In July 2014, Apple ranked as the world's most valuable company, with a market capitalization of $550 billion. But during the last decade steady growth in the U.S. economy drove several stocks across the trillion-dollar threshold. Six publicly traded companies are currently members of that elite group, and they are listed below from largest to smallest:
- Apple: $3.4 trillion
- Microsoft: $3.2 trillion
- Nvidia: $2.9 trillion
- Alphabet: $2.2 trillion
- Amazon: $1.9 trillion
- Meta Platforms: $1.2 trillion
Eleven companies are on their way to trillion-dollar valuations, as they're worth at least $500 billion today. But I think Broadcom (AVGO +2.02%) and Berkshire Hathaway (BRK.A 0.16%) (BRK.B 0.11%) could reach that milestone by mid-2025, and certain Wall Street analysts agree:
- Broadcom is currently worth $732 billion. In July, Hans Mosesmann at Rosenblatt Securities raised his 12-month price target to $240 per share, implying 53% upside from the current share price of $157. That would bring its market capitalization to $1.1 trillion.
- Berkshire Hathaway is currently worth $936 billion. In May, Brian Meredith at UBS raised his 12-month price target to $490 per share, implying 13% upside from the current Class B share price of $434. That would bring its market capitalization just north of $1 trillion.
To put things in perspective: There's nothing particularly significant about becoming a trillion-dollar company, and the possibility of short-term gains is a poor reason to buy a stock. But Broadcom and Berkshire have more to offer. Here's how these brilliant stocks could fit into your portfolio.
NASDAQ: AVGO
Key Data Points
1. Broadcom
Broadcom provides a broad range of semiconductor products and infrastructure software, and the company has a strong presence in several markets. However, Broadcom's three largest opportunities lie in data center virtualization software, networking chips for data center switches and routers, and application-specific integrated circuits (ASICs) for artificial intelligence (AI).
Virtualization software reduces IT costs by making data center hardware more efficient. For instance, physical servers often operate at a fraction of their capacity because each is limited to one operating system and is sometimes dedicated to a single application. Virtualization makes it possible to run multiple operating systems and applications on a single physical server.
Last year, Broadcom acquired virtualization software leader VMware. Restructuring expenses associated with the merger are currently a modest headwind, but the long-term upside should outweigh the near-term downside. The data center virtualization software market is projected to grow at a compound rate of 16% annually through 2030, and Broadcom is focused on upselling customers with its most comprehensive virtualization product, VMware Cloud Foundation.
Beyond infrastructure software, Broadcom is the leader in two important semiconductor verticals. It holds 80% market share in data center networking chips, and 60% market share in ASICs, custom chips built for specific use cases like AI workloads. Over the next few years the networking chip market is forecast to grow at 25% annually, and the custom AI chip market at 42%.
Broadcom reported solid financial results in the second quarter of fiscal 2024 (ended May 2024), beating expectations on the top and bottom lines. Revenue increased 43% to $12.5 billion, and non-GAAP (adjusted) net income rose 20% to $5.4 billion. CEO Hock Tan said demand for AI products and for VMware were the driving forces.
Looking ahead, Wall Street expects Broadcom's non-GAAP earnings per share to grow at 24% annually through fiscal 2025 (ends October 2025). That consensus estimate makes the current valuation of 36.2 times non-GAAP earnings look quite reasonable. If you're looking for a semiconductor stock (besides Nvidia) that should benefit as businesses build out their AI infrastructure, consider buying a small position in Broadcom today.
NYSE: BRK.B
Key Data Points
2. Berkshire Hathaway
Berkshire Hathaway is a holding company that groups its subsidiaries into three operating segments: insurance companies; railroad, utilities, and energy companies; and manufacturing, service, and retailing companies.
Investors should find Berkshire's business model attractive for two reasons.
First, insurance subsidiaries like Geico and Berkshire Hathaway Primary Group generate cash up front and pay claims later. CEO Warren Buffett has used that cash to create shareholder value by acquiring businesses and purchasing stock. As evidence, Berkshire's book value per share -- a good proxy for changes in intrinsic value -- compounded at 11.1% annually over the last decade, outpacing the gains in the S&P 500.
Second, Berkshire has shown above-average resilience during economic downturns and stock-market corrections because it has exposure to defensive industries like insurance and utilities. Since 1980, Berkshire shares outperformed the S&P 500 by a median of 4.4 percentage points during recessions and a median of 14.9 percentage points during bear markets, according to Bespoke Investment Group.
Berkshire had a good first quarter. Revenue increased 5% to $89.8 billion and operating earnings surged 41% to $5.20 per diluted share, topping the highest estimate on Wall Street. Earnings based on generally accepted accounting principles (GAAP) declined 64% to $5.88 per diluted share due to an accounting technicality. Specifically, GAAP earnings include unrealized investment gains and losses.
Berkshire recorded $23 billion in unrealized gains in the first quarter of 2023, and it recorded nearly $10 billion in unrealized losses in the first quarter of 2024. That discrepancy caused a significant decline in GAAP earnings. However, Buffett sees operating earnings as a more accurate measure of performance because it excludes those changes.
Looking ahead, Catherine Seifert at CFRA Research expects Berkshire's operating earnings per share to increase by 12% annually over the next three years, and Stephen Biggar at Argus Research estimates they will increase at 12% annually over the next five years. Those estimates align with the five-year average, and they make the current valuation of 23.2 times operating earnings look relatively reasonable.
If you're interested in a stalwart defensive stock, especially one likely to keep pace with the S&P 500 over time, consider buying a position in Berkshire Hathaway today.
