We recently published a list of 7 Best AI Value Stocks That are ‘Money Machines’ According to NYU’s Aswath Damodaran. Since Microsoft Corp (NASDAQ:MSFT) ranks 2nd on the list, it deserves a deeper look.
Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University. His thoughts on economy and stock valuations are given a lot of weight by analysts. Damodaran in his recent interview with CNBC said that Magnificent Seven stocks have become the “value stocks for investors who care about earnings and cash flows.”
“We look at the last year and a half, they’ve added $8.8 trillion in market cap… just these seven companies. Just to give you perspective, the second-largest market in the world, China, has a market cap of $12.1 trillion. These seven stocks alone have added more in market cap than the entire German market, the French market, the Swiss market.”
Damodaran’s comments are important because he’s been repeatedly saying in the past that major technology companies are fully or overvalued. In September, he said on CNBC that if you go through the list of top tech stocks, “you are more likely to be overvalued than undervalued.”
But in his latest interview, Damodaran said that before we “dismiss” Mag. 7 stocks as “risky tech companies,” we should keep in mind that “these are the money machines in this market.”
However, when asked whether he believes we are not in any kind of “danger zone,” the professor said we are in the danger zone not just in terms of these seven stocks, but the market overall.
In this article we take a look at the Mag 7. stocks and their AI-related growth catalysts. With each stock we have 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).
Microsoft Corp Inc (NASDAQ:MSFT)
Number of Hedge Fund Investors: 293
MSFT is one of the top members of the Mag. 7 group of stocks which Aswath Damodoran called AI “value” stocks that have become “money machines.” In September last year, he said MSFT was one of the direct beneficiaries of AI and that’s why “some” of its stock rally was “justified.”
New Street Research started covering the stock with a Buy rating. The firm said that Microsoft Corp (NASDAQ:MSFT) is well positioned to grow profit in the “low teens for years to come” even if the AI revolution fails to pan out. New Street Research has a $570 price target on Microsoft Corp (NASDAQ:MSFT).
Analysts believe Microsoft Corp’s (NASDAQ:MSFT) AI ecosystem around its products would strengthen its Cloud division thanks to Microsoft Corp’s (NASDAQ:MSFT) integration of AI into its Cloud products. Microsoft Corp’s (NASDAQ:MSFT) Intelligent Cloud segment’s profit in the latest quarter totaled $12.51 billion, a whopping 32% growth on a YoY basis.
Microsoft Corp’s (NASDAQ:MSFT) huge investments to revive its Search business are also working. Bing’s market share has jumped to 3.64% as of April 2024, a 0.88 points gain on a YoY basis.
Wall Street expects Microsoft Corp’s (NASDAQ:MSFT) earnings to grow 12.50% next year. The stock’s forward P/E of 31 based on 2025 EPS makes it look attractive at the current levels. Average analyst estimate for Microsoft Corp (NASDAQ:MSFT) is $483, which presents a 14% upside potential from the current levels.
Aristotle Capital Value Equity Strategy stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter:
“Microsoft Corporation (NASDAQ:MSFT), a leading technology company specializing in software, hardware, cloud services, AI and digital applications, was one of the largest contributors during the quarter. The company continues to execute on a myriad of catalysts across its businesses, particularly within cloud‐based applications like Azure and platform‐based servicessuch as LinkedIn. For Azure, Microsoft detailed previously announced partnerships with NVIDIA and AMD to develop first‐party silicon chips and custom‐ designed infrastructure innovations, including its AI accelerator (Azure Maia) and CPU (Azure Cobalt). These advancements are part of Microsoft’s strategy to enhance AI performance and efficiency within the Azure ecosystem. LinkedIn, which has more than doubled its membership to over one billion in the past four years, is expanding its revenue streams across subscriptions and advertising and increasingly disrupting traditional recruiting and training functions. LinkedIn recently passed $16 billion in run rate annual revenue, which is only ~7% of total Microsoft revenue, but if it were a standalone business, it would be in the top half of S&P 500 constituents! The Azure and LinkedIn examples are just two of many that illustrate Microsoft’s ongoing transformation from an operating system to a total technology solutions provider.”
Overall, Microsoft Corp (NASDAQ:MSFT) ranks 2nd on Insider Monkey’s list titled Jim Cramer’s Latest Portfolio: Top 10 Stocks in July. While we acknowledge the potential of Microsoft Corp (NASDAQ:MSFT), our conviction lies in the belief that 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 Microsoft Corp (NASDAQ:MSFT) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These Stocks.
Disclosure: None. This article is originally published at Insider Monkey.