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We’ve recently seen a surge of interest in finding the next trillion-dollar company.
Perhaps it’s the recent successes of current trillion-dollar companies. Microsoft (NASDAQ:MSFT) has risen 28% this year, while Apple (NASDAQ:AAPL) has surged 37%. Or maybe the thought of missing out on a summer rally is becoming too great to ignore. Will any stock be able to ride it to a $1 trillion valuation?
Yet, becoming a trillion-dollar company is hard. A typical corporation needs to generate roughly $30 billion in annual free cash flow to achieve a justified value of $1 trillion, or at least be on track to doing so. This measures the actual amount of cash an enterprise generates after deducting necessary expenses.
Many firms also fail to maintain such lofty valuations.
The inflated $569 billion price tag Cisco (NASDAQ:CSCO) sported in 2000 (or $1 trillion in today’s dollars) lost 85% of its value as the dot-com mania subsided. Adjusted for inflation, the firm was only producing $8.1 billion in free cash flow at the time. Speculative cryptocurrencies like Bitcoin (BTC-USD) can do even worse. The world’s largest crypto has now surpassed the $1 trillion mark twice, only to disappoint investors each time.
The trick, of course, is knowing which companies will generate that magic $30 billion FCF figure, and which will not.
Some require an enormous leap of faith. Firms like Tesla (NASDAQ:TSLA) will need to create yet-to-be-invented streams of revenues to achieve $30 billion FCF, such as renting customer vehicles out as driverless taxis. These bets are only appropriate for risk-tolerant investors who don’t mind buying duds along the way.
Other companies have a far clearer path to $1 trillion. Maturing firms like Amazon in the late 2010s only needed to sell more online goods and cloud computing services. They didn’t have to invent businesses out of thin air.
Today, we’re going to examine five stocks to buy in this increasingly popular field of potential trillion-dollar companies.
InvestorPlace analyst Louis Navellier has been bullish on Nvidia (NASDAQ:NVDA) for years. It wasn’t so much the semiconductor designer’s focus on high-end graphic processing units (GPUs) – although that certainly helped.
Instead, Louis realized that the Silicon Valley chip company was incredible at figuring out how to make itself essential.
That ingenuity has transformed Nvidia from a videogame rendering firm into one at the forefront of machine learning. Its high-end processors are now used for everything from training new large language models to helping radiologists identify breast cancer from MRI images.
Essentially, GPUs have a far higher number of cores than ordinary central processing units (CPUs), allowing for simultaneous computations. By some estimates, GPUs are four to five times faster than CPUs – an enormous difference, because most large AI models can take months to train. Nvidia is the dominant firm in the high-end market.
That sets Nvidia, which currently is valued at around $700 billion, on the path to becoming the next trillion-dollar company. The company surpassed Cisco’s (inflation adjusted) $8 billion FCF mark two years ago, and analysts forecast well over $14 billion free cash flow by 2026. With GPU demand forecast to increase at almost 30% annually through 2030, Nvidia is a firm with one of the clearest trajectories to $1 trillion.
On the other hand, longtime readers will know that Louis has choice words for the banking sector. He spent years at what’s now the FDIC helping banks pass regulatory hurdles. Looking back, he calls it “putting lipstick on a pig.”
Nevertheless, financial firms are still an essential part of any economy. And as the industry develops beyond old-fashioned banking via fintech innovations, investors are beginning to have investment choices beyond risky “lipstick-on-a-pig” banks.
And that brings us to Visa (NYSE:V), a financial processing firm that generates revenues from merchants every time users make a purchase.
From a financial standpoint, Visa has a clear path to a trillion-dollar valuation. The company, whose market cap now stands at around $480 billion, generated $18 billion in free cash flow in 2022, and analysts believe that rate will grow roughly 10% per year as consumers worldwide increasingly abandon cash transactions. Remember that countries like India still lag in contactless payments.
Additionally, InvestorPlace analyst Luke Lango is now seeing a “goldilocks” moment for stocks, where America enjoys a soft landing. This economic stability is important for firms like Visa that rely on lucrative cross-border transactions from travelers. With the economy moving back on track, Visa will likely achieve a $30 billion FCF level by 2028.
Berkshire Hathaway (BRK-A, BRK-B)
Warren Buffett’s financial holding company is an extraordinarily lucrative enterprise that generated $22 billion of FCF in 2022.
Of course, the term “free cash flow” needs to be used loosely here. Berkshire relies on subsidiaries to generate cash, and modern accounting rules treat these figures differently depending on the levels of ownership. A small equity stake, for instance, will only count the equity value of the investment.
