As of May 20, the 10 largest companies in the world by market cap were:
- Microsoft: $3.4 trillion
- Nvidia: $3.3 trillion
- Apple: $3.1 trillion
- Amazon: $2.2 trillion
- Alphabet: $2.0 trillion
- Meta Platforms: $1.6 trillion
- Tesla: $1.1 trillion
- Berkshire Hathaway (BRK.A +0.21%) (BRK.B +0.21%): $1.1 trillion
- Broadcom: $1.1 trillion
- Taiwan Semiconductor Manufacturing: $0.9 trillion
Among these companies, Apple is the largest position in Berkshire Hathaway's portfolio, while Amazon is a much smaller holding. Among some of the world's other largest companies beyond the trillion-dollar enterprises above are Visa, Mastercard, and Bank of America -- each of which is also a notable position in Berkshire's portfolio.
While any of these companies could very well be a multi-trillion-dollar business in the coming years, I've got my eyes on one Buffett stock in particular: Berkshire. Let's assess Berkshire's growth over the years and explore how the company could achieve a $2 trillion valuation within the next five years.
NYSE: BRK.B
Key Data Points
How Buffett built Berkshire into a trillion-dollar business
It's pretty obvious that Berkshire is the outlier when it comes to the trillion-dollar club. Every other company in the list above is a technology business and has been riding high on the artificial intelligence (AI) wave for the last few years now.
Berkshire doesn't have that luxury. At its core, Buffett's investment vehicle is a financial services firm -- not exactly a business that screams high growth. Nevertheless, Buffett has been able to separate Berkshire from other financial services businesses thanks to his steadfast approach to investing. Unlike other wealth management firms or hedge funds, Berkshire's entire investment philosophy revolves around capital preservation and long-term gains.
Buffett seeks out quality businesses that have built strong brand moats, generate steady cash flow, and often reward shareholders through stock buybacks or dividend payments. With that in mind, it's not surprising that some of Berkshire's core holdings include Apple, Visa, and Coca-Cola. This strategy has paid off in spades, as Berkshire has generated compound annual returns of 19.9% since Buffett took over the firm in 1965. This is roughly double that of the S&P 500, and equates to a total gain of 5,502,284% over the last six decades.
With a track record like that, is it any surprise that investors love owning (and holding!) Berkshire stock? I don't think so.
Image source: Getty Images.
What would it take for Berkshire to achieve a $2 trillion valuation?
The chart below illustrates Wall Street's consensus revenue estimates for Berkshire over the next two years. Assuming I carry out the 5% annual revenue growth from the figures below through 2030, Berkshire would generate approximately $480 billion in sales by then. Using the company's long-run average price-to-sales (P/S) multiple of 2.6, I'd arrive at an implied market cap of $1.2 trillion by 2030. That's a far cry from my $2 trillion prediction.
BRK.B Revenue Estimates for Current Fiscal Year data by YCharts.
In order for Berkshire to roughly double its value from current levels, its P/S ratio would need to expand to about 4.2. So, why do I think that could happen?
What catalysts does Berkshire have right now?
It took Berkshire nearly 60 years to achieve and sustain a valuation of $1 trillion. I'll admit that predicting that the company could double its valuation in the next five years is aggressive. One of the chief reasons I think it's possible is that Buffett will be retiring as Berkshire's CEO at the end of the year. Unless there are any major changes over the next six months, top lieutenant Greg Abel is positioned to take over Berkshire while the company holds an astounding $348 billion of cash and short-term investments on the balance sheet.
One of my other predictions is that under Abel's leadership, Berkshire could adopt more flexibility when it comes to investing in higher-growth areas such as fintech, AI, or green energy. In addition, I think it's only a matter of time before investors begin to apply some pressure on how Berkshire deploys its growing heaps of cash. Two ways to entice new investors to buy or existing ones to hold on to shares could be through continued share buybacks or even initiating a dividend of its own.
This is all to say that I think in a post-Buffett era, Berkshire is positioned for accelerated growth. For these reasons, I would not be surprised if investors begin to apply more of a premium to Berkshire stock -- especially if the company is able to surpass Wall Street's outlook by a meaningful margin.
So even though doubling in size will require some meaningful expansion in Berkshire's valuation multiples, I think it's a possibility. The bigger idea at play here is that Berkshire has been a winning investment for many decades, and Abel looks to be taking the reins from a position of strength. For those reasons, I'm optimistic on Berkshire's ability to continue generating strong returns for investors -- regardless of whether, or when, it achieves a $2 trillion market cap.
