Breakingviews: Trillionaire club throws an indulgent theme party

The trillionaire club is growing quickly. Six years ago, Apple became the charter member, not long before oil titan Saudi Aramco publicly debuted with a 13-digit market capitalization. Few would have predicted five more inductees so soon, and investors are nudging even more companies to join. Chipmaker Broadcom is riding an artificial intelligence wave just like Nvidia, Microsoft, Amazon.com, Alphabet and Meta Platforms. Eli Lilly is on its way thanks to the anti-obesity craze. Hyped megatrends sparking giddy valuations, however, will inevitably lead to disappointment.

Broadcom, under boss Hock Tan, has been expanding by acquisition. It bought several rivals before paying almost $70 billion last year for cloud-computing software developer VMware. The deals have enabled it to slash costs and raise prices. The $839 billion company’s total return for shareholders, including reinvested dividends, has been an eye-popping 3,200% over the past decade. Its AI-linked chips also have started to draw comparisons to Nvidia, which just overtook Microsoft as the world’s most valuable company and whose $3.3 trillion market cap exceeds the entire Russell 2000 Index.

Lilly, at $847 billion, is cashing in on the surging desire for weight-loss medications. Its Zepbound molecule, also used to treat diabetes, generated $5.3 billion of revenue last year. The only limitation now is production, as the market it shares with Novo Nordisk rumbles toward $100 billion annually by 2030, according to Goldman Sachs analysts.

The doubling of Broadcom’s and Lilly’s market values in a year makes thematic investing seem easy and the somewhat arbitrary expectations fun. Even Warren Buffett’s Berkshire Hathaway conglomerate is on track to be part of the group, boosted by its large holding of Apple stock. It’s easy to forget that fiberoptics and Dow 10,000 hats were all the rage in 1999, and darkly ironic a decade later.

Both the chipmaker and the drugmaker also face valid questions about whether their valuations reflect overly excessive growth projections. Lilly trades at 18 times anticipated revenue for the next 12 months, or more than 3 times peer Merck’s multiple, based on LSEG data. Its patent protection will eventually lapse, however, and rivals could roll out better therapies even sooner.

Broadcom’s stock trades at 32 times estimated earnings, or twice its 10-year average. Its most recent quarterly revenue increased just 12% from a year earlier after excluding VMware’s contributions; semiconductor sales grew 6%. Other companies built around buying and cutting, such as cheese-and-ketchup purveyor Kraft Heinz, have struggled to sustain the business model. It all makes the four-comma theme party look indulgent.