In this piece, we will take a look at the ten best magic formula stocks for the rest of 2024.
One of the best known investment strategies on Wall Street, and one that’s also followed by investing greats the like of Warren Buffett of Berkshire Hathaway and Seth Klarman of Baupost Group is value investing. Another fund manager who has delivered fantastic returns through a value based approach is Joel Greenblatt. Greenblatt currently runs the hedge fund Gotham Asset Management, a fund that he set up in 2008 after moving forward from his previous fund called Gotham Capital.
Greenblatt is among the fund managers that have consistently delivered double digit percentage returns during their career on Wall Street. His previous firm, Gotham Capital, had an amazing run between 1985 and 1994. During this time period, the firm delivered a net return of 34%. This was particularly impressive, as 1985 was the year in which Gotham Capital was founded. On an annualized basis, the fund’s returns were even stronger, since during the same period, Greenblatt’s fund delivered 50% in returns.
The hallmark of a value investing strategy, as you’ll understand if you study Warren Buffett’s investment strategy in detail, is patience. This also applies to Greenblatt, who typically waits for at least a couple of years after making an investment to reap the returns. But while patience might be a virtue, on Wall Street, it’s the returns that matter. On this front, Greenblatt hasn’t disappointed, as his fund’s blazing run in the 1980s wasn’t its only one. After setting up Gotham Asset Management in 2008, the value investor managed multiple funds. Two of these were the Gotham Absolute Return (AR) fund and the Gotham Neutral fund. Among these, the AR fund was set up in 2012, and between then and 2018, its returns sat at 58.6%.
However, while these returns are impressive, this period was filled with ups and downs for the investment vehicle. For instance, 2013 was one of the best years for this fund as it posted 29.82% in returns. These gains were trimmed down to 9.31% in 2014. While these weren’t as strong as the previous year’s performance, they were nevertheless in the green. This is important since the next year wasn’t great by any account, since in 2015, the AR fund ended up with -10.25%. 2016 was somewhat turbulent for American stock markets since the Brexit vote in the UK, slowing Chinese GDP growth, and a commodities slump led to US and global stocks dipping between the end of 2015 and the first half of 2016. Between June 2015 and late February 2016, the blue chip Dow index had lost roughly 9% and the broader NASDAQ had bled a much higher 11%.
The next year would see Greenblatt bounce back. In 2016, the fund delivered 7.97% in returns and accelerated its performance later on through posting 10.03% in gains. During these same years, i.e., in 2014, the Gotham Neutral fund’s annualized returns had sat at 6.83%.
Since the onset of the coronavirus pandemic in late 2019, the stock market has been operating in a changed environment. The pandemic’s immediate aftermath saw major stock indexes crash by 30%+, which then led to the Federal Reserve reducing rates to near zero levels. The subsequent low cost of capital, the boom in demand for consumer technology products, and the rise in retail investing then saw markets soar. During this time period, i.e., the bottom in March 2020 and the peak of December 2021, Greenblatt’s AR fund was up by 55% while the flagship S&P index gained 103%. This might make you think that perhaps the investor, who calls his investment approach a ‘Magic Formula’ had lost its magic.
But you’d be wrong. The magic of the Magic Formula was visible during the next phase of the stock market. This was marked by the Federal Reserve’s rapid interest rate tightening cycle that came in response to soaring inflation. Between December 2021 and October 2023, inflation continued to rise, as the interest rates took their sweet time to make a mark. This meant that the flagship S&P was down by 13.6% from 2021 close to the end of October 2023.
However, during the same period, the AR fund had gained 3.41%. A short strategy had helped Greenblatt, it seems, as the AR fund advertises itself as being 50% to 60% net long. Gotham’s pure play long fund, which is 100% long, led the S&P in losses during this time period as it had lost 15.52% during the same period and a stronger 27% from its peak in November start. However, the magic was visible between the March bottom and the November 2021 peak as during this period the 100% long fund had gained 97% to nearly match the flagship index.
