In this article, we will be taking a look at the 10 most promising growth stocks according to hedge funds.
Bull Market and Investor Sentiment
Investors had been anxiously anticipating the start of a bull market, which the S&P 500 confirmed earlier this year. The bull run has seen the market continue to rise to new record highs, supporting revenue and earnings growth across the board.
Fast forward, the upward momentum appears to have peaked, with market indices at record highs. While it was highly expected that stocks would explode on the Federal Reserve offering support to a struggling economy with interest rate cuts, that has not been the case.
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It’s become increasingly clear that investors have become more sensitive to growth scares as the global economy faces many issues. Top on the list is the rising geopolitical tensions in the Middle East that threaten to disrupt supply chain networks. Energy prices rising owing to the escalation of a full-blown war could trigger higher inflation, something that is unsettling the markets.
Analysts at UBS are already warning investors that they should get overweight on defensive names as global growth slows at the back of deteriorating fundamentals. While UBS doesn’t anticipate a severe downturn, the bank is cautious, advising its clients to focus on important sectors like utilities and pharmaceuticals, which always outperform in a downturn.
While investors are increasingly rotating into defensive plays amid concerns about geopolitical tensions and the slowing global economy, Morgan Stanley Investment Management’s Andrew Slimmon recommends against this strategy.
“Now is the time to just be cautious. Don’t chase the defensives that are working because I think when we get to the fourth quarter, that won’t work,” the portfolio manager told CNBC’s “The Exchange.
“While our expectation is for October to remain choppy, we don’t view the overall market action to be bearish and encourage investors to maintain perspective on the longer-term trends,” Robert Sluymer, technical strategist at RBC Wealth Management, wrote to clients.
The sentiments echo the need to focus on high-growth companies. Investors who diversify their portfolio into high-growth companies eventually earn great returns regardless of how much a stock rises or falls in the short term.
Analysts project that S&P 500 stocks will grow at a median annual EPS rate of 8.5% over the next five years. On the other hand, the best growth stocks are well poised to outperform this benchmark by a factor of two to three or more.
For starters, companies exposed to artificial intelligence spectacles or those leveraging technology continue to deliver record earnings and revenue growth, thus dominating most hedge fund portfolios. Additionally, the most promising growth stocks, according to hedge funds, are those whose core business would be positively impacted by improving consumer purchasing power. As the Fed steers the economy into a soft landing, consumer purchasing is expected to improve, benefiting consumer cyclical stocks. Moreover, the rate cuts will likely benefit growth and tech stocks as well.
Market fluctuations are inevitable, but the secret to a growth stock’s success lies in the robustness of its core operations. Regardless of whether a stock is rising or falling in the short term, if you consistently invest in a competitively solid business, you’ll eventually reap substantial rewards.
Source: Pexels
Our Methodology
To compile the list of the most promising growth stocks according to hedge funds, we sifted through ETFs and online rankings to find 30 popular growth stocks. Then we selected the 10 that were the most widely held by hedge funds, as of Q2 2024. Finally, we ranked the stocks in ascending order of the number of hedge funds that have stakes in them.
At Insider Monkey, we are obsessed with 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. Palo Alto Networks Inc (NASDAQ:PANW)
Number of Hedge Fund Holders: 66
Cybersecurity is one of the fastest-growing sectors as threats online soar amid the artificial intelligence race. Palo Alto Networks, Inc. (NASDAQ:PANW) is recognized as a key player as it does not concentrate on a specific segment of the cybersecurity sector. The firm operates across all aspects of the market.
Having succeeded in its firewall sector, PANW has ventured into various cybersecurity areas such as cloud protection, endpoint defence, data analysis and advisory services. By 2024, Gartner recognized Palo Alto Networks, Inc. (NASDAQ:PANW) as a frontrunner in both Security Service Edge (SSE) and Software-Defined Wide Area Network (SD-WAN), positioning it as the sole vendor for Secure Access Service Edge (SASE) to receive recognition in both segments.
