We recently published a list of Top 10 Trending AI Stocks in Q4. In this article, we are going to take a look at where Microsoft Corporation (NASDAQ:MSFT) stands against other top trending AI stocks in Q4.
As LLMs continue to hog data from the open internet for training, publishers are growing concerned about their intellectual property and compensation. In a latest development, The New York Times issued a cease and desist letter to Perplexity to stop using its data for training without permission.
Gene Munster of Deepwater Asset Management, while talking about this news on CNBC, said that these developments could prove “horrendous” for LLMs in the short term.
“The short-term economics for these large language models is horrendous, and so, I think it changes from bad to worse in the short term. I just want to put some quick context around those numbers. Right now, OpenAI pays NewsCorp about $50 million. They’re going to do about $4 billion in revenue this year and $11 billion next year, so, I mean, it’s measurable.”
However, Munster thinks in the long term, these licensing deals would not impact major LLM companies negatively given the ROI they’d be enjoying.
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The analyst also made a prediction about Perplexity. He believes the company would be acquired because it’s competing with a lot of “big guns.” He quoted Oracle’s Larry Ellison who said that it takes about $100 billion to be a “proprietary” large language model.
“So, you look at the $6 billion at OpenAI, and you need to be raising in chunks of billions, not millions. Understand that it’s a big raise for a private company that’s moving quickly, but they’re going to get acquired. They’re just up against too many other big guns here to try to get to those coveted four or five spots of the LLM landscape.”
For this article we picked 10 AI stocks trending based on latest news. With each company we have mentioned its hedge fund sentiment. 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).
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Microsoft Corp (NASDAQ:MSFT)
Number of Hedge Fund Investors: 279
KeyBanc’s third-quarter 2024 survey of value-added resellers (VARs) has noted a rise in IT budget expectations.
“For 2024, IT budgets saw a slight growth in expectations, but the bigger shift was in 2025, where budgets are now expected to grow by 4.4%, up from 3.2% just 90 days ago,” said KeyBanc analysts, led by Jackson Ader, in a detailed report to investors.
“Today, 37% of VARs expect IT budgets to bounce back in early 2025,” Ader said. “That’s a rise from last quarter, and the fact that it starts soon gives more clarity than before.”
Based on this survey, the firm gave bullish ratings to several stocks, including Microsoft Corp (NASDAQ:MSFT). Microsoft’s target was increased to $505 from $490.
DA Davidson recently downgraded the stock, with analyst Gil Luria saying the company’s advantages in the cloud and code generation sectors have diminished, making it difficult for Microsoft Corp (NASDAQ:MSFT) to maintain its previous performance. He highlighted that Amazon Web Services is now nearly matching Azure in cloud growth, while Google Cloud is also gaining momentum. Luria downgraded Microsoft Corp (NASDAQ:MSFT) from Buy to Neutral, maintaining a $475 price target. He pointed out that Amazon and Google have made significant strides in integrating custom silicon into their data centers, putting Microsoft at a disadvantage. This reliance on NVIDIA (NVDA) for technology means Microsoft is effectively transferring wealth from its shareholders to NVIDIA’s, according to Luria.
Following a year of margin expansion, Microsoft Corp (NASDAQ:MSFT) is now projecting a decline in operating margins due to increased data center capital expenditures rising from 12% to 21% of revenue. This increase outpaces that of Amazon and Google, largely due to Microsoft’s dependence on NVIDIA. Luria said that if Microsoft Corp (NASDAQ:MSFT) continues to overinvest at the current rate, margins could drop by at least 1 percentage point cumulatively, potentially necessitating layoffs of around 10,000 employees each year to maintain margins. The analyst also thinks Microsoft Corp (NASDAQ:MSFT) has lost much of its edge with GitHub Copilot, as Amazon and GitLab (GTLB) have caught up in capabilities.
The concerns voiced by the analyst are not unfounded. Microsoft is also losing its edge in open-source models as enterprises shift toward cost-effective, transparent open-source solutions like Meta’s Llama 3.1.
Generation Investment Management Global Equity Strategy stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter:
“Generative AI’s hunger for power has increased disproportionately with its intelligence. According to one estimate, OpenAI’s GPT-4 required 50 gigawatt hours (GWh) of electricity to train, much more than the 1.3 GWh needed for GPT-3.3 And then AI requires even more power when it is put to use (so called ‘inference’). Some of the latest trends worry us. Microsoft Corporation (NASDAQ:MSFT) appears to be slipping in its ESG goals, with its greenhouse gas emissions rising again last year, as it invests in becoming a big player in AI. It is struggling in particular to curb its Scope 3 emissions in the capital goods category – nowhere more so than in the activity associated with the construction of data centres: both the embedded carbon in construction materials like steel and cement, as well as the emissions from the manufacturing of hardware components such as semiconductors, servers and racks. Google’s emissions have risen by close to 50% in the past five years.
We feel it is worth dwelling on Microsoft for a few moments, since we suspect you will be hearing a lot more about the relationship between AI and sustainability in the coming months. The bottom line is that we continue to see Microsoft as a sustainability leader. In the case of Scope 2 emissions, the company covers 100% of its electricity use with purchases of renewable energy. Crucially, though, the majority of this green energy is directly sourced via power purchase agreements, which bring new renewable capacity to the grid. Microsoft is also committed to operating 24/7 on renewable power by 2030, a policy that will help bring energy storage onto the grid as well…” (Click here to read the full text)
Overall, MSFT ranks 1st on our list of top trending AI stocks in Q4. While we acknowledge the potential of Microsoft Corp (NASDAQ:MSFT), our conviction lies in the belief that under the radar 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 MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.