Before we head to our list of the best Magic Formula Stocks, it’s also important to take a brief look at what this investment technique entails. Greenblatt’s strategy is based on two metrics, the return on capital employed (ROCE) and the earnings yield. In a simple implementation, stocks are ranked according to these metrics, and the top stocks are bought and held for the long term. A specialty implementation is what Gotham calls its Gotham Yield. According to the fund, this is a proprietary technique that assesses a firm’s “pre-tax cash flow, return on capital, and enterprise value.”
With these details in mind, let’s take a look at the ten best magic formula stocks to buy.
Joel Greenblatt of Gotham Asset Management
Our Methodology
To make our list of the best magic formula stocks to buy, we ranked the stocks present in Gotham Asset Management’s Q2 2024 SEC filings by their dollar value and picked out the most valuable holdings.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Investors In Q2 2024: 80
Gotham Asset Management’s Q2 2024 Stake: $31.8 million
Johnson & Johnson (NYSE:JNJ) is an American pharmaceutical giant that is headquartered in New Brunswick, New Jersey. One of the biggest pharmaceutical and general well being companies in the world, it benefits from a robust supply chain, diversified markets, and the resulting economies of scale. However, this also means that in case it makes a mistake, the costs are high. This has been the case in 2024 as Johnson & Johnson (NYSE:JNJ) has struggled to settle with consumers who were affected by its talcum powder. It has agreed to pay $700 million as settlements, and the dispute moved forward in August when Johnson & Johnson (NYSE:JNJ) sources claimed that the firm could announce bankruptcy to help with the whopping $6.4 billion in lawsuits that it is facing. However, Johnson & Johnson (NYSE:JNJ)’s size, as evidenced by its cash and equivalents of $ means that it can focus on growth initiatives while it battles mega lawsuits. In 2024, it announced a cumulative of $15 billion of acquisitions and rights purchases that include two medical device companies and a skin disease drug. These growth initiatives are important since Johnson & Johnson (NYSE:JNJ) might lose exclusivity rights to its arthritis drug Stelara in 2025.
Johnson & Johnson (NYSE:JNJ)’s management shared details for its medical device growth plans during the Q2 2024 earnings call:
“Turning to MedTech, we continue to advance our pipeline, launch new commercial products and integrate strategic acquisitions that broaden and further differentiate our portfolio. In cardiovascular, we are enhancing our portfolio and shifting into higher growth markets through strategic acquisitions such as Shockwave Medical. In May, we announced the launch of our CARTO 3 Version 8 electroanatomical mapping system. This is the latest version of our 3D heart mapping system, which has machine learning capabilities that increase efficiency, reproducibility, and accuracy in maps electrophysiologists use to treat atrial fibrillation and other arrhythmias. In pulsed field ablation, we initiated the commercial launch of the VARIPULSE platform in the EU and Japan receiving early positive physician feedback in the external evaluation period.
We also delivered results from the pivotal phase of the admIRE trial, where the VARIPULSE platform demonstrated 85% peak primary effectiveness with minimal adverse events, short PFA application times and low fluoroscopy exposure. In orthopedics, we received 510(k) FDA clearance for the clinical application of the VELYS Robotic-Assisted Solution in unicompartmental knee arthroplasty. This is designed for both medial and lateral procedures enabling surgeons to guide precise implant placement without a CT scan. In surgery, we launched the ECHELON 3000 in the U.S., which combines 3D stapling and gripping surface technology to enable greater staple line security. This has been shown to deliver 47% fewer leaks, reduce surgical risks and improve surgical outcomes.”
