Berkshire Hathaway reaches the trillion-dollar mark: Is the stock overvalued?

On Wednesday, Berkshire Hathaway succeeded in joining the exclusive club of trillion-dollar companies, achieving a market capitalization of $1 trillion. Notably, Berkshire is the only US company to achieve this milestone without being a technology company. Instead, Berkshire's success stems from a mix of business segments that many investors consider rather unremarkable. With a share price now about 40% above the 52-week low and having increased by approximately 135% over the past five years, one might assume that Berkshire is now overpriced. However, it is worth taking a closer look at the company's valuation. Berkshire's valuation is complex, not least because of its more than 60 subsidiaries, extensive stock portfolio, and a large amount of cash reserves. The latter two components make the company appear more expensive by conventional valuation measures than it actually is. Additionally, due to an accounting rule, unrealized gains and losses from the stock portfolio must be included in earnings calculations, rendering the conventional price-earnings ratio nearly useless. CEO Warren Buffett himself has gradually placed less emphasis on the company's book value, which long served as a valuation metric. Fortunately, two of the three components are relatively easy to value individually. Berkshire's current market value is approximately $1 trillion. Of this, $277 billion is attributed to cash and cash equivalents, giving the company enormous financial flexibility to seize emerging opportunities and generate billions in interest income. After subtracting these cash reserves, a market value of $723 billion remains. Berkshire's stock portfolio has a collective market value of approximately $318 billion. After deducting these positions, a market value of $405 billion for the operating business areas remains. Considering these factors, Berkshire has an enterprise value of just over $400 billion. Last year, Berkshire's subsidiaries generated operating earnings of $42.1 billion. This means that Berkshire's operating business areas are trading for about 9.5 times the earnings achieved in the last 12 months. Even after excluding interest income from the operating earnings, the company still achieved a profit of $30.9 billion, resulting in a price-earnings ratio of about 13. This is for a collection of largely recession-resistant companies that increased their operating earnings by 26% in 2024. Therefore, it is difficult to argue that the stock is overvalued. Berkshire remains a reasonably valued collection of businesses, assets, and cash, with no signs of a downturn on the horizon. A key note: Analysts at The Motley Fool have identified the 10 best stocks to invest in right now, and Berkshire Hathaway is not among them. Companies like Nvidia, whose investments have already yielded enormous returns in the past, are on the list.