The Bill & Melinda Gates Foundation (BMGF) engages in various philanthropic activities around the world. The grant payments made by the organization come from the BMGF Trust, which holds and invests the endowment.
The BMGF Trust has outperformed the S&P 500 by 13 percentage points in the last three years, due in part to concentrated positions in two megacap stocks. As of September, 28% of the portfolio was invested in Microsoft (MSFT 0.11%) and 23% was invested in Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.15%).
These companies operate in very different parts of the economy, but both have been brilliant investments. During the three-year period that ended in September 2024, Microsoft returned 52% and Berkshire returned 68%, while the S&P 500 advanced 33%. Here’s what investors should know about these megacap stocks.
Microsoft: 28% of the BMGF Trust
Microsoft has two important growth engines in enterprise software and cloud services and already has a strong position in both markets. It’s the largest software company and second-largest public cloud, as measured by sales. But Microsoft is leaning on artificial intelligence (AI) in both areas to create new revenue streams.
Microsoft 365 Copilot is a generative AI assistant that automates tasks across its office productivity software. That includes revising text in Word, creating slides in PowerPoint, and organizing data in Excel.
Nearly 70% of Fortune 500 companies use the product. Similarly, Copilot Studio lets businesses build custom AI assistants, and its user base doubled sequentially in the last quarter.
In cloud computing, Microsoft Azure lost 3 percentage points of market share in the September quarter, but its partnership with OpenAI is an important advantage. It positions Azure as the sole cloud provider to OpenAI, such that it benefits from ChatGPT usage. Additionally, usage of Azure OpenAI Service, which lets businesses integrate OpenAI models into custom generative AI applications, doubled in the last six months.
CEO Satya Nadella told analysts on the recent earnings call, “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 analyst Keith Weiss sees Microsoft as the “clearest AI winner in software.” He estimates AI revenue will jump 160% to $26 billion by fiscal 2026 (ends in June 2026). That could help Azure regain lost market share.
Wall Street expects Microsoft’s earnings to grow at 13% annually through fiscal 2026. That makes the current valuation of 37 times earnings look rather expensive.
I think investors should wait for a better buying opportunity. But among the 59 analysts following Microsoft, the median target is $500 per share. That implies 12% upside from the current share price of $446.
Berkshire Hathaway: 23% of the BMGF Trust
Berkshire Hathaway is a holding company with dozens of subsidiaries that operate across a diverse range of industries, including insurance, freight railroad transportation, manufacturing, retail, and utilities. However the insurance businesses are the most important because they generate “float,” which is investable cash in the form of policy premiums that haven’t 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 understudies, Todd Combs and Ted Weschler, have invested that money to great effect. Berkshire’s book value per share, a good measure of intrinsic value, has increased by 11% annually over the last three years.
Buffett says the company has historically paid “less than nothing” for its float. That means its insurance business has been profitable on a cumulative basis, which reflects disciplined underwriting. Indeed, Berkshire achieved a combined ratio of 89% through the first three quarters of 2024, better than the industry average of 98%. Values below 100% indicate profitable underwriting.
Wall Street expects Berkshire’s operating earnings to increase by 4% annually through 2025. That consensus makes the current valuation of 24 times operating earnings look expensive. Also, shares currently trade at 1.57 times book value, a small but important premium to the three-year average of 1.46. Finally, Buffett chose not to repurchase stock in the most recent quarter, marking the first time he has not bought shares in 25 quarters.
In short, Berkshire is an excellent company, but the stock is relatively expensive today. Even Buffett seems to agree.
I think investors should wait for a better entry point before buying the stock. Among the six analysts following the company, the median target is $531 per share, which implies 15% upside from the current share price of $461.
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.