Nevertheless, it’s a metric that’s helpful in understanding the value of Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B). The company’s incoming CEO, Greg Abel, is known as an astute dealmaker. This means Berkshire will likely find ways to expand long after current management at the company retires.
And because the firm distributes only a small fraction of its cash back to shareholders, Berkshire Hathaway naturally grows larger over time. (It currently has a market cap of around $708 billion.) In a sense, it’s like filling an empty swimming pool without draining any water.
That naturally puts the Omaha, Nebraska-based firm on a path to generating $30 billion of cash per year within the decade. For risk-averse investors seeking stable growth, Berkshire Hathaway is an ideal holding for the long run.
Exxon Mobil (XOM)
This is perhaps the strangest company on this list. It’s a company that generated $58 billion in free cash flow in 2022, yet trades well under the $1 trillion mark.
The reason for this mismatch is simple:
Investors don’t believe Exxon Mobil (NYSE:XOM) can maintain a $30 billion-plus FCF for long.
Analysts expect the energy giant will see cash flows shrink to $41 billion this year and $39 billion the next as energy prices stall and electric vehicles replace gas-guzzling ones.
We’re broadly of a different mind here at InvestorPlace.com. This week, Eric Fry notes that the International Energy Agency now believes that the oil market will fall into a 400,000 barrel-per-day (BPD) deficit soon, then swell to a 2-million-BPD deficit in the second half of the year. Reasons include unexpectedly strong Chinese demand, an OPEC+ cut, and a general unwillingness of American drillers to boost production.
That means Louis’ $100-per-barrel oil prediction could happen as soon as this summer, if not by the end of the year. Such a reversal will reduce Exxon’s historic price discount and send shares higher. (Its market cap is now at around $430 billion.)
Longer term, Exxon has also shown an ability to profitably adapt to new situations. InvestorPlace.com’s Josh Enomoto notes that Exxon has 40 years of consecutive annual dividend increases, a feat achieved by expanding into offshore drilling, horizontal fracking, and downstream chemical production.
As governments increasingly push EV adoption, don’t be surprised if Exxon surprises investors once again.
Meta Platforms (META)
Finally, Facebook’s parent could soon regain its trillion-dollar crown.
Social media giant Meta Platforms (NASDAQ:META) first became worth $1 trillion in June 2021 on an accelerating advertising business. At the time, analysts believed the firm would generate $33 billion the following year.
That didn’t go to plan. The company would instead post $19 billion in free cash flow due to a slowdown in online advertising and mounting losses from its virtual reality business. Meta’s market capitalization sank as low as $250 million last year. (It’s inched back up to around $600 billion.)
Still, Luke sees Meta as a promising bet. Earlier this month, he noted that the firm’s aggressive cost-cutting measures and improving ad business were already showing positive results. And soft inflation figures from earlier this week set the stage for a summer stock surge. Facebook is historically more sensitive than its peers to market cycles.
That means a recovery could happen faster than expected. FCF is now expected to recover to $23 billion this year and hit the “magic” $30 billion level in 2024. Heavy advertising spending from the 2024 presidential election means these figures will likely play out this time around.
Free Cash Flow: Boring, But Vital
There’s nothing attractive about the term “free cash flow.”
It conjures no imagery of “growth” or “innovation.” Nor does it sound much like “intrinsic value” or “cheapness” for the value investors out there.
The term is also merciless in penalizing cash costs as they happen. If a company suffers a fire at a warehouse, FCF doesn’t care that it’s a one-time loss or who started the blaze. It only cares about how much money the insurance firm sends back.
Predicting the next trillion-dollar companies requires this unsparing level of reality.
That’s because hype alone is rarely enough to move companies into the trillion-dollar club. Cisco, Bitcoin, and Tesla joined that group only briefly before reality set in (inflation adjusted, of course, for Cisco).
On the other hand, shares of companies that produce enormous amounts of cash have no choice but to only go up.
For his part, Luke says investors are starting to realize that their dream of a “soft landing” is coming true.
He and his team are confident that over the next few months, the Fed will stop its rate-hiking campaign. Meanwhile, they believe, the economy will avoid a recession due to job market resilience.
And he says you can start capitalizing on them – including our potential trillion-dollar companies – now.
As each economic report makes his predicted outcome more visible and likely, Luke says, stocks will keep pushing higher.
On the date of publication, Tom Yeung held a LONG position in GOOG. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.