9. Broadcom Inc. (NASDAQ:AVGO)
Number of Hedge Fund Investors In Q2 2024: 130
Gotham Asset Management’s Q2 2024 Stake: $32.6 million
Broadcom Inc. (NASDAQ:AVGO) is a diversified technology company whose businesses range from semiconductor design to software as a service (SaaS). This provides it with one of the widest moats in the technology industry. Semiconductor design is all the buzz on Wall Street, particularly due to AI GPU giant NVIDIA’s $3 trillion dollar valuation. While Broadcom Inc. (NASDAQ:AVGO)’s $752 billion valuation is less than a third of NVIDIA’s, it benefits from being exposed to a broader set of industries. The firm’s modems, radios, application specific integrated chips (ASICs), and other products are used in smartphones, satellite applications, and other computing equipment. This means that Broadcom Inc. (NASDAQ:AVGO) is one of the most well heeled chip designers on the planet, and this can benefit it in the artificial intelligence race. This led to a 15% share price jump in June when management shared that the firm could earn $11 billion in annual revenue from AI chips (particularly through ASICs) compared to the earlier estimate of $10 billion. Broadcom Inc. (NASDAQ:AVGO)’s cybersecurity business provides it with a high margin division and stable recurring revenue in an industry that is expected to grow at a CAGR of 14.3% between 2024 and 2032 for a final value of $562 billion.
Aristotle Atlantic Partners mentioned Broadcom Inc. (NASDAQ:AVGO) in its Q2 2024 investor letter. Here is what the fund said:
“Broadcom is a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. The company strategically focuses its research and development resources to address niche opportunities in target markets and leverage its extensive portfolio of U.S. and other patents and other intellectual property to integrate multiple technologies and create system-on-chip component and software solutions that target growth opportunities. Broadcom designs products and software that deliver high performance and provide mission-critical functionality. The company has a history of innovation in the semiconductor industry and offers thousands of products that are used in end products such as enterprise and data center networking, home connectivity, “set-top boxes broadband access”, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Broadcom differentiates itself through its high-performance design and integration capabilities and focuses on developing products for target markets where it believes it can earn attractive margins.
We view Broadcom’s semiconductor business as being very well positioned to benefit from secular growth in data center networking, which is being driven by AI and cloud computing. The company continues to invest in research and development, and we see this as a competitive advantage for the company. Broadcom’s infrastructure software business is a recurring revenue business model that provides mission-critical mainframe support software to its customer base. The recent VMware acquisition will enhance this business strategy and accelerate the growth rate of this business unit, as VMware’s product suite includes key tools for AI server upgrades. Our long-term investment thesis is supported by Broadcom’s success in its strategy of maintaining technology and market share leadership in mission-critical markets with high switching costs and deep profit pools.”
8. QUALCOMM Incorporated (NASDAQ:QCOM)
Number of Hedge Fund Investors In Q2 2024: 100
Gotham Asset Management’s Q2 2024 Stake: $43.9 million
QUALCOMM Incorporated (NASDAQ:QCOM) is the leading player when it comes to designing smartphone chips. The firm also benefits from a well thought out business model, which sees it profit from both licensing revenue and chip sales. This means that QUALCOMM Incorporated (NASDAQ:QCOM) is guaranteed revenue from its current sales in the future as well. However, the highly cyclical nature of the smartphone industry means that the firm’s fortunes are tied to the global economy. Smartphones typically sell well when the economy is robust, and QUALCOMM Incorporated (NASDAQ:QCOM) has somewhat struggled lately due to an economic slowdown in China. For instance, not only did rumors claim that the firm was shutting down research centers in China last year due to an economic slowdown, but QUALCOMM Incorporated (NASDAQ:QCOM)’s earnings call for the third quarter of fiscal 2023 also saw the firm estimate that it continued “to estimate that calendar 23 handset units will be down at least a high single-digit percentage relative to calendar ’22, reflecting the macro environment and a slower recovery in China.” Recently though QUALCOMM Incorporated (NASDAQ:QCOM) is making moves to mitigate its smartphone dependence by investing in making chips for cars and IOT gadgets.
