Apple (NASDAQ:AAPL) was the first company to reach $1 trillion in market capitalization in 2018. Value creation has continued, with its market valuation topping $3 trillion in June 2023. Apple is a good example of stories driven by innovation that are a buy-and-hold forever. While AAPL stock remains interesting, I am on the lookout for the next trillion-dollar companies. Without a doubt, there will be major growth stories in the coming years that will translate into a surge in market valuation.
It won’t be just companies with sizzling growth entering the trillion-dollar club. There will be blue-chip stocks that gradually create value. This column focuses on these stocks with an investment horizon of five years.
A key screener is the cash flow potential. Ultimately, valuation depends on the company’s ability to generate cash. Apple’s core business is a cash flow machine allowing it to invest in dividends, share repurchases, acquisitions and product development.
Let’s talk about three potential trillion-dollar companies.
Chevron (CVX)
There is no doubt that policymakers globally are focusing on green energy. However, it’s too early to declare that the days of fossil fuel are over. Also, crude has declined due to sluggish global growth. With potential rate cuts impending next year, buying oil and gas stocks is a good opportunity. Chevron (NYSE:CVX) is one stock likely to create immense value.
After a decline of 18% year-to-date, CVX stock looks undervalued. Further, the stock offers a dividend yield of 4.17%. Given the company’s low break-even assets and ability to generate strong cash flows, I am currently bullish.
To put things into perspective, Chevron reported operating cash flow of $9.7 billion for Q3 2023. This translates into an annual cash flow potential of $40 billion. Additionally, cash flows will swell with the impending acquisition of Hess Corporation (NYSE:HES). After the acquisition, Chevron expects an annual capital expenditure of $19 billion to $22 billion. These investments will translate into production growth and further upside in free cash flows.
Salesforce (CRM)
Salesforce (NYSE:CRM) stock has surged by 86% year-to-date. However, valuations look reasonable, with the stock trading at a forward price-earnings ratio of 30.7. Salesforce has a big addressable market, ample headroom for growth, and has delivered healthy cash flows.
As an overview, Salesforce describes itself as the leading AI-driven customer relationship management company. By 2026, Salesforce believes its solutions will have a total addressable market of $290 billion. With presence across industries and geographic diversification, the growth outlook is robust.
For Q3 2023, Salesforce reported healthy revenue of $8.72 billion, and the outlook for Q4 is also positive. However, I want to focus on the cash flows. For the year’s first nine months, Salesforce reported operating cash flow of $6.8 billion. This implies an annual OCF potential of $9 billion. Further, the company has cash and equivalents of nearly $12 billion as of Q3. The cash flow potential and a healthy liquidity buffer provide scope for aggressive expansion and investment in product development.
Costco Wholesale (COST)
Costco Wholesale (NASDAQ:COST) might race ahead of Walmart (NYSE:WMT) to become the first trillion-dollar retail stock. Of course, I am talking about traditional retail and not the likes of Amazon (NASDAQ:AMZN).
It’s worth noting that retail stocks have faced inflation-related challenges coupled with macroeconomic headwinds. However, COST stock has been a performer with an upside of 34% year-to-date. I expect strong comparable store sales growth to sustain the positive momentum.
An important point is that Costco has 738 warehouses in the United States, Canada and Mexico. Overall, the company has 861 warehouses globally. There is a significant concentration in North America. With just five warehouses in China, there is ample scope for expansion and growth.
Costco has also generated $4.6 billion in membership fees in the last 12 months. I expect recurring membership fees to swell further in the coming years. This will boost key margins and cash flows.
On the date of publication, Faisal Humayun did not hold (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.
