Size is relative. A standard Manhattan apartment would seem almost claustrophobic compared to the vast spaces that suburban living offers. A similar movement is occurring in the market.
Mega-cap companies are generally defined as companies with a market capitalization of more than $200 billion. Of course, the largest companies are orders of magnitude larger than that. for example, meta, The company, which reported impressive earnings this week, currently has a market cap of $1.65 trillion.
But concerns about the cost of building AI wiped out $135 billion in market capitalization in just four sessions, or, put another way, nearly wiped out the value of Uber and Uber as a whole. While market capitalization is one way to understand the size of these companies, another is to look at the size of the business and its opportunities.
Consider the muse.
Meta’s personal AI agents are designed to be more active digital assistants than traditional conversational chatbots. Muse can open your browser, fill out forms, send emails, make plans, book trips, and even (potentially) make purchases.
To understand what a huge economic opportunity this represents for your company, consider how much such things are worth. $5 per user per month? (Not necessarily included in the subscription fee, just to be clear, there’s only monetizable economic value). Seems a little low for something this powerful. $10 a month? It’s quite realistic. Next, consider the size of Meta’s ecosystem’s daily active user base across Facebook, Instagram, WhatsApp, and Messenger. The number is truly “mega”. 3.6 billion people, but each person is probably only counted once. Assuming each of these individuals owns and uses a global phone, 5.86 billion people on the planet do so, and Meta interacts with 61.4% of them at least once each day.
If Muse were worth $120 a year and reached just 1% of Meta’s daily active users, that would be $4.3 billion a year. If it were worth half that amount, but still accounted for 20% of your daily activity, that would be $43.2 billion a year. The initial numbers seem absurdly low for a back-of-the-napkin number, but in less than a week, the $135 billion in write-downs is offset by $20 billion in revenue (the company’s sales are just under 7 times higher). If Muse can generate $30 billion in revenue, it will become a mega-cap company in its own right.
If everything was rosy, why was the company sold? A massive $25 billion lawsuit in New Mexico, potential PR woes related to a deal the company struck with its founders to resolve potential tax obligations from retaining voting rights for billionaires in California, and, of course, concerns about on-balance sheet and external debt to finance the huge investments the company is making (and growing) in AI, and the jitters in AI in general. However, the company is currently pricing in much of that, with fiscal year earnings at 20 times and fiscal 2027 expected earnings at less than 17 times. These headaches create headwinds, but the underlying story provides support.
trade
I like selling December stocks here, especially the 580/745 stocks. As of today’s closing price, you’ll earn about $21.30 per share. This trade has been profitable virtually anywhere between the high and low prices of the year, and we’re currently roughly in the middle of that range.
Disclosure: Tidal owns/holds all securities mentioned in the article.
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