Hedge fund Aristotle Capital Management shared its insights on QUALCOMM Incorporated (NASDAQ:QCOM)’s plans for diversification during the Q2 2024 investor letter:
“Qualcomm, a leading wireless communications technology company, was the largest contributor for the quarter. After a period of weaker global demand for smartphones (driven by a slowdown in China) and elevated channel inventory, demand from Chinese handset manufacturers accelerated 40% year‐over‐year. More importantly, in our opinion, Qualcomm continues to execute on a previously identified catalyst of shifting its business mix beyond smartphones. The company announced increased progress for its automotive and Internet of Things (IoT) solutions. Within auto, the increase in vehicle content has resulted in 35% year‐over‐year revenue growth, with a design win pipeline of ~$45 billion, keeping the company on track to achieving ~$4 billion in auto‐related revenues by 2026. In recent years, despite persistent threats of insourcing from large clients (most notably Apple), Qualcomm has been able to retain its high market share in handsets while simultaneously expanding in non‐smartphone devices. We believe this progress is a testament to Qualcomm’s history of high (and productive) R&D spending, resulting in technological superiority. We believe Qualcomm’s technologies will continue to benefit as the world stays on a path toward a proliferation of connectivity between varying devices and as AI applications extend from the cloud to on‐device.”
7. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Investors In Q2 2024: 219
Gotham Asset Management’s Q2 2024 Stake: $49.2 million
Meta Platforms, Inc. (NASDAQ:META) is the parent company of Facebook, WhatsApp, and Instagram. With roughly 3.2 billion people using its applications as of March 2024, it is one of the biggest social media and connectivity firms in the world. This provides Meta Platforms, Inc. (NASDAQ:META) with a sizeable moat that reduces the pressure for growth on management. As a result, the key drivers of the firm’s hypothesis include its ability to maintain the user base, increase average revenue per user, and introduce new products and services to monetize the user base. On these fronts, Meta Platforms, Inc. (NASDAQ:META) has lately been implementing artificial intelligence into its products. The firm plans to use AI to enable advertisers to autonomously create their campaigns, and Meta Platforms, Inc. (NASDAQ:META) is also setting itself up for AI monetization through its AI Studio which enables users on its platform to create their own AI. Meta Platforms, Inc. (NASDAQ:META)’s technology focused management and business has also allowed it to create its own AI model called Llama. This means that the firm does not have to license AI from others, such as OpenAI.
Evercore analyst Mark Mahaney shared how Meta Platforms, Inc. (NASDAQ:META) is monetizing AI during a recent talk with CNBC:
“If you look at what happened with Meta Platforms Inc (NASDAQ:META). they went to almost 30% revenue growth, they are growing dollar-wise faster than anybody else that’s because they used AI to rebuild their ad-tech stack because they used AI to rebuild their user interface and get us more engaged, so it actually worked for them.”
6. Snowflake Inc. (NYSE:SNOW)
Number of Hedge Fund Investors In Q2 2024: 69
Gotham Asset Management’s Q2 2024 Stake: $59.8 million
Snowflake Inc. (NYSE:SNOW) is a cloud computing company headquartered in Montana. Its stock is down 38.6% year to date, with the selloff kicking off in February after its CEO resigned and the midpoint of first quarter revenue guidance came out at $747.7 million to significantly undershoot analyst estimates of $759 million. The lower guidance leading to an 18% share price drop is a classic for a SaaS stock as their hypothesis is built on the ability to grow consistently and control costs. Then, in its Q2 results, Snowflake Inc. (NYSE:SNOW) Q3 guidance came at a midpoint of $852.5 million which surpassed analyst estimates of $851 million by a hairline. Naturally, investors weren’t impressed and the stock tumbled by an additional 14.7%. Snowflake Inc. (NYSE:SNOW) hasn’t been controlling costs either, with roughly 96% of its revenue being spent on marketing, administrative costs, and research and development. While these can set it up well for future growth, it creates a lot of risk in the stock that investors appear to be avoiding.
