The Next Trillion Dollar Company Is…

What company in the United States generates revenues and profits that rivals big tech companies but is valued at less than half of most of them? The answer turns out to be Warren Buffett’s Berkshire Hathaway.

Last quarter alone, Berkshire Hathaway generated an astonishing $89 billion in revenues and reported $17 billion in operating income. How does that compare to the Big Tech giants?

Apple posted figures of $90 billion and $28 billion in operating income while Microsoft almost rivaled Apple with $26 billion in operating income on just $60 billion in revenues.

So how high can Berkshire go, and will it catch up to the Big Tech firms when it comes to market capitalization?

Key Points

• Berkshire Hathaway’s $89 billion in revenue and $17 billion in operating income last quarter rivaled Apple and Microsoft’s financials.
• Despite its performance, Berkshire’s market cap is $876 billion, much lower than Apple and Microsoft’s almost $6 trillion combined.
• With a perfect Piotroski score and nearly $200 billion in cash reserves, Berkshire has an 18% upside potential, making it a stable, high-growth investment.

Why Is Berkshire Worth So Much Less?

While Apple has a market cap of $2.8 trillion and Microsoft is worth $3.1 trillion, Berkshire Hathaway has a relatively paltry $876 billion, but make no mistake about it, a trillion dollar market cap is the next stop and it’s unlikely to stop there. That’s because Berkshire stuns on the key metric that counts the most, free cash flow.

As an aside when Jeff Bezos was asked why he didn’t focus on profits in the early years when Amazon was growing its top line rapidly but failing to drop those gains to the bottom line, he commented that free cash flow per share was the most important metric in his mind.

Over the past year, in each and every quarter, Berkshire has posted free cash flow that has ranged from between $6.1 billion to $8.6 billion. That level of cash production is precisely why Berkshire is sitting on nearly $200 billion in cash on the balance sheet, just waiting to deploy it into a monumental purchase if the markets offer him the opportunity.

If you’re wondering why Berkshire isn’t valued as highly as Apple or Microsoft despite having similar revenues to Apple and operating income to both enterprises, the answer is in that free cash flow line item. As impressive as Berkshire’s free cash flows are, they fall far short of Apple’s which ranged over the past year between $29 billion and $41 billion.

In other words, Apple produces FCF quarterly that rivals Berkshire’s annually. So too Microsoft has generated an astonishing $70 billion in FCF over the past twelve months alone, or thereabouts.

How High Can Berkshire Go?

While Apple and Microsoft are in a league of their own in terms of financial efficiencies, Berkshire Hathaway has a great deal going for it.

First of all, it’s got a perfect Piotroski score of 9, suggesting it’s about as fundamentally sound as any company. That’s not a surprise given how Berkshire prioritizes cash reserves that now amount to almost $200 billion.

Secondly, all those cash flows we spoke about can be forecasted out in time and discounted to the present day to arrive at a valuation, and by our numbers, Berkshire still has upside of about 18% to $482 per share for Class B shares before hitting fair value.

Analysts are a little more pessimistic and believe $462 per share is intrinsic value. Either way, Berkshire has substantial upside potential and the added advantage of being a low volatility play when compared to the tech behemoths.

The bottom line is if you’re looking for a company that has some decent upside and is likely to join the elite companies of the world reaching a $1 trillion market capitalization, you are unlikely to go too far wrong with Berkshire Hathaway.