Why Meta Platforms Could Surpass Amazon and Alphabet by 2026

Meta Platforms is emerging as a unique blend of growth and value.

Meta Platforms (META) has recently achieved a significant milestone, reaching an all-time high with its market value exceeding $1.5 trillion for the first time. The company's stock has soared by 66% in 2024 alone and an impressive 387% since the beginning of 2023. Currently, Meta is positioned as the sixth-most-valuable company in the U.S., closely following Amazon and Alphabet, which feature market caps of $1.96 trillion and $2.06 trillion respectively.

This article explores the reasons why Meta may surpass both of these tech giants by 2026 and why it remains a strong investment opportunity even after its exceptional growth.

Understanding Meta's Growth Potential

Investing fundamentally revolves around identifying companies that can generate more profits in the future compared to their current levels. While some established firms reward shareholders with dividends and share buybacks, others operate at a loss yet hold vast future potential.

Meta, alongside other tech leaders like Amazon and Alphabet, blends strong cash flow with promising growth prospects. However, Meta stands out with a clear path for earning growth.

Instagram, under Meta's umbrella, continues to evolve, merging modern entertainment with social media, thus yielding high profit margins. Unlike YouTube from Alphabet, which is a desktop-centric platform, Instagram is designed for mobile users, encouraging engagement and content sharing.

Recent features like Instagram Stories, Live, and Reels have transformed it from a static image-sharing app into a dynamic, real-time video platform. User engagement has surged as personalized feeds filled with short videos grab users' attention.

By providing targeted marketing options, Instagram has become a top choice for advertisers. Advertisers benefit from quick transactions and measurable metrics to assess the impact of their marketing efforts. Additionally, like YouTube, Instagram benefits from user-generated content, thus avoiding substantial costs associated with content creation faced by traditional media giants like Netflix.

Advancing with Artificial Intelligence

Meta is also poised to benefit from advancements in artificial intelligence (AI). The company is actively investing in AI solutions to better connect advertisers with consumers. While advertisements can be unwelcome, delivering relevant ads enhances user experience and engagement.

AI tools allow Meta to refine content recommendations, increasing user interaction with its applications. More extended app usage leads to greater advertisement exposure, effectively benefiting Meta’s business model.

In contrast, Alphabet is facing challenges as alternative AI-driven tools like SearchGPT and ChatGPT begin to pose competition against Google’s traditional search engine. Alphabet has made attempts to innovate, such as implementing an AI Overview feature that summarizes search results, but it remains uncertain whether it can solidify its market position in face of these new rivals.

While the cloud services sectors of Amazon Web Services (AWS) and Google Cloud stand to gain from AI demand, Google Cloud currently ranks behind AWS and Microsoft Azure in market share. Outside of its cloud services, Amazon's other divisions appear to be struggling with growth and profitability. This positions Meta favorably as a leading AI investment among the three companies.

Potential for Valuation Growth

One possible reason for Meta's potential to outperform both Amazon and Alphabet lies in its current valuation metrics. Meta has a notably low forward price-to-earnings (P/E) ratio among the "Magnificent Seven" tech companies, positioned second only to Alphabet, while boasting the highest free cash flow (FCF) yield in the group.

The FCF yield, calculated as FCF per share divided by share price, illustrates the amount of free cash flow a company generates compared to its valuation. Despite its staggering 400% growth since the start of 2023, Meta still appears to be relatively affordable from a valuation standpoint. Its stock could seem even more attractive if earnings growth continues to surpass the increase in stock price in the future.

A valuation expansion may occur when the market assigns a higher earnings multiple to a company due to improved earnings quality or heightened investor optimism regarding future growth. For instance, Apple has seen its P/E ratio rise due to continuous improvements in its products and services, demonstrating a market shift in its valuation over a decade.

Meta's earnings and cash flow demonstrate potential, although substantial investments in the Reality Labs division are currently dragging profitability down. This division, which focuses on the metaverse and virtual reality technologies, reported an operating loss of $8.33 billion for the first half of the year. Nevertheless, if Reality Labs eventually starts producing significant returns, it could lead to considerable profitability upside for Meta.

Meta's substantial revenue streams from Instagram, Facebook, and WhatsApp provide the company with the financial strength to support its extensive research and development investments, engage in share buyback programs, and to initiate dividends. The market currently assigns minimal value to Reality Labs, leaving considerable potential for appreciation if breakthroughs occur.growth, investment, value