We recently published a list of the Top 10 Overbought AI Stocks in 2024. Since Microsoft Corp (NASDAQ:MSFT) ranks 2nd on the list, it deserves a deeper look.
The second half of 2024 is here and rate cuts from the Federal Reserve remain elusive, with warnings about valuations and AI-led market hype growing louder. A number of notable Wall Street analysts have recently warned that the markets remains more concentrated than ever where just a few stocks account for most of the gains, thanks to their dominance in the AI industry. Many also believe the market is up for a correction as it has entered the overbought territory. Financial services company BTIG recently said in a report that the world’s fifth-largest exchange-traded fund by assets under management (AUM), QQQ Trust Series 1, now trades “well into” overbought territory based on its Relative Strength Index technical indicator. QQQ tracks the Nasdaq-100 Index and it’s not surprising to see the ETF showing signs of being overbought as more and more investors pile into mega-cap tech stocks in order to ride the AI bandwagon.
For this article we scanned the holdings of the Invesco QQQ Trust Series 1 ETF and picked top technology holdings of the fund with higher Relative Strength Index (RSI) values. Usually, an RSI value of 60 and above shows a stock is overbought. We have also mentioned the number of hedge