The firm has acquired over 15 businesses, with a combined cost of approximately $4 billion. This approach of expanding through acquisitions is a key strategy in its journey to become a comprehensive provider of cybersecurity services.
During the last three months of the fiscal year 2024, the company’s cybersecurity business saw a 12% increase in revenue from the previous year, reaching $2.19 billion, which was higher than what analysts predicted by $40 million. Its earnings per share (EPS) also saw a 5% increase to $1.51, surpassing the average forecast by $0.10.
A significant indicator of Palo Alto’s future growth is the rapid uptake of its advanced security solutions. Palo Alto Networks, Inc. (NASDAQ:PANW)’s advanced security solutions cover emerging areas like secure access service edge (SASE), cloud security, and artificial intelligence (AI). The company’s total recurring revenue from these advanced solutions, which is the annualized revenue from all active contracts for these solutions at the end of the reporting period, grew by a strong 43% year over year to $4.2 billion. Additionally, the stock is rated as a buy with an average price target of $390.99, implying an 8.44% upside potential.
By the end of the second quarter, 66 hedge funds tracked by Insider Monkey had positions in Palo Alto Networks, Inc. (NASDAQ:PANW), compared to 78 in the previous quarter. Citadel Investment Group emerged as the largest shareholder, with 2.84 million shares in the company.
Here is what TimesSquare Capital Management U.S. Focus Growth Strategy said about Palo Alto Networks, Inc. (NASDAQ:PANW) in its Q2 2024 investor letter:
“Our cybersecurity holdings were also beneficial to the strategy this quarter. The global provider of network and cloud-based cybersecurity systems, Palo Alto Networks, Inc. (NASDAQ:PANW), chipped in with a 19% return. Its revenues and earnings were higher than anticipated as Palo Alto shifted its marketing strategy to emphasize larger platform contracts.”
9. Tesla, Inc. (NASDAQ:TSLA)
Number of Hedge Fund Holders: 85
Tesla, Inc. (NASDAQ:TSLA) stands out as one of the most promising growth stocks according to the hedge funds, as it is not only an automaker but an artificial intelligence and robotics investment play. While the company makes most of its revenues in selling electric vehicles, it also boasts of a lucrative energy storage business that promises to generate long-term value.
For many years, Tesla, Inc. (NASDAQ:TSLA) has been recognized for robust growth fueled by strong demand for its premium self-driving electric cars. Moreover, the company’s higher-end pricing and cost benefits in production have always triggered significant earnings growth.
However, in recent years, this positive environment has changed. Higher interest rates have made purchasing a Tesla vehicle more expensive for buyers due to higher monthly payments. Consequently, the company’s revenue base has taken a hit.
As the company struggles to sell more electric cars than it used in the past, it’s already looking to diversify its revenue base. It’s already strengthening its energy storage business, which is expected to be a key source of revenue.
Since its introduction in 2014, Tesla, Inc. (NASDAQ:TSLA) has been offering Autopilot and its advanced Full Self-Driving (FSD) capability, necessitating human oversight for automated driving, since 2020.
Independent forecasts suggest that the adoption rate stands at 2%, though Elon Musk has mentioned it’s “significantly higher,” The goal is for FSD to eventually result in a collection of more self-driving cars. Tesla customers would own these vehicles, providing an avenue for the company to generate reliable subscription revenue. Analysts on Wall Street have an average buy rating on the stock with an average price target of $207.83, implying a 15.32% upside potential from current levels.
In total, 85 hedge funds were long Tesla, Inc. (NASDAQ:TSLA) in the second quarter, with a total stake value of $4.9 billion.