Snowflake Inc. (NYSE:SNOW)’s CEO kept an upbeat tone during the Q2 2025 earnings call when he shared his three personal areas of focus:
“As I said last quarter, I have three key areas on personally focused on, listening to and learning from our customers, fueling innovation and product delivery, driving execution and alignment within our go to market team. And in Q2, we delivered on all fronts, which you can see in our results. Product revenue for the quarter was $829 million, up 30% year over year. Remaining performance obligations totaled $5.2 billion with year over year growth accelerating to 48%. Given the strong quarter, we are increasing our product revenue outlook for the year. Companies like Capital One, NBCU, Petco, Pfizer, Snapchat and Western Union are all relying on Snowflake to help them fuel their businesses. I’m really encouraged by the strength of our core business under rapid progress we have made on the AI front.
I’m very optimistic about where we are going and the opportunities we have in front of us to deliver for our customers. In fact, the more I’m with our customers, the more I appreciate just how critical they are to their business and how much they’re counting on us to be their trusted advisor in their AI data journey. Nothing brings to life how strong and trusted relationship is then when you go through challenges together.”
5. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Investors In Q2 2024: 308
Gotham Asset Management’s Q2 2024 Stake: $60.8 million
Amazon.com, Inc. (NASDAQ:AMZN) is an American eCommerce company that has also diversified its business into the lucrative cloud computing market. Its eCommerce site attracted 3.25 billion users in June, which provides the firm with a sizeable customer base and increases its value to merchants and advertisers. Amazon.com, Inc. (NASDAQ:AMZN)’s cloud business and its tech focused approach have also allowed it to bring its very own AI model under its fold. The firm’s partnership with Anthropic has enabled Amazon.com, Inc. (NASDAQ:AMZN) to use the Claude AI model. This enables it to build a variety of internal and external AI driven services on a foundational base, meaning that the company does not have to pay fees to others for using AI. Additionally, Amazon.com, Inc. (NASDAQ:AMZN) is also working on all three layers of the AI stack, from developing its own chips, to building a foundation model and developing AI applications. This could position the firm nicely to benefit from all aspects of AI demand in the future.
Amazon.com, Inc. (NASDAQ:AMZN’s management provided key details for its AI work during the Q2 2024 earnings call:
“You can see this philosophy in the primitive building blocks we’re building at all three layers of the Gen AI stack. At the bottom layer, which is for those building generative AI models themselves, the cost to compute for training and inference is critical, especially as models get to scale. We have a deep partnership with NVIDIA and the broadest selection of NVIDIA instances available, but we’ve heard loud and clear from customers that they relish better price performance. It’s why we’ve invested in our own custom silicon in Trainium for training and Inferentia for inference.
And the second versions of those chips, with Trainium coming later this year, are very compelling in price performance. We’re seeing significant demand for these chips. These model builders also desire services that make it much easier to manage the data, construct the models, experiment, deploy to production, and achieve high-quality performance, all while saving considerable time and money. That’s what Amazon SageMaker does so well, including its most recently launched feature called HyperPods that changes the game and networking performance for large models. And we’re increasingly seeing model builders standardized on SageMaker. While many teams will build their own models, lots of others will leverage somebody else’s frontier model, customize it with their own data and seek a service that provides broad model selection and great generative AI capabilities.
This is what we think of as the middle layer, what Amazon Bedrock does and why Bedrock has tens of thousands of companies using it already. Bedrock has the largest selection of models, the best generative AI capabilities in critical areas like model evaluation, guardrails, RAG and agenting, and then makes it easy to switch between different model types and model sizes. Bedrock has recently added Anthropic’s Claude 3.5 models, which are the best performing models on the planet. Meta’s new Llama 3.1 models and Mistral’s new Large two models. And Lama’s and Mistral’s impressive performance benchmarks in open nature are quite compelling to our customers as well. At the application or top layer, we’re continuing to see strong adoption of Amazon Q, the most capable generative AI powered assistant for software development and to leverage your own data.
