The bigger the better? Warren Buffett might seem to think so. He has loaded Berkshire Hathaway's (BRK.A 0.70%) (BRK.B 0.73%) portfolio with large-cap stocks. Nine of the 50-plus stocks that Berkshire Hathaway owns are mega-caps with market caps of $200 billion or more.
There are only two stocks that trade on U.S. exchanges with market caps of over $2 trillion: Apple (AAPL +0.33%) and Microsoft (MSFT 0.95%). Berkshire holds a huge position in Apple but has never directly owned Microsoft shares.
But don't be surprised if Berkshire's portfolio features another member of the $2 trillion club in the not-too-distant future. Here's the one Buffett stock that's most likely to join Apple and Microsoft.
An easy call
It's actually an easy call to determine which stock in Berkshire's portfolio is the best candidate to join the $2 trillion club. There are only three stocks that trade on U.S. exchanges other than Apple and Microsoft with market caps of over $1 trillion. Buffett owns only one of them -- Amazon (AMZN +0.39%).
Alphabet (GOOG +0.31%) (GOOGL +0.25%) is much closer to reaching the $2 trillion level with its market cap of over $1.6 trillion. Although Buffett has expressed regret for not buying the stock years ago, he has never pulled the trigger.
Nvidia (NVDA +1.13%) is the other stock with a market cap of above $1 trillion. But shares of the chipmaker are trading at a whopping 56.5 times forward earnings. I think hell would freeze over before Buffett bought the stock at that valuation.
How Amazon can get to $2 trillion
With its market cap currently close to $1.43 trillion, Amazon stock would need to rise another 40% to hit the $2 trillion threshold. I don't see that happening in the immediate future considering that it has already soared around 65% so far in 2023.
If we extend the horizon out a few years, though, I think Amazon could easily join Apple and Microsoft in the $2 trillion club. There are two primary ways I can envision this scenario unfolding.
Most importantly, I expect Amazon Web Services (AWS) to gain significant momentum. The cloud services unit experienced a growth slump in the last few quarters. However, increasing adoption of artificial intelligence (AI) should provide a major catalyst for AWS.
In particular, AWS has a massive opportunity in generative AI. Amazon CEO Andy Jassy said in the company's Q2 call, "[W]e think AWS is poised to be customers' long-term partner of choice in generative AI."
The other way that I predict Amazon will grow into a market cap of $2 trillion or more is by increasing its profitability. Investors have learned to more or less shrug off the company's relatively meager earnings through the years. But I suspect that a surge in profits could turn some heads.
Amazon is already making progress on this front. For example, its net income more than doubled quarter over quarter in Q2 to $6.7 billion. Jassy noted in the Q2 call that the company's "profitability trajectory" has improved significantly over the last year. He added, "[W]e really like where that's headed and we're expanding that meaningfully."
Will Buffett win big?
Will Buffett win in a big way if Amazon indeed becomes part of the exclusive $2 trillion club? Yes and no.
Berkshire currently owns a little over 10.5 million shares of Amazon. If Amazon stock jumps another 40% and reaches a $2 trillion market cap, the value of Berkshire's position would increase by less than $600 million. That's a lot of money, of course. It's not nearly enough, though, to move the needle much for the giant conglomerate.
Perhaps Buffett will add to Berkshire's position in Amazon in the coming quarters. When it comes to owning a stake in Amazon, I think that bigger truly could be better.
