The Bill & Melinda Gates Foundation (BMGF) is engaged in various philanthropic activities around the world, and the organization had made grant payments totaling $78 billion as of December 2023. This charitable gift is made possible by the BMGF Trust, which invests the foundation’s donations.
Importantly, the BMGF Trust returned 11.4% annually over the three-year period ending June 2024. Meanwhile, the S&P500(SNPINDEX: ^GSPC) returned 10% annually during the same period, including dividends. This outperformance makes the BMGF Trust a good case study for individual investors.
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As of June 2024, the BMGF Trust had $48 billion across 23 positions, but 54% of the funds were concentrated in just two stocks: 33% were allocated to Microsoft(NASDAQ: MSFT) and 21% was invested Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B). Both stocks have been brilliant investments over the past three years, as they easily outperformed the S&P 500.
Here’s what investors need to know about Microsoft and Berkshire.
Microsoft has two major growth engines in commercial software and public cloud services, and has a strong competitive position in both areas. Indeed, Morgan Stanley estimates that its market share in commercial software will approach 19% this year thanks to strong performance in business productivity (Office), enterprise resource planning (Dynamics) and business intelligence (Power Platform) products.
Microsoft has been steadily gaining market share in software in recent years, and that pattern is likely to continue as the company integrates artificial intelligence (AI) features into its products. For example, the generative AI assistant Microsoft 365 Copilot was made generally available last November, and nearly 70% of Fortune 500 companies have already adopted it.
Microsoft is truly formidable because it combines leading commercial software with cloud infrastructure and platform services (CIPS). Granted, according to Synergy Research Group, its cloud computing unit Azure has lost 3 percentage points of CIPS market share over the past year. But Rishi Jaluria of RBC Capital believes Microsoft is better positioned than other major public clouds thanks to its unique partnership with OpenAI.
Overall, Microsoft reported encouraging financial results in the first quarter of fiscal 2025, ending September 2024. Revenue rose 16% to $65.6 billion thanks to particularly strong revenue growth in cloud services. Meanwhile, GAAP earnings rose 10% to $3.30 per diluted share. Importantly, the recent acquisition of Activision added 3 points to revenue growth and subtracted 2 points from earnings growth.
CEO Satya Nadella said: “Our AI business is on track to surpass $10 billion in annual revenue next quarter, which will make it the fastest company in our history to reach this milestone.” Morgan Stanley analysts believe this figure could rise 53% annually to $67 billion by fiscal 2029, and they see Microsoft as “the clearest AI winner in software.”
Looking ahead, Wall Street expects Microsoft’s profits to grow 14% annually through 2028. That makes the current valuation of 35 times earnings expensive. However, Microsoft deserves a premium valuation due to its strong competitive position in the commercial software and cloud services markets. Investors who are comfortable with volatility may consider buying a small position here.
Berkshire Hathaway is a holding company that owns a diverse group of subsidiaries engaged in businesses ranging from freight rail and manufacturing to retail and utilities. However, the insurance activities are most important because they generate investable capital called ‘float’, a term referring to insurance premiums collected from policyholders that have not yet been paid out in the form of claims.
Berkshire is the world’s leading insurance float, meaning it has more capital available for investments than other insurance companies. CEO Warren Buffett and his co-investment managers Todd Combs and Ted Weschler have used that money to great effect. Berkshire’s book value per share (a good measure of intrinsic value) has risen about 80% over the past five years.
Importantly, the company has actually been paid to invest that money, because the insurance segment regularly makes profits through disciplined underwriting. For example, Berkshire has achieved a combined ratio of 89% year to date, which is well below the industry average of 101.5%. Values below 100% correspond to profitable adoption.
Berkshire narrowly missed Wall Street expectations in the third quarter. Operating earnings, excluding gains and losses on equities, fell 6% to $10.1 billion. That was 4% less than the consensus forecast. The deficit was mainly due to a decline in insurance revenues, offset by an increase in revenues in the energy and rail freight segments.
Wall Street expects Berkshire’s operating profits to grow 5% annually through 2026. That makes the current valuation of 24 times operating profits pricey. Buffett seems to agree. He opted not to buy back shares in the third quarter of 2024, the first time he hasn’t bought shares in 25 quarters. That suggests Berkshire’s stock is overvalued in his opinion.
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*Stock Advisor returns November 4, 2024
Trevor Jennevine has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Billionaire Bill Gates has invested more than 50% of his trust in two brilliant stocks, originally published by The Motley Fool
