After its recent blowout earnings, Nvidia (NASDAQ:NVDA) was the seventh stock to join the trillion-dollar club. However, the stock is up almost 200% year-to-date and might not present value. So, what undervalued companies to invest in will likely eclipse this milestone in the future?
For starters, trillion dollar potential stocks must already be large enough. It’s easier for a large-cap stock to reach that market capitalization than a small-cap stock. After all, a $500 billion stock only needs to double, whereas a $5 billion midcap needs to be 200x.
Secondly, the stock must have solid fundamentals. More so, revenues and earnings must grow to support an increasing capitalization. Stocks with upside potential maintain a healthy EPS growth trajectory attracting investor interest over the long term.
Here are some undervalued companies to invest in. Already, these companies are mega caps meaning their total market cap exceeds $200 billion. In addition, their EPS growth rate over the next five years is over 20%. Lastly, they are undervalued based on their historical earnings multiples.
Berkshire Hathaway (BRK-A, BRK-B)
Given its greater than $700 billion market valuation, Berkshire Hathaway (NYSE:BRK-A,NYSE:BRK-B) is on its way to a $1 trillion market cap. This Omaha-based company is a conglomerate with diverse operating businesses ranging from financial services to utilities.
Over the decades, the founder and CEO, Warren Buffet, has garnered a reputation as one of the best investors. He has been a great risk manager and steward of capital, making timely investments that bore enormous returns. As he notes in the 2022 shareholder letter, “Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate.”
Berkshire is in excellent financial shape. First, they have a best-in-breed investment portfolio concentrated in some of the best American businesses. Per the latest 13F filing, Apple (NASDAQ:AAPL), Bank of America (NYSE:BAC), American Express (NYSE:AXP), Coca-Cola (NYSE:KO) and Chevron (NYSE:CVX) made up over 70% of the portfolio. It was worth $328 billion as of March 31.
Then, there are diversified operations in insurance, railroads, energy and utilities. These are competitively advantaged businesses that dominate their respective industries. For instance, the auto insurance company, Geico, has the second-largest U.S. market share after State Farm. Likewise, rail operator BNSF is the largest rail company in terms of revenues in North America. These businesses generated $30.8 billion in operating earnings in fiscal year (FY) 2022.
It’s a surprise that given the strength of Berkshire, it’s yet to hit a $1 trillion valuation. One reason is that it might suffer from conglomerate discounts. Another factor could be that investors are wary of what will happen when Warren Buffet is no longer CEO.
But this is an opportunity for investors looking for stocks with upside potential. As of this writing, Berkshire has a market cap of $740 billion. Q1 2023 results showed that its equity portfolio was worth $328 billion and it had over $130 billion in cash on its balance sheet. Therefore, at current levels, you are buying the rest of the business at under 12 times trailing operating earnings.
Taiwan Semiconductor (TSM)
Despite the treacherous geopolitical landscape, Taiwan Semiconductor (NYSE:TSM) is one of the best undervalued companies to invest in. Yes, the threat of a Chinese invasion of Taiwan looms large, but this might be exactly why the stock presents an opportunity. China might be unwilling to shoot itself in the foot by disrupting the semiconductor ecosystem it hugely benefits from.
In terms of fundamental performance, Taiwan Semiconductor has crushed the competition. It is a foundry – semiconductor manufacturer – with a substantial competitive advantage over peers. Over the last decade, it has dominated the chip manufacturing industry in producing leading-edge node chips.
Given its colossal technology advantage, companies such as Nvidia, Apple and Qualcomm (NASDAQ:QCOM) have increasingly outsourced their chip production to this company. Now AI is taking center stage, and TSM stock is having a resurgence. The company is experiencing a surge in AI-related orders from chip designers like Nvidia.
Analysts expect revenue growth to resume in FY2024 due to a monopoly in leading-edge node production. Competitors like Intel (NYSE:INTC) cannot manufacture leading-edge smaller node chips leaving the entire market to Taiwan Semiconductor. As my colleague David Moadel noted, TSM will ride the AI boom higher.
Currently, the market cap is approaching $500 billion. If the valuation discount with other semiconductor peers closes, it could easily reach a $1 trillion valuation. Such a scenario is reasonable since the stock trades at an inexpensive forward P/E of 17.
ASML Holding NV (ASML)
ASML Holding NV (NASDAQ:ASML) is one of the critical players in the semiconductor industry. It develops and produces advanced lithography systems used by semiconductor manufacturers deriving 62% from extreme ultraviolet (EUV) and the rest from deep ultraviolet (DUV) systems. These systems are essential for manufacturing next-generation semiconductor chips with smaller feature sizes and increased complexity.
According to Fitch, the Dutch-based company has over 90% market share in the overall lithography system market. Additionally, the company has a monopoly in EUV tools used to produce advanced 7nm, 5nm or 3nm nodes. This dominance guarantees demand, making ASML one of the top undervalued companies to invest in.
Given its monopoly, it is a candidate for the trillion dollar potential stocks list. Major semiconductor manufacturers worldwide have no other supplier for advanced tools. They rely on ASML systems to produce high-performance chips used in smartphones, data centers, autonomous vehicles and artificial intelligence.
Looking ahead, ASML is among the top semiconductor stocks with upside potential. As AI and autonomous systems adoption increases, revenues are soaring. In the first quarter, the company reported net sales of €6.7 billion, up 91% year-over-year. Management was optimistic, forecasting a 25% revenue increase in 2023. Also, backlog was approximately €39 billion, almost twice the expected sales in FY2023.
On valuation, the stock is still reasonably priced despite the massive year-to-date rally. According to Finviz, the company will grow EPS at 29.80% over the next five years. Considering this stellar forecast, the stock is a bargain at a forward P/E of 30.
On the date of publication, Charles Munyi did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
