Is Berkshire Hathaway a Millionaire Maker?

Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%) has minted many millionaires over the past six decades. If you had invested $10,000 in Berkshire on May 10, 1965 -- the day Warren Buffett's investment fund took full control of the struggling textile maker -- your investment would be worth a whopping $381.9 million today.

Under Buffett, Berkshire liquidated its textile business, acquired insurance and energy companies, and expanded into other industries. It now directly owns well-known brands like GEICO, BNSF Railway, Dairy Queen, Fruit of the Loom, Duracell, Acme Brick, and See's Candies. It used the cash from those subsidiaries to expand its investment portfolio, which is now worth over $300 billion and holds massive stakes in blue chip giants, like Apple (AAPL -1.32%), American Express, Bank of America (BAC -0.47%), Coca-Cola, and Chevron.

Image source: The Motley Fool.

From 1965 to 2023, Berkshire's net earnings grew at a compound annual growth rate (CAGR) of 20%, from $2 million to $96.2 billion. It expanded and evolved into one of the world's largest conglomerates and is still a beloved stock among long-term investors. But could Berkshire generate even more millionaire-maker gains in the future?

How fast has Berkshire Hathaway been growing?

Berkshire Hathaway's complexity and diversification can make it a tough company to understand. But Warren Buffett usually splits it into two distinct divisions: its wholly owned subsidiaries and its investment portfolio.

For its core business, Buffett prefers to use its proprietary "operating earnings" metric -- which excludes capital gains or losses from its investment portfolio -- instead of its net earnings on a generally accepted accounting principles (GAAP) basis. Buffett says the non-GAAP metric filters out the near-term noise from the volatile stock market.

Its total operating earnings grew 26% in 2021, 12% in 2022, and 21% in 2023. The accelerating growth of its insurance underwriting and investment businesses offset the macro headwinds for its railroads, utilities, and energy businesses last year.

Data source: Berkshire Hathaway.

Berkshire only reports its operating earnings once a year. But in the first nine months of 2024, its net earnings (which include the profits and losses from its investment portfolio) grew 18% year over year as the market recovered and it sold some of its top stock holdings -- including Apple and Bank of America -- to raise more cash.

At the end of the third quarter of 2024, Berkshire's cash, cash equivalents, and short-term Treasury holdings rose 94% year over year to a record high of $325.2 billion. That big rotation toward cash, along with its slowing buybacks, suggested Buffett was bracing for a market pullback after the S&P 500 set new record highs over the past year.

Berkshire Hathaway's stock has rallied about 55% over the past three years, and it looks historically expensive at 26 times its operating earnings for 2023. Five years ago, it was trading at 21 times its trailing operating earnings for 2018.

Some investors might wonder whether it can still justify that higher valuation as it loses its original leaders. Warren Buffett will retire soon and hand the reins over to Greg Abel, the chairman and CEO of Berkshire Energy. Ajit Jain, who served as Berskhire's insurance chief for nearly four decades, sold more than half of his shares earlier this year and could also retire in the near future. Buffett's longtime partner, Charlie Munger, who served as Berkshire's vice chairman, passed away in 2023.

If Berkshire's next generation of leaders fails to stick with Buffett's slow but steady focus on expanding its cash-rich businesses and investing in undervalued stocks, it could lose its luster as an evergreen investment.

Could Berkshire Hathaway be a millionaire-maker stock?

Berkshire Hathaway generated massive gains for its early investors, and it's consistently outperformed the S&P 500 since Buffett took the helm in 1965. But with a market cap of nearly $1 trillion, it's doubtful it will turn a fresh $10,000 into $1 million again anytime soon. For that to happen, Berkshire's market cap would need to reach $100 trillion. The world's most valuable company, Apple (which is still Berkshire's top holding), currently has a market cap of $3.9 trillion.

From 2018 to 2023, Berkshire grew its operating earnings at a CAGR of 8.6%, even as the pandemic, geopolitical conflicts, inflation, and high interest rates rattled the market. Assuming interest rates decline and the macro environment warms up, I believe Berkshire could grow its operating earnings at a CAGR of 10% from 2023 to 2034.

If that happens and it trades at a more conservative 20 times its operating earnings by the final year, its market cap could nearly double to $1.94 trillion. That would be a solid long-term gain, but it would be less impressive than its 200% return over the past decade.