While Bill Gates famously founded Microsoft and has an impressive track record in technology, some of the largest investments within the Gates Foundation’s trust are not in tech. In fact, Gates would likely be worth over $1 trillion today had he held onto every share of the 45% stake he originally held in Microsoft after its 1986 public offering. Over nearly four decades, though, Gates has methodically sold off portions of his Microsoft holdings, opting to diversify his investment portfolio and donate substantial portions of his wealth to charitable causes.
Much of Gates’ generous giving has been directed towards the Bill & Melinda Gates Foundation, which focuses on improving global healthcare and reducing poverty. Gates isn’t alone in his philanthropic efforts. Since 2006, Warren Buffett has been a significant contributor, offering annual donations. Buffett, who led Berkshire Hathaway and served as a trustee until 2021, not only has shared his financial resources but also his strategic insight with the foundation.
Presently, the foundation’s trust boasts an equity portfolio worth around $44 billion. Surprisingly, just three stocks comprise about two-thirds of this portfolio.
It’s no shocker that Microsoft, the tech giant Gates co-founded, is the trust’s largest holding. For much of the foundation’s history, however, this wasn’t the case. Between 2002 and 2017, Microsoft shares did not appear in the foundation’s portfolio reports. It wasn’t until 2017 that Gates made his first donation of Microsoft shares since 2000.
He increased his donation in 2022, and by the end of September, the trust held nearly 29 million Microsoft shares, valued at around $12.5 billion. Recently, the trust has trimmed this particular holding by roughly 26%, primarily to fund grants and operations. Despite this reduction, the soaring value of Microsoft shares has retained their status as the trust’s largest stake.
Since July 2022, when Gates last made a donation of shares, Microsoft’s stock has surged over 60%. This impressive rise is largely due to the company’s strong position in leveraging generative artificial intelligence (AI). Microsoft was quick to invest in OpenAI, the brains behind ChatGPT, significantly expanding its investment in early 2023. This move has solidified Microsoft’s appeal to developers who use its cloud offerings to create AI-driven applications.
Its cloud computing arm, Azure, has been on a remarkable growth trajectory, recently posting a 33% increase in revenue. The company expects even faster growth as its new data center investments become operational. Additionally, Microsoft remains a top player in enterprise productivity software and PC operating systems, creating a solid base for promoting its Copilot AI services to a vast pool of users. The uptake of Copilot services is swift, with impressive sequential growth exceeding 50% across various options.
Currently, Microsoft’s shares trade at 33 times forward earnings, forming a notable premium over the broader market. Yet this price is arguably justified given Microsoft’s leadership in two critical AI sectors—cloud computing and enterprise software—and its accelerating growth. Moreover, consistent free cash flow generation supports the company’s share buyback initiatives, enhancing future earnings value for shareholders.
Shifting from tech, we find that Berkshire Hathaway constitutes 23% of the foundation’s trust portfolio. Warren Buffett has been contributing Berkshire Hathaway Class B shares to the Gates Foundation annually since 2006. He converts his Class A shares, known for their superior voting power, into Class B shares specifically to make these donations while retaining control over his company.
At the close of the third quarter, the foundation held about 22 million Berkshire Hathaway shares, valued at $10 billion. To manage the influx of Buffett’s annual donations, the foundation likely will sell some of these shares. Buffett has stipulated that his donation must be fully distributed by the foundation each year, in addition to an extra 5% of its net assets. The trustees have adeptly maintained a significant holding in the conglomerate while reallocating other investments.
Berkshire Hathaway’s value is largely derived from its sizable investment portfolio, currently estimated around $300 billion. It also maintains roughly $325 billion in cash and Treasury bills. Recently, Buffett has opted to divest from some of the company’s more significant holdings, preferring the security of Treasuries amid climbing stock prices. Meanwhile, Berkshire’s wholly owned businesses have delivered robust performance, with operating income rising by 17% over the first nine months of 2024.
This solid operational execution and favorable stock market trends have driven a 27% increase in Berkshire shares in 2024, marginally outperforming the S&P 500. Yet Buffett has expressed concerns about stock valuations, including those of Berkshire Hathaway, resulting in no share buybacks for the first time since 2018 during the third quarter of 2024.
Although the stock’s valuation has eased somewhat from its third-quarter high, it still trades around 1.6 times book value. However, considering Berkshire’s substantial cash reserves and strong operational outcomes, this premium pricing may be warranted. Buffett’s faith in the company is evident: a major portion of his net worth is tied to Berkshire Hathaway.
Lastly, Waste Management, making up 15% of the foundation’s trust, stands out as a long-term investment. Over the years, trustees have consistently added to this position. By the end of September, the foundation owned 32.2 million shares, valued at approximately $6.5 billion, even after offloading 3 million shares in the third quarter.
Though it might not be the most glamorous sector, Waste Management commands attention due to its strategic landfill ownership, which is critical amidst stringent regulatory barriers. These assets provide a competitive edge, with others paying fees to utilize its infrastructure.
The company enjoys several avenues for earnings growth. It possesses significant pricing power, had demonstrated its ability to hike prices effectively against inflation, and benefits from route density to improve operational profitability. Moreover, Waste Management has strategically acquired businesses like Stericycle to bolster its offerings.
These strategies have been successful, as evidenced by an 11% jump in EBITDA during the third quarter, fueled by record profit margins. Looking ahead to 2025, management anticipates a transformative increase in revenue, earnings, and free cash flow. Reflecting this confidence, the company raised its dividend by 10% for the year.
With a current enterprise-value-to-EBITDA ratio of 16, Waste Management’s valuation aligns with its historical average and its main competitors. Given its optimistic outlook, it might justify a premium pricing. This steadfast, prudent investment approach explains why the Gates Foundation has held onto its Waste Management shares for so long. It’s a sensible, strong-performing stock trading at a fair value.
