This might be the most prepared company in the world to invest its capital opportunistically.
By 1965, Warren Buffett had invested enough into the struggling textile company Berkshire Hathaway (BRK.A 1.17%) (BRK.B 1.33%) to take control of it. Back then, it usually traded in what is now considered nano-cap stock or micro-cap stock territory — it was sometimes worth less than $50 million.
Under Buffett’s direction, Berkshire Hathaway transformed its business, and its value has steadily increased for nearly 60 years. As of this writing, its market capitalization is close to an all-time high, valuing the company at nearly $900 billion.
BRK.A market cap; data by YCharts.
There are a handful of companies that have surpassed a trillion-dollar market cap, including Alphabet, Meta Platforms, and Apple. And at nearly $900 billion now, Berkshire Hathaway would seem like a shoo-in to join their ranks by 2030. But investors need to remember that by 2030, the company could have undergone a major change.
A change in leadership is coming
Warren Buffett was in his 30s when he took over Berkshire 60 years ago. Now in his 90s, he’s unlikely to still be in charge by 2030. And it’s possible that he won’t be the one to lead the company over a market cap of $1 trillion. That task could fall to his successor-in-waiting, Greg Abel.
Before I talk about Abel, I want to mention why Berkshire Hathaway has gone from a micro-cap stock to one of the biggest companies in the world. It didn’t cure a disease, build a rocket, or anything like that. It simply ran a profitable business and used its money to invest in undervalued stocks or acquire other profitable businesses.
This strategy is surprisingly simple: It requires good capital allocation. But counterintuitively, it’s hard to pull off — because with money, there are plenty of emotions that cloud good decisions.
As Buffett says, “If you cannot control your emotions, you cannot control your money.” Fortunately for Berkshire Hathaway’s shareholders, Buffett mastered his emotions and makes good capital-allocation decisions regularly.
Once Abel is in charge, he’ll face greater pressure to make good capital-allocation decisions, intensifying the emotions associated with the job. So on one hand, it’s impossible to predict how well he will do until he’s actually wearing Buffett’s shoes. But on the other hand, shareholders have excellent reason to be optimistic. Buffett recently said, “Greg understands capital allocation as well as I do.”
Buffett is arguably the greatest capital allocator there is. So this is high praise for Abel and strong reassurance regarding the future of Berkshire.
How Buffett or Abel can lead Berkshire to $1 trillion
As of this writing, Berkshire’s market cap is $877 billion, implying that it needs to rise about 14% to hit $1 trillion. But investors should keep in mind that from a price-to-book-value (P/B) perspective, the stock trades at a slightly more expensive valuation than it usually does, as the chart below shows.
BRK.A price to book value; data by YCharts.
If Berkshire’s P/B valuation drops back down to normal, then the company will need to grow its book value a little more than 14% to reach $1 trillion. Therefore, I believe investors should ask how the company can grow its book value per share by 15% to 20% in coming years.
Its leaders will definitely have opportunities. For starters, consider that the stock market drops 20% or more multiple times per decade, on average. Between now and 2030, there are likely to be more stock market crashes, which means that there will be some bargain investment opportunities.
As of the first quarter of 2024, Berkshire Hathaway had $189 billion in cash and short-term investments at its disposal — its highest amount ever. In short, there isn’t a company on earth more prepared to invest in undervalued companies when there are opportunities.
Berkshire can grow its book value per share by investing in good opportunities, taking advantage of its enormous cash pile. But the company can also boost shareholder value by repurchasing its own shares, which is one of its favorite activities.
Buffett or Abel might make a bad decision or two in the future, setting back progress. But even if this happens, one of the great things about Berkshire is that it provides its decision-makers with a constant source of new cash. Not only are its wholly owned businesses profitable and increasing their earnings potential, the company also owns a portfolio of dividend stocks that provides billions of dollars of annual income.
When looking at Berkshire Hathaway holistically, it seems likely that it will find ways to increase its book value, whether it’s still Buffett in charge or whether Abel takes over. And I find it likely that the company will join the trillion-dollar stock club before 2030.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Berkshire Hathaway, and Meta Platforms. The Motley Fool has a disclosure policy.