ClearBridge Small Cap Value Strategy stated the following regarding Tesla, Inc. (NASDAQ:TSLA) in its Q2 2024 investor letter:
“Tesla, Inc. (NASDAQ:TSLA) manufactures electric vehicles, related software and components, and solar and energy storage products. The stock contributed as Tesla continued to drive vehicle manufacturing costs lower, accelerate the launch of new models, and invest heavily in its lucrative AI initiatives. Shareholders reaffirmed the CEO’s compensation plan, alleviating personnel and legal uncertainties. Despite material operational complexities resulting in significant shutdowns of key manufacturing facilities and lower sales volume, Tesla presented better-than-expected margins in the quarter. It expects to launch a lower cost model as soon as late 2024, which should result in accelerated revenue growth, reduced manufacturing costs, and increased factory utilization. The company continued to advance its autonomous driving capabilities, expanding its already significant data centers and developing its humanoid robot Optimus. These investments increased confidence in the attractive growth opportunities that remain ahead.”
8. Eli Lilly and Company (NYSE:LLY)
Number of Hedge Fund Holders: 100
Eli Lilly and Company (NYSE:LLY) stands out as one of the best growth stocks in the healthcare sector owing to the vast sales potential for weight loss treatments. It is one of the biggest players in the industry, backed by the blockbuster drug Tirzepatide, which has been approved for treating obesity.
While Eli Lilly and Company (NYSE:LLY) generated $1.2 billion in sales from Zepbound in the second quarter, it is also working on other next-generation candidates that should strengthen its prospects in the industry. Mounjaro is another flagship weight loss drug cementing the company’s prospects, generating $3.1 in sales in the second quarter.
The two drugs, Mounjaro and Zepbound, sold under Tirzepatide, can generate as much as $25 billion in peak sales, allowing the company to generate significant shareholder value.
Thanks to strong demand for weight loss drugs, Eli Lilly and Company (NYSE:LLY) posted a 36% year-over-year increase in second-quarter revenue totaling $11.3 billion. Its net income totaled $3.5 billion, 86% higher than in Q2 2023.
LLY is already looking into the future as it proceeds with the development of orforglipron and retatrutide, which are projected to bring in more than $1 billion in revenue annually by the year 2030. Furthermore, the company is in the process of gaining regulatory approval for its once-weekly insulin medication, which could be ready within the next couple of years.
Eli Lilly and Company (NYSE:LLY) also recently achieved a significant regulatory milestone with the FDA’s approval of Kisunla, known by its generic name donanemab, as a treatment for Alzheimer’s disease.
While the company pays a partial 0.58% dividend yield, it is essential to note that it has increased by 101.6% over the past five years. Consequently, as the company generates more revenues from its weight loss drugs, it should pay more dividends. Eli Lilly and Company (NYSE:LLY) is rated as a Buy on Wall Street with an average price target of $1,050.65, implying a 14.02% upside potential from current levels.
Eli Lilly and Company (NYSE:LLY) was a part of 100 hedge fund portfolios at the end of Q2 2024, down from 109 in the previous quarter, as per Insider Monkey’s database. Fisher Asset Management owned the largest stake in the company, worth over $4.4 billion.
Here is what PGIM Jennison Health Sciences Fund said about Eli Lilly and Company (NYSE:LLY) in its Q2 2024 investor letter:
“Eli Lilly and Company (NYSE:LLY) is a diversified biopharmaceutical company with core franchises in Diabetes, Obesity, Immunology, Neurodegeneration, and Oncology. The company is one of the two global leaders in diabetes with blockbuster products in Trulicity and recently launched Mounjaro (tirzepatide) to serve this large underserved market. To date, the Mounjaro launch is the strongest for any diabetes drug ever launched, which we attribute to off label usage in the obesity indication as well as on label use in diabetes. We believe the tirzepatide (the generic name for Mounjaro) franchise is also uniquely positioned to grow substantially from here thanks to its recent approval for obesity. To that note, in late 2023, Eli Lilly received approval for tirzepatide in obesity and is commercializing it for obesity under a new brand name, Zepbound. While still early in the launch, uptake has been extremely strong, exceeding that of both Wegovy and Mounjaro at the same timepoint in their launches. While Alzheimer’s Disease has been a tough market for drug developers, Eli Lilly has breakthrough designation from the food and drug administration (FDA) for donanemab and recently presented Phase III pivotal trial data that positions donanemab as the most efficacious drug in the class. In June, the FDA advisory committee voted unanimously in favor of donanemab as an effective treatment where the benefits outweigh the risks, praising the therapy as innovative. Donanemab was then approved under the brand name Kisunla in early July. Eli Lilly also has exciting franchises in dermatology, immunology, and oncology that are starting to add meaningfully to growth. With a proven history of strong commercial execution and one of the highest research and development (R&D) success rates in the industry, we see opportunity for continued success. With a lack of meaningful patent expirations for the rest of the decade. Eli Lilly is uniquely positioned amongst its larger-cap peers. Recent positive performance has been driven by the continued strong growth of Mounjaro and Zepbound, which led to a big guidance raise on the 1Q call, an unusual action for Eli Lilly this early in the year, which speaks to their confidence in the strong trends they are seeing.”
