The stock market is more dynamic than you probably realize. History has consistently shown that, due to innovation and execution, today's largest publicly traded companies are unlikely to retain their pedestal position for a significant length of time.
As an example, just one of the 10 largest publicly traded companies in 1999 is still in the top 10 (Microsoft). Meanwhile, previous giants like Intel, Nokia, and American International Group have fallen far down the pecking order, in terms of market cap.
Chances are that electric vehicle (EV) kingpin Tesla (TSLA 4.96%) will also be dethroned as one of the world's largest publicly traded companies.
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Tesla is the fifth-largest publicly traded stock... for now
As of the closing bell last week, a single share of Tesla would set an investor back more than $1,000, which equates to a hearty market cap of $1.04 trillion. That makes Tesla the fifth-largest publicly traded company in the U.S., and only the sixth to ever reach the $1 trillion valuation plateau.
There are certainly valid reasons why Tesla's shares have skyrocketed over the past decade. For instance, it's the first automaker in over five decades that built itself from the ground up and reached mass production. In the first quarter, Tesla produced more than 305,000 EVs and delivered just north of 310,000 EVs. That puts it on track to easily surpass 1 million EVs produced and delivered in 2022.
To add to this point, Tesla's first-quarter operating results featured its largest quarterly profit in history. Despite supply chain challenges, Tesla generated $3.32 billion in net income in Q1 2022, which was a 658% improvement from the prior-year period.
But there are also plenty of reasons to believe Tesla's market cap, which is equal to most auto stocks on a combined basis, is due for a reversion. Although the company has been riding competitive advantages with regard to production, power, range, and battery capacity, competition is beginning to catch up. For instance, a handful of EVs offer better range than Tesla's flagship sedans (the Model 3 and Model S).
Another point of concern is CEO Elon Musk. While there's no question he's a visionary, he's also an unwanted distraction at times. Musk has a habit of overpromising and under-delivering when it comes to the launch of new technology or new EVs, and his side projects arguably get in the way of overseeing Tesla's operations.
Berkshire Hathaway CEO, Warren Buffett. Image source: The Motley Fool.
These stocks could surpass Tesla over the next eight years
In other words, there's a very real chance Tesla's valuation could deflate by 2030 and other publicly traded stocks could surpass it. What follows are three stocks that could be worth more than Tesla by the turn of the decade.
The logical choice: Berkshire Hathaway
The no-brainer choice to surpass Tesla in market cap by (or well before) 2030 is Warren Buffett's conglomerate, Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%). Berkshire would need to gain about $300 billion in market cap to catch Tesla, as of this past weekend.
Historically, Buffett's company has been virtually unstoppable. Even though Berkshire Hathaway doesn't increase in value every year, Buffett has overseen an average annual return of better than 20% since taking the helm as CEO in 1965. Put another way, shareholders have doubled their money holding Berkshire Hathaway stock, on average, every 3.6 years for close to six decades.
One of the key reasons Berkshire Hathaway is such a success -- aside from being led by Warren Buffett -- is due to its investment portfolio being packed with cyclical companies. Cyclical businesses perform well when the U.S. and global economy are expanding and struggle when recessions arise. The thing is, recessions typically last for a few months or a couple of quarters, whereas economic expansions are often measured in years. Buffett and his investing team are playing a simple numbers game where patience is the not-so-secret ingredient to wealth-building.
Berkshire Hathaway is also raking in passive income. This year alone, Buffett's company is on pace to collect well north of $5 billion in dividend income. Over $4 billion in payouts will come from just a half-dozen holdings. This dividend income allows Berkshire to thrive in virtually any economic environment.
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If everything went just right: Visa
A second well-known stock that has all the tools necessary to surpass Tesla's market cap, but would need things to continue to go its way, is payment processor Visa (V 0.05%). To leapfrog Tesla, Visa must make up a nearly $590 billion valuation gap.
Arguably the biggest challenge is going to be the emergence of blockchain technology, as well as the rise of digital payment platforms. Blockchain offers a way to circumvent banks and financial institutions to process payments quickly and cheaply. Visa is a payment processor on traditional merchant networks and will need payments to continue to flow through those channels if it's to have any chance of surpassing Tesla's market cap.
Similar to Berkshire Hathaway, Visa benefits from the cyclical nature of financial stocks. Since economic expansions last disproportionately longer than contractions and recessions, Visa spends most of its time benefiting from an increase in consumer and enterprise spending. In the U.S., the largest market for consumption in the world, Visa holds a 54% share of credit card network purchase volume, as of 2020.
Additionally, Visa acts purely as a payment processor and not a lender. Although lending would generate net interest income and fee revenue, it would also expose Visa to loan delinquencies during recessions. Since there's no loan exposure, there's no need for the company to set aside capital to cover possible losses during recessions. This is a big reason why Visa's profit margin is consistently above 50%.
With the majority of global transactions still being conducted in cash, Visa's growth runway remains robust.
Image source: Getty Images.
The long shot: Broadcom
Lastly, the long shot of the group to surpass Tesla's market cap by 2030 is semiconductor solutions company Broadcom (AVGO 2.99%). With a market cap of $240 billion, Broadcom would need to more than quadruple just to catch Tesla at its current valuation.
The reason I've classified Broadcom as a "long shot" is the cyclical nature of the semiconductor industry. Even though periods of expansion handily outlast contractions and recessions, Wall Street has typically kept a low ceiling on price-to-earnings multiples for large chipmakers.
On the other hand, there are multiple avenues for Broadcom to generate high-single-digit to low-double-digit annual sales growth throughout the decade. Currently, it generates the bulk of its revenue from wireless chips and assorted solutions used in next-generation smartphones. Telecom companies upgrading wireless infrastructure to 5G should lead to a multiyear device replacement cycle that keeps demand and pricing power high for Broadcom's smartphone solutions.
However, it's the company's ancillary opportunities that could hold the key to surpassing Tesla. For example, Broadcom supplies connectivity and access chips used in data centers. With businesses shifting their data and that of their clients into the cloud at an accelerated pace in the wake of the pandemic, data center demand shouldn't slow anytime soon. Broadcom supplies chips used in next-gen vehicles, too.
A final factor working in Broadcom's favor is its historically high backlog of $14.9 billion. This is a company that's booking production well into 2023, according to CEO Hock Tan. If Broadcom can maintain a large backlog of orders, its operating cash flow and valuation can steadily increase.
