We recently published a list of Insiders are Selling These 10 AI Stocks. Since Microsoft Corporation (NASDAQ:MSFT) ranks 8th on the list, it deserves a deeper look.
Positive sentiment is prevailing in the market after strong bank earnings and increasing hopes of a soft landing. Ryan Detrick, Carson Group chief market strategist, said while talking during a recent program on CNBC that he sees more runway for the current bull market.
“This is a bull market. Now we’re in the third year of a bull market. My friend Sam Stovall said once you get to 65 years old, the odds of getting to 85 are really, really high. Bull markets work that way. Going back 50 years, there’s five other bull markets that made it into their third year, like this one is right now. The worst any of them went was another three years. A five-year total. The average was eight years. I’m not saying we have another six years of a bull market but what we’re saying is this is an economy that keeps surprising to the upside.”
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However, the analyst said large-cap tech stocks are “pricey.” He believes small- and mid-cap stocks are cheap and labeled financials and industrials as fairly valued.
There are some top AI stocks that are seeing insider selling activity. In this article, we take a look at those stocks and analyze their fundamentals and market sentiment. 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
On September 9, 2024, Microsoft Corp (NASDAQ:MSFT) Vice Chair and President Bradford L. Smith sold 40,000 shares at $402.59 per share, reducing his ownership by 7% to 532,347 shares. The sale was valued at approximately $16.1 million. The stock is up about 3% since the transaction.
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 Insider Monkey’s list titled Insiders are Selling These 10 AI Stocks. 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.