7. Visa Inc. (NYSE:V)
Number of Hedge Fund Holders: 163
Visa Inc. (NYSE:V) is one of the most promising growth stocks according to hedge funds in the financial service sector. While the company has made a name as a payment technology company offering credit debit and clearing products, it is well-positioned to benefit from the so-called war on cash.
The company is well positioned to generate significant fees from its card as consumer spending patterns improve after the Fed cuts interest rates. A booming economy is always good for Visa Inc. (NYSE:V)’s core business, which generates transaction fees.
In emerging economies, a larger percentage of the population tends to be without or have limited access to banking services. As these economies advance, Visa could see an increase in the amount of transactions it processes, leading to steady growth in its earnings.
Visa Inc. (NYSE:V)’s impressive profit margins are another strong reason why it is one of the most sought-after growth stocks. The firm reported an outstanding operating margin of 67% in the third quarter of fiscal 2024, a rare figure among other companies.
Its growth might attract little attention, but it’s incredibly resilient. Over the past ten years, the business has seen a revenue increase of over 7.8% annually (except a 4.9% decrease in the fiscal year 2020, which was heavily impacted by the pandemic).
Investors should feel confident that this positive trend will persist in the coming years as over half of Americans still rely on cash for a portion of their weekly purchases. This is an unexpectedly high percentage, particularly for one of the world’s most advanced economies. Visa Inc. (NYSE:V) is rated as a buy with an average price target of $315.42, implying a 14.28% upside potential.
By the end of Q2 2024, 163 hedge funds held stakes in Visa Inc. (NYSE:V), with Chris Hohn’s TCI Fund Management being the largest shareholder, holding stakes valued at $4.4 billion.
Here is what Wedgewood Partners said about Visa Inc. (NYSE:V) in its Q2 2024 investor letter:
“Visa Inc. (NYSE:V) detracted from performance despite healthy corporate results. The company grew earnings per share +12% as payment volume growth was up +8% and cross-border payment grew +16%, adjusted for currency. There are over 4.4 billion Visa debit and credit cards in circulation generating over $15 trillion in volume over the past 12 months. There is another estimated $10 trillion in cash and check volume, globally, which we think Visa can continue to move over to its electronic payment rails. In addition, the company has spent the past several years extending its payment capabilities into new flows of commerce, particularly for business-to-business transactions. This is another, extremely large (+$200 trillion) long-term growth opportunity for Visa that we believe investors are ignoring.”
6. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders: 179
When it comes to artificial intelligence, NVIDIA Corporation (NASDAQ:NVDA) stays ahead of the pack owing to the strong demand for its graphic processing units used to power various AI models. The artificial intelligence frenzy has powered the company to become the most valuable company in the world on the back of record-breaking revenues and earnings.
Revenue in the second quarter was up 122% to $30 billion as net income more than doubled to $16.6 billion. The company expects Q3 revenue to increase 80% to $32.5 billion. Given the rate at which the company’s earnings and revenues are growing while the artificial intelligence frenzy is all but starting, underlines why it is one of the most promising growth stocks according to hedge funds.