Q has the highest known score and acceptance rate for code suggestions, but it does a lot more than provide code suggestions. It tests code, outperforms all other publicly benchmarkable competitors on catching security vulnerabilities and leads all software development assistants on connecting multiple steps together and applying automatic action. It also saves development teams time and money on the muck nobody likes to talk about. For instance, when companies decide to upgrade from one version of a framework to another, it takes development teams many months, sometimes years, burning valuable opportunity costs and churning developers who hate this tedious, though important work. With Q’s code transformation capabilities, Amazon has migrated over 30,000 Java JDK applications in a few months, saving the company $260 million and 4,500 developer years compared to what it would have otherwise cost.”
4. Alphabet Inc. (NASDAQ:GOOGL)
Number of Hedge Fund Investors In Q2 2024: 216
Gotham Asset Management’s Q2 2024 Stake: $68.7 million
Alphabet Inc. (NASDAQ:GOOGL) is the mega cap technology firm that primarily earns revenue through its search engine, Google Search. Additionally, the firm also has a key presence in lucrative industries such as video streaming and cloud computing. However, Alphabet Inc. (NASDAQ:GOOGL)’s business is still heavily dependent on Search. During Q2, $42.6 billion of Alphabet Inc. (NASDAQ:GOOGL)’s $72.6 billion in revenue came from Search. This sizeable business allows the firm to command more than 50% of the search advertising market, and it provides Alphabet Inc. (NASDAQ:GOOGL) significant leverage with publishers and advertisement companies to divert their transactions through its platform. Additionally, it also has a foundational AI model in the form of Google Bard, which places it at the forefront of AI developments. However, despite its moat, Alphabet Inc. (NASDAQ:GOOGL) faces challenges such as purported Justice Department plans to break it up and a growing preference among advertisers to choose focused platforms such as eCommerce websites.
Patient Capital Management mentioned Alphabet Inc. (NASDAQ:GOOGL) in its Q2 2024 investor letter. Here is what the fund said:
“Alphabet Inc. (GOOGL) was a top contributor in the second quarter, finally catching up to its peers in the Magnificent 7. The company gained 20.8% in the period following strong first quarter earnings, a new $70B repurchase program (3% of shares outstanding) and the initiation of a cash dividend ($0.20 per share; 0.42% yield). We continue to believe the market underappreciates Google’s exposure to AI with its Gemini model being integrated into search results, YouTube advertising and its cloud offering. We continue to think that the cloud players will be the AI winners in the long-term, with Google being well positioned to take advantage. While the company trades at 24x 2024 earnings, if you remove the money-losing and under-earning businesses, you realize that you are paying below a market multiple for the core Google business. We do not believe there are many other AI winners trading at such an attractive multiple.”
3. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Investors In Q2 2024: 184
Gotham Asset Management’s Q2 2024 Stake: $93.8 million
Apple Inc. (NASDAQ:AAPL) is the most valuable consumer technology firm in the world. It is a global brand and generates 52% of its revenue through the iPhone. This allows Apple Inc. (NASDAQ:AAPL) a sizeable user base of 1.5 billion users as of 2023, which is its gold mine in the simplest of terms. Apple Inc. (NASDAQ:AAPL)’s closed ecosystem means that its users have to use the firm’s services, and it has used it to create a Services business that generates $78 billion in revenue annually. The user base is also the key to Apple Inc. (NASDAQ:AAPL)’s hypothesis, as the confidence in its ability to ensure that the users continue to upgrade their iPhones. It has also allowed Apple Inc. (NASDAQ:AAPL) to emerge as a late winner in the AI race. Its shares have lost a mere 1.71% since July, which pales in comparison to MSFT’s 11.20% losses. This is because as opposed to MSFT, Apple Inc. (NASDAQ:AAPL) is perceived to be in a better position to monetize AI due to its consumer focused business as opposed to the former’s enterprise focused model.
