The Bill & Melinda Gates Foundation (BMGF) engages in various philanthropic activities around the world, and the organization had issued grant payments totaling $78 billion as of December 2023. That charitable giving is made possible by the BMGF Trust, which invests the foundation's endowment.
Importantly, the BMGF Trust returned 11.4% annually during the three-year period that ended in June 2024. Meanwhile, the S&P 500(SNPINDEX: ^GSPC) returned 10% annually during the same period, including dividends. That outperformance makes the BMGF Trust a good case study for individual investors.
As of June 2024, the BMGF Trust had $48 billion spread across 23 positions, but 54% of the funds were concentrated in just two stocks: 33% were allocated to Microsoft(NASDAQ: MSFT) and 21% were invested in Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B). Both stocks were brilliant investments over the last three years in that they handily outperformed the S&P 500.
Here's what investors should know about Microsoft and Berkshire.
Microsoft: 33% of the BMGF Trust
Microsoft has two important growth engines in commercial software and public cloud services, and it has a strong competitive position in both areas. Indeed, Morgan Stanley estimates its market share in commercial software will apporach 19% this year due to strength in business productivity (Office), enterprise resource planning (Dynamics), and business intelligence (Power Platform) products.
Microsoft has steadily gained software market share in recent years, and that patterns is likely to continue as the company integrates artificial intelligence (AI) features into its products. As an example, 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 pairs industry-leading commercial software with cloud infrastructure and platform services (CIPS). Admittedly, its cloud computing unit Azure lost 3 percentage points of CIPS market share during the past year, according to Synergy Research Group. But Rishi Jaluria at RBC Capital believes Microsoft is in a better position than other major public clouds due to its unique partnership with OpenAI.
Overall, Microsoft reported encouraging financial results in the first quarter of fiscal 2025, which ended in September 2024. Revenue increased 16% to $65.6 billion on particularly strong sales growth in cloud services. Meanwhile, GAAP earnings increased 10% to $3.30 per diluted share. Importantly, the recent acquisition of Activision added 3 points to sales growth and subtracted 2 points from earnings growth.
CEO Satya Nadella said, "Our AI business is on track to surpass an annual revenue run rate of $10 billion next quarter, which will make it the fastest business in our history to reach this milestone." Morgan Stanley analysts think that figure can compound at 53% annually to reach $67 billion in fiscal 2029, and they see Microsoft as "the clearest AI winner in software."
Looking ahead, Wall Street expects Microsoft's earnings to grow at 14% annually through 2028. That makes the current valuation of 35 times earnings look expensive. However, Microsoft deserves a premium valuation due to its strong competitive position in the commercial software and cloud services markets. Investors comfortable with volatility can consider buying a small position here.
Berkshire Hathaway: 21% of the BMGF Trust
Berkshire Hathaway is a holding company that owns a diverse group of subsidiaries that engage in activities ranging from freight railroad transportation and manufacturing to retail and utilities. However, the insurance businesses are the most important because they generate investable capital called "float," a term that refers to insurance premiums collected from policyholders that have not yet been paid out in claims.
Berkshire is the world leader in insurance float, meaning it has more capital available for investment 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 for intrinsic value) has increased about 80% over the last five years.
Importantly, the company has effectively been paid to invest that money because the insurance segment regularly turns a profit due to disciplined underwriting. For instance, 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 underwriting.
Berkshire narrowly missed Wall Street's estimates in the third quarter. Operating earnings, which excludes gains and losses on stocks, declined 6% to $10.1 billion. That was 4% short of the consensus forecast. The shortfall was primarily due to a decline in insurance-underwriting earnings, offset by an increase in earnings in the energy and freight railroad transportation segments.
Going forward, Wall Street expects Berkshire's operating earnings to grow at 5% annually through 2026. That makes the current valuation of 24 times operating earnings look pricey. Buffett seems to agree. He chose not to repurchase stock during the third quarter of 2024, the first time he did not buy shares in 25 quarters. That suggests Berkshire's stock is overvalued in his estimation.
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