While NVIDIA Corporation (NASDAQ:NVDA) has gained significantly over the past year, causing the stock to trade at a premium with a price-to-earnings multiple of 34, there is still room for more gains. The stock could hit another all-time high due to the ‘insane’ demand for the company’s new Blackwell chip.
CEO Jensen Huang said “It [Blackwell] gives us an opportunity to triple down, to really drive the innovation cycle so that we can increase capabilities, increase our throughput, decrease our costs, and decrease our energy consumption.”
Given that the company has delivered five straight quarters of triple-digit percentage revenue growth, the trend is not expected to change. The Federal Reserve cutting interest rates by 50 basis points and hinting at further cuts should make it easy for companies investing in AI, fueling additional demand for Nvidia chips.
The market experienced a strong tailwind for AI chips, and the expansion of data centers translates to NVIDIA Corporation (NASDAQ:NVDA)’s booming business. The company’s own guidance calls for 79% in revenue growth in the current quarter, affirming the tremendous opportunities in the market.
With NVIDIA Corporation (NASDAQ:NVDA)’s board approving an additional $50 billion in share buybacks last summer, there’s a strong belief that the stock is worth considering. It is one of the stocks rated as a buy with an average price target of $152.44, implying a 14.60% upside potential.
Based on our Insider Monkey database, by the end of Q2 2024, 179 investors held a positive outlook on NVDA, collectively holding stakes worth $53.7 billion.
Ithaka Group’s Ithaka US Growth Strategy stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter:
“NVIDIA Corporation (NASDAQ:NVDA) is the market leader in visual computing through the production of high-performance graphics processing units (GPUs). The company targets four large and growing markets: Gaming, Professional Visualization, Data Center, and Automotive. NVIDIA’s products have the potential to lead and disrupt some of the most exciting areas of computing, including: data center acceleration, artificial intelligence (AI), machine learning, and autonomous driving. The reason for the stock’s appreciation in the quarter was twofold: First, the stock benefited from tremendous excitement surrounding the further development of generative AI and the likelihood this would necessitate the purchase of a large number of Nvidia’s products far into the future; Second, Nvidia posted another strong beat[1]and-raise quarter, where the company upped its F2Q25 revenue guidance above Street estimates, showcasing its dominant position in the buildout of today’s accelerated computing infrastructure.”
5. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 184
Apple Inc. (NASDAQ:AAPL) is one of the most promising growth stocks, according to hedge funds, as it reduces its reliance on the hardware business. While the company is best known for its iPhone product line, it’s also a key player in cloud computing, offering various services, including game subscriptions and app sales.
The iPhone product line accounted for 52% of Apple’s $296.1 billion revenues for the three quarters that ended in June. Likewise, Apple has moved to reduce its reliance on the iPhone product line by focusing on the service front, which is expected to be a key driver of long-term value.
Consequently, the company has been growing its prospects in advertising, supporting products, cloud service, app store sales, and payments. During the most recent three-month period, services sales increased by 14.1% to $24.2 billion.
Moreover, the service sector boasts of a significantly greater gross margin than hardware, at 74% compared to 35.3% for hardware sales. They also provide a recurring and predictable revenue stream for Apple Inc. (NASDAQ:AAPL), which is exactly what shareholders want.
Even as Apple faces slow hardware sales, it is increasingly investing in artificial intelligence as it seeks to enhance user experience with its devices. New devices are coming with AI-powered software to help summarize text, boost writing skills, and edit photos as Apple seeks to fuel sales.
There is no doubt that Apple trades at a premium as a growth stock with a price-to-earnings multiple of 34.7 compared to an average P/E of 28 for the S&P 500. Apple Inc. (NASDAQ:AAPL)’s premium valuation is expected, given its robust growth on the services front, as it also strengthens its hardware products with AI. Its ability to generate and return value through stock buybacks while offering a 0.44% dividend also underscores why it is a solid long-term growth stock.
