels (at time of writing), which would be enough to help Meta Platforms reach a $2 trillion valuation in the coming three years.
Considering Meta currently trades at 27 times earnings, investors are getting a good deal on this AI stock. They may not want to miss it, considering the potential profits it could bring in over the next three years.
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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. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.
This Beautiful Artificial Intelligence (AI) Stock Could Reach a $2 Trillion Valuation in the Next Three Years Originally published by The Motley Fool
