Scale is relative. Compared to the spacious living areas of suburban residences, standard apartments in Manhattan can seem almost cramped. A similar dynamic exists in the market as well.
Super-large market capitalization companies are typically defined as those with a market value of over $200 billion. Of course, the largest companies exceed this scale by an order of magnitude. For example, Meta released impressive financial results this week, and its current market value is $1.65 trillion.
However, concerns about the AI's construction expenditures wiped out its $135 billion market value in just four trading days. In other words, this is roughly equivalent to the total market value of the entire Uber. Market value is one way to understand the scale of these companies; another way is to examine their business volume and the opportunities they possess.
Taking Muse as an example.
The personal AI agent of Meta is designed to be a more proactive digital assistant than traditional conversational chatbots. It can open browsers, fill out forms, send emails, schedule appointments, book trips, and even (potentially) complete shopping tasks.
To understand the economic opportunities this represents for the company, one can think about how much such a product might be worth. $5 per user per month? (This doesn’t necessarily refer to a subscription fee, but rather the monetizable economic value.) For such a powerful tool, that figure seems a bit low. $10 per month? That’s quite realistic. Then consider the daily active user base of the Meta ecosystem on Facebook, Instagram, WhatsApp, and Messenger. This number is indeed “huge”: 3.6 billion, and it’s said that each person is counted only once. If we assume that all of these people own and use mobile phones – there are 5.86 billion unique individuals worldwide who meet this criterion – that means Meta interacts with at least 61.4% of them every day.
If Muse is worth $120 per year and only reaches 1% of the daily active users of Meta, that would result in annual revenue of $4.3 billion. If its value is only half of that amount but it reaches 20% of the daily active users, then the annual revenue would be $43.2 billion. The first figure may seem ridiculously low as a rough estimate, but a valuation loss of $135 billion in less than a week could be offset by just $20 billion in revenue (the company's current price-to-sales ratio is slightly less than 7 times). If Muse can generate $30 billion in revenue, it would itself become a company with an extremely large market value.
So, if everything is so wonderful, why has the company come under pressure to be sold? The reasons include: a major lawsuit in New Mexico worth up to $25 billion; an agreement reached between the company and its founder that could lead to public relations issues—this agreement aims to resolve potential tax liabilities related to a possible billionaire tax in California while retaining voting rights; of course, there are also concerns about the financing needed for the company's massive and ongoing investments in AI, including both on-balance-sheet and off-balance-sheet debts, as well as broader AI-related tensions. However, with a price-earnings ratio of 20 times based on this fiscal year's earnings, and less than 17 times based on estimated earnings for the 2027 fiscal year, the current pricing of the company already takes into account many of these factors. These difficulties represent headwinds, but the underlying logic still provides support.
This transaction
I prefer to sell 12-month wide spread combinations here, specifically the 580/745 wide spread. As of today's closing price, the seller can collect a premium of approximately $21.30 per share. This trade can be profitable at almost any point between the past year's high and low of that stock, and currently, the stock price is roughly in the middle of this range.
Disclosure: Tidal holds all the securities mentioned in this article.
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