Analysts on Wall Street believe Apple is a strong buy with an average price target of $248.90, implying a 9.32% upside potential from current levels. Overall, Apple Inc. (NASDAQ:AAPL) was held by 184 hedge funds in the second quarter of 2024, with total stakes worth $124.18 billion. According to the Insider Monkey database, Berkshire Hathaway is the top shareholder of the company, with a position worth $84.25 billion
Columbia Contrarian Core Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter:
“Apple Inc. (NASDAQ:AAPL) – Despite the stock falling after announcing earnings in late May, Apple regained ground toward the end of the quarter, fueled by the company’s long-awaited AI announcement at its annual Worldwide Developers Conference (WDC). At the conference, the company showcased some of its new AI features powered by Apple Intelligence that would be coming to Apple products and also announced a partnership with ChatGPT. Investors greatly welcomed the announcement of Apple’s AI strategy and the stock surged, passing Microsoft as the world’s most valuable company (although this hallmark wouldn’t last). Beta testing of these new features will be coming later this summer, but the initial promise and excitement looks to be a potential catalyst for an upgrade cycle, as the company looks to persuade users who have had the same smartphone for years to consider an upgrade.”
4. Alphabet Inc. (NASDAQ:GOOGL)
Number of Hedge Fund Holders: 216
Alphabet Inc. (NASDAQ:GOOGL), a global tech titan, has made a name for itself on a search that continues to power its lucrative advertising business. While the company controls a 90% market share in search, it remains well-positioned to generate significant value as the digital advertising industry grows by more than 15% through the rest of the decade.
Additionally, Alphabet Inc. (NASDAQ:GOOGL) owns the largest video platform, YouTube, the top streaming service in daily TV viewership. As more families opt to cancel their conventional cable plans in favor of the more affordable and more accessible nature of streaming services, YouTube is expected to attract more viewers. This, in turn, will result in increased advertising income for the company.
The ad sales from YouTube brought in $8.7 billion for Alphabet in the second quarter, showing a growth from the $7.7 billion seen in the year before and affirming why it is one of the most promising growth stocks according to hedge funds.
On the other hand, Google Cloud ranks as the third most popular cloud service globally, just after Amazon Web Services and Microsoft Azure. Google Cloud reported a 29% increase in revenue from the previous year in the second quarter. Moreover, it achieved $1.2 billion in operating income, achieving a profit margin of 11%.
The operating margin for Alphabet Inc. (NASDAQ:GOOGL) has consistently been outstanding, averaging a remarkable 26.6%. Its substantial earnings allowed Alphabet to produce an impressive $13.5 billion free cash flow (FCF) during the second quarter. The firm is utilizing this FCF to fund its artificial intelligence technology and benefit its investors by buying back shares and distributing a $0.20 dividend. Analysts on Wall Street maintain a buy rating on Alphabet with an average price target of $206.60, implying 26.77% upside potential.
As per the Insider Monkey database, 216 hedge fund portfolios held Alphabet Inc. (NASDAQ:GOOGL) at the end of the second quarter, which was 222 in the previous quarter.
3. Meta Platforms Inc (NASDAQ:META)
Number of Hedge Fund Holders: 219
Meta Platforms, Inc. (NASDAQ:META) is arguably the most promising growth stock, according to hedge funds, for diversifying an investment portfolio in the social media space. As the top social media company, Meta has cemented its position in the lucrative advertising business. It also leverages artificial intelligence to strengthen its competitive edge and enhance user experience.
As of June, Meta Platforms, Inc. (NASDAQ:META) commanded over 3.3 billion active users across its suite of applications, Facebook, Instagram, WhatsApp, Messenger, and Threads. The massive target market has made Meta the go-to for advertising campaigns, allowing the company to strengthen its advertising empire.
Meta Platforms, Inc. (NASDAQ:META) stands out in advertising services as it enables advertisers to reach specific audiences by considering their age, interests, and geographical location. This highly effective business strategy propelled Meta’s stock to unprecedented levels.
During the second quarter of 2024, Meta’s advertising division brought in $38.3 billion in revenue, marking a 22% increase from the previous year. This figure represented 98% of Meta’s total income, indicating its significant influence on its strategic direction.
Growth has been excellent, propelled by the ongoing trend of digital advertising. Over the last ten years, Meta has achieved a yearly revenue increase of 29.7%. Considering that the worldwide digital ad market is expected to rise to more than $1 trillion by 2030, Meta still has a strong opportunity for further growth.
Meta Platforms, Inc. (NASDAQ:META)’s economic moat is solid as it boasts a return on invested capital (ROIC) of 31%, threefold the mean ROIC of the S&P 500. This indicator shows Meta’s remarkable skill in producing sufficient profits from its reinvested capital. Without this barrier, the ROIC number would be significantly reduced. Likewise, the stocks command an average buy rating on Wall Street with a $611.20 price target, implying a 4.32% upside potential.
By the end of the second quarter, Meta Platforms, Inc. (NASDAQ:META) appeared in the portfolios of 219 hedge funds, with a combined stake value of $42.5 billion.
Polen Focus Growth Strategy stated the following regarding Meta Platforms, Inc. (NASDAQ:META) in its Q2 2024 investor letter:
“In the second quarter, the top relative contributors to the Portfolio’s performance were all names we do not hold: Home Depot, Meta Platforms, Inc. (NASDAQ:META), and AbbVie. Meta Platforms delivered robust results in the period, with revenue growth accelerating in the first quarter. However, revenue comparisons for Meta will become more difficult from here, and its guidance for 2Q revenue fell below market expectations. After the company’s “year of efficiency,” where it cut costs in its core business, management is now indicating another ramp-up in GenAI and metaverse spending, spurring concerns about future profit margins. Metaverse spending, by our calculations, is now over $20 billion per year with little to no expected return on the foreseeable horizon.”
2. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 279
Microsoft Corporation (NASDAQ:MSFT) has etched its name as an artificial intelligence investment play. Having invested nearly $13 billion into OpenAI, the tech giant is increasingly leveraging AI to strengthen its software offerings. Likewise, its 25% market share in cloud computing, one of the fastest-growing sectors, underscores why it is one of the most promising growth stocks according to hedge funds.
Its latest AI offerings are broadening its impact in Azure, the cloud computing unit. During the fiscal fourth-quarter earnings call, management mentioned that Azure now boasts 60,000 AI clients, which is about 60% more than the previous year’s period, affirming the underlying growth.
In addition to cloud computing, Microsoft Corporation (NASDAQ:MSFT) also boasts of a robust gaming unit spearheaded by the Xbox console. The acquisition of Activision Blizzard has strengthened the company’s prospects in the multibillion-dollar gaming sector, positioning it to generate long-term value.
Microsoft Corporation (NASDAQ:MSFT) regularly achieves solid financial results; its most recent quarter was no exception. Its income from sales and operating earnings both rose by 15% compared to the previous year, showing remarkable performance for a company of its stature. Its earnings per share (EPS) reached $2.95, surpassing analyst estimates. The rise in Microsoft’s earnings per share (EPS) proves its skill in boosting profits while maintaining steady growth across various businesses.
While the stock trades at a premium with a price-to-earnings multiple of 31, it boasts of one of the highest dividend yields of 0.80% among the magnificent 7, making it an ideal growth stock for passive income.
While analysts on Wall Street rate Microsoft as a Buy, it commands an average price target of $504.73, implying 20.93% upside potential. In the second quarter, 279 hedge funds held positions in Microsoft Corporation (NASDAQ:MSFT), and their stakes amounted to $89.07 billion.
Here is what Baron Opportunity Fund said about Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter:
“Microsoft Corporation (NASDAQ:MSFT) is the world’s largest software and cloud computing company. Microsoft was traditionally known for its Windows and Office products, but over the last five years it has built a $135 billion run-rate cloud business, including its Azure cloud infrastructure service and its Office 365 and Dynamics 365 cloud-delivered applications. The stock contributed to performance because of continued strong operating results and investor enthusiasm regarding Microsoft’s leadership across the secular megatrends of AI and cloud computing. Recent business momentum continued to show evidence of the strength and attractiveness of Microsoft’s product portfolio among its customer set: (1) Azure OpenAI – its suite of AI services – is now used by 65% of the Fortune 100 and contributed 7% of Azure revenue (an annualized run rate of $5.2 billion); (2) GitHub Copilot – its AI code writing service – is bending the productivity curve for developers (reports of 40%- plus improvements in developer efficiency) and now has 1.8 million paid subscribers, with growth accelerating to over 35% quarter-over-quarter; and (3) Copilot Studio – its AI application service that makes it easier for anyone to build an application, automate a workflow, or create a Copilot using natural language. 30,000 organizations across every industry have used Copilot Studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter-over-quarter. In the March quarter, Microsoft again reported better-than-expected financial results, highlighted by Microsoft Cloud growing 23% year-over-year, with the fastest commercial bookings in six quarters, and Azure accelerating to 31% constant currency growth, up from 28% in the previous quarter. June quarter guidance came in-line with consensus, but the company provided higher guidance for the most important segment, Intelligent Cloud, on the back of continued strong trends across Azure and Azure OpenAI. We remain confident that Microsoft is one of the best-positioned companies across the overlapping software, cloud computing, and AI landscapes.”
1. Amazon.com Inc (NASDAQ:AMZN)
Number of Hedge Fund Holders: 308
Amazon.com, Inc. (NASDAQ:AMZN) has often been perceived as a technology investment play, given its investment in various tech solutions to strengthen its edge in multiple sectors. Nevertheless, it stands out as one of the most promising growth stocks according to hedge funds for diversifying an investment portfolio in the consumer cyclical sector.
With the recent interest rate cuts expected to bolster consumer purchasing power, Amazon should be one of the biggest beneficiaries as customers flocking its e-commerce platform.
Amazon.com, Inc. (NASDAQ:AMZN)’s long-term prospects lie in the digital marketplace as the Prime program gains widespread recognition. The more benefits Amazon offers through Prime, the more loyal its customers become, allowing it to increase its pricing and thus generate more revenue.
Likewise, the company emerged successful in the online shopping sector by integrating the retail business framework and leveraging its vast scale to provide outstanding service and competitive pricing. This strategy is being replicated in the cloud industry, where it commands a 31% market share.
While the company generates most of its revenue from the online marketplace, it reaps most profits from its cloud unit, which is billed as the world’s largest cloud infrastructure. AWS operates at much higher margins, thus subsidizing the growth of Amazon’s lower-margin e-commerce business.
Amazon.com, Inc. (NASDAQ:AMZN) has also sought to diversify its revenue stream by advertising live sports and acquiring the rights to air National Basketball Association and Women’s National Basketball Association games beginning in 2025.
Analysts expect Amazon’s earnings to grow by nearly 28% yearly over the next three to five years, justifying the stock trading at a premium with a price-to-earnings multiple of 30. Additionally, analysts rate the stock as a buy with an average price target of $223.43, implying a 21.77% upside potential. Based on our Insider Monkey database, by the end of Q2 2024, 308 hedge funds had invested in AMZN, with their total stakes reaching $65.85 billion.
Diamond Hill Select Strategy stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q2 2024 investor letter:
“Among our top individual contributors in Q2 were Amazon.com, Inc. (NASDAQ:AMZN), Texas Instruments and Mr. Cooper Group. Internet retail and cloud infrastructure company Amazon is benefiting from strong profitability, particularly in its Amazon Web Services (AWS) business. Shares also received a boost amid growing optimism around the demand for AWS as Amazon customers’ investments in generative AI projects continue growing.”
While AMZN is an exceptional investment, we believe that AI stocks hold promise for delivering high returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than the ones mentioned in our list but that trades at less than 5 times its earnings check out our report about the cheapest AI stock.
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