Baron Funds mentioned Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter. Here is what it said:
“Recent Activity This quarter we re-initiated a position in Apple Inc., a leading technology company known for its innovative consumer electronics products like the iPhone, MacBook, iPad, and Apple Watch. Apple is a leader across its categories and geographies, with a growing installed base that now exceeds 2 billion devices globally. The company’s attached services – including the App Store, iCloud, Apple TV+, Apple Music, and Apple Pay – provide a higher margin, recurring revenue stream that both enhances the value proposition for its hardware products and improves the financial profile. Apple now has well over 1 billion subscribers paying for these services, more than double the number it had just 4 years ago. The increasing services mix has led to healthy operating margin improvement, providing more free cash flow for Apple to reinvest in the business and to distribute to shareholders. Throughout its 48-year history, Apple has successfully navigated and capitalized on major technological shis, from PCs to mobile to cloud computing. We believe the company’s leading brand and device ecosystem position it to do equally well in the AI age, and this was the driver of our decision to re-invest. “Apple Intelligence” – the AI strategy unveiled at Apple’s recent Worldwide Developer Conference – leverages on- device AI and integrations with tools like ChatGPT to enhance user experiences across its ecosystem. The AI suite enables users to create new images, summarize and generate text, and use Siri to perform actions across their mobile applications, all while maintaining user privacy and security. We think Apple Intelligence can drive accelerated product upgrade cycles and higher demand for Apple services. The combination of growth re-acceleration, increasing services contribution, and thoughtful capital allocation should continue driving long-term shareholder value.”
2. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Investors In Q2 2024: 279
Gotham Asset Management’s Q2 2024 Stake: $95.3 million
Microsoft Corporation (NASDAQ:MSFT) is the mega cap technology giant that is one of the biggest players in the cloud computing industry as well as personal computing. Microsoft Corporation (NASDAQ:MSFT)’s Windows powers up most of the world’s computers, while Azure is believed to control 26% of the global cloud computing market. Like other big tech firms, it has access to its own foundational model, through partner firm OpenAI’s ChatGPT. OpenAI’s brand status as the firm that popularized AI also allows Microsoft Corporation (NASDAQ:MSFT) to benefit from the association. This is key to the firm’s future especially as it plans to market AI products to enterprise customers through cloud computing. The central tenet of Microsoft Corporation (NASDAQ:MSFT)’s hypothesis these days is its ability to monetize AI especially since it has plowed billions of dollars into the technology. In fact, after its Q2 earnings, Microsoft Corporation (NASDAQ:MSFT)’s shares tanked by 8% as it revealed that Azure growth had slowed to 29% from an earlier 31%––which cast doubts on its ability to add tailwinds from AI services.
The stock began to recover though as Microsoft Corporation (NASDAQ:MSFT)’s shared during the earnings call:
“For Intelligent Cloud we expect revenue to grow between 18% and 20% in constant currency, or US$28.6 billion to US$28.9 billion. Revenue will continue to be driven by Azure which, as a reminder, can have quarterly variability primarily from our per-user business and in-period revenue recognition depending on the mix of contracts. In Azure, we expect Q1 revenue growth to be 28% to 29% in constant currency. Growth will continue to be driven by our consumption business, inclusive of AI, which is growing faster than total Azure. We expect the consumption trends from Q4 to continue through the first half of the year. This includes both AI demand impacted by capacity constraints and non-AI growth trends similar to June. Growth in our per-user business will continue to moderate.
And in H2, we expect Azure growth to accelerate as our capital investments create an increase in available AI capacity to serve more of the growing demand. In our on-premises server business, we expect revenue to decline in the low single digits as continued hybrid demand will be more than offset by lower transactional purchasing. And in Enterprise and partner services, revenue should decline in the low single digits. In More Personal Computing, we expect revenue to grow between 9% and 12% in constant currency, or US$14.9 billion to US$15.3 billion. Windows OEM revenue growth should be relatively flat, roughly in line with the PC market. In Windows commercial products and cloud services, customer demand for Microsoft 365 and our advanced security solutions should drive revenue growth in the mid-single digits.”
1. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Investors In Q2 2024: 179
Gotham Asset Management’s Q2 2024 Stake: $192 million
NVIDIA Corporation (NASDAQ:NVDA) is the stock market’s top stock when it comes to artificial intelligence. The firm’s competitive moat is based on its GPU design, as NVIDIA Corporation (NASDAQ:NVDA)’s chips are widely perceived to be the best of breed in the industry. This has led to an insatiable demand for NVIDIA Corporation (NASDAQ:NVDA)’s GPUs, so much so that it has made the firm’s revenue grow from $16.7 billion in 2021 to $79.7 billion on a trailing twelve month basis. This marks a 377% growth on an absolute basis, and during the same time period, NVIDIA Corporation (NASDAQ:NVDA)’s shares have appreciated by 299%, after having trimmed their gains since July. By July, the stock had appreciated by 339%, before NVIDIA Corporation (NASDAQ:NVDA) shared its results for the second quarter of fiscal 2025. Since its hypothesis depends solely on its GPUs, NVIDIA Corporation (NASDAQ:NVDA) is vulnerable to any inventory disruptions or gluts since it has few alternatives to rely on for revenue. At the same time, its technological strength means that any GPU alternatives from other firms can be hard to come by, making the world continue to be dependent on NVIDIA Corporation (NASDAQ:NVDA) for the best GPUs.
Baron Funds mentioned NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter. Here is what the fund said:
“More recently, however, we’ve entered the period of doubts and questioning, some of which is real and normal in the first stages of a new paradigm, and some of which is prompted by short sellers. Given the explosive returns of NVIDIA and other AI leaders, AI bears and fear mongers have been comparing the current AI market winners with the internet bubble of the late 1990s/early 2000s, and NVIDIA’s stock move today with Cisco’s back then. First, while many stocks were trading at nosebleed valuations and on made up metrics (such as price per eyeballs) before the bursting of the internet bubble, as we’ve said many times, the internet proved to transform our world and create the digital age we are now living in. Second, while NVIDIA’s stock price inflection has been nothing short of unprecedented for a company of its size, it was fueled almost entirely by explosive growth in revenues, earnings, and cash flows– not multiple expansion. Over the last 12 months, NVIDIA’s stock has eectively tripled, but its forward P/E multiple has remained essentially flat, because NVIDIA blew away Wall Street expectations despite being covered by over 60 sell-side analysts, who have increased their forward projections every single quarter. In my career, the only comparative analogue is when Apple first introduced the iPhone and stunned Wall Street with its growth. In contrast, most of Cisco’s move in the late 1990s was due to multiple expansion. At its peak, Cisco traded at a P/E ratio over 130 times, more than quadruple its five-year average of 37 times. At the end of the second quarter, NVIDIA traded at a P/E ratio of 40 times, equal to its five-year average, and at a P/E to growth (or PEG) ratio for 2025 of 0.8 times, as consensus expectations are for NVIDIA to grow earnings per share 40% next year.
Moreover, investor concerns have arisen about the financial impact AI is having and whether surging capital expenditures (capex) across the technology landscape, particularly the large cloud players (Microso, Google, Amazon, and Meta), known as the hyperscalers, will be justified and earn reasonable returns on invested capital (ROIC). First, the adoption and penetration of new technology typically traces a classic S-curve–or more precisely, in our view, a series of S-curves or phases. For at least the past year and a half, we’ve been in what might be called the AI infrastructure- build phase – building the AI factories, as NVIDIA CEO Jensen Huang has articulated it, and this phase has been dominated by the infrastructure- layer players – the accelerated computing chips suppliers like NVIDIA and Broadcom, as well as data center, cloud infrastructure and energy companies. The hyperscalers, other enterprises, and sovereign entities investing ahead understand that if you want to be in the AI game, you must invest now – build the infrastructure, build the factories – or else you’ll find yourselves disrupted on the sidelines or playing catch up in the biggest game, the most important race in a technology generation. Only those who invest today even have the chance to be the winners of the future.”
NVDA’s magic also makes it the best magic formula stock according to Joel Greenblatt’s hedge fund’s investments. But our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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