The growing adoption of AI in the digital ad market should help this social media giant deliver robust earnings growth and stock upside over the next three years.
Artificial intelligence (AI) has turned out to be a tremendous catalyst for many companies, thanks to its growing adoption in multiple industries ranging from cloud computing to factory automation to retail to advertising. The good part is that the technology is currently in its early phases of growth.
Bloomberg Intelligence forecasts that generative AI could become a $1.3 trillion industry in 2032 (compared to just $40 billion in 2022), clocking an annual growth rate of 42%. It’s worth noting that the adoption of AI within the advertising industry is forecast to grow at a stronger rate during this period. More specifically, generative AI-driven ad spending is expected to grow at an annual rate of 125% through 2032, generating $192 billion in annual revenue, compared to just $57 million in 2022.
The rapid adoption of generative AI within the advertising market is playing a key role in driving impressive growth for Meta Platforms (META -1.35%), the world’s seventh-largest company, with a market cap 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’ integration of AI has started paying off
Meta Platforms released its third-quarter 2024 results on Oct. 30. The company’s revenue increased 10% year over year to $40.6 billion, while its non-GAAP earnings per share shot up at a faster pace of 37% to $6.03 per share. Wall Street would have settled for $5.25 per share in earnings from Meta on revenue of $40.3 billion.
The “Magnificent Seven” stock’s robust year-over-year growth was driven by a combination of an increase in ad impressions delivered and a jump in the average price per ad. More specifically, Meta’s ad impressions increased by 7% from the same period last year, while the average price per ad was up 11% on a year-over-year basis. The stronger growth in the company’s earnings can be attributed to the fact that its costs and expenses increased at a slower pace of 14% year over year to $23.2 billion.
However, Meta stock dipped 4% following its quarterly report, despite reporting better-than-expected numbers. That was because of management’s guidance about an increase in capital spending. Meta has increased its 2024 capital expenditure budget from the earlier range of $37 billion to $40 billion to an updated range of $38 billion to $40 billion.
Additionally, management remarked on the latest earnings conference call that investors can “continue to expect significant capital expenditure growth in 2025.” Given that Meta’s 2024 capex forecast points toward a big jump of 39% from last year’s outlay of $28 billion, investors and analysts are probably worried about the potential effect of the company’s aggressive spending on its bottom line.
However, it would be wise to look at the bigger picture. Meta has been raising its capex budget to build AI infrastructure. CEO Mark Zuckerberg remarked on the earnings call that “our AI investments continue to require serious infrastructure,” and he’s confident that the new opportunities created by AI will “accelerate our core business that should have strong ROI over the next few years.”
The good part is that Zuckerberg points out that AI is already having a positive effect on Meta’s core business — which is advertising — and monetization efforts. For instance, AI-driven content has led to an 8% increase in time spent by users on Facebook, along with a 6% increase in time spent on Instagram. This explains why Meta may be able to grab a bigger share of advertisers’ wallets, leading to an increase in the number of ad impressions delivered and the average price per ad.
Even marketers have been using the company’s AI tools to create ads. In October, for instance, Meta claims that more than 1 million advertisers used the company’s generative AI tools to create over 15 million ads. More importantly, Meta says that businesses using its AI-based image generation tools have witnessed a 7% jump in conversions.
With Meta boasting of a massive daily active user base of 3.29 billion people in September 2024, an increase of 5% from the prior-year period, it’s easy to see why advertisers are flocking to its platform to reach their audience. AI seems to be helping them reach their target audience in a more efficient manner.
For example, Meta says that advertisers using its AI-powered ad tools such as Advantage+ shopping campaigns are witnessing a 32% increase in returns on ad spending. Advantage+ shopping is a platform that gives advertisers end-to-end automation to optimize various aspects of their campaigns, ranging from audience targeting to ad placements to creatives to budget.
So, the growing adoption of AI in the advertising space is already acting as a tailwind for the company. That trend is likely to continue in the long run, considering how big this market is set to become.
Robust bottom-line growth could send the company into the $2 trillion club
Even though Meta is forecasting higher capital spending in 2025, analysts have increased their earnings expectations from the company. This is evident in the chart below.
META EPS Estimates for Current Fiscal Year data by YCharts.
The company is expected to clock double-digit earnings growth over the next couple of years, though don’t be surprised to see it delivering bigger increases. After all, stronger returns to advertisers with the help of AI tools could help Meta increase the number of impressions it delivers and also enjoy stronger pricing per ad.
But even if it manages to achieve $28.66 per share in earnings in 2026 and trades at 30 times forward earnings at that time, in line with the Nasdaq-100 index (using the index as a proxy for tech stocks), its stock price could jump to $860. That points toward a potential stock price jump of 53% from current levels (at the time of this writing), which would be enough to help Meta Platforms achieve a $2 trillion valuation in the next three years.
Given that Meta is currently trading at 27 times earnings, investors are getting a good deal on this AI stock. They may not want to miss it, considering the potential gains it could deliver over the next three years.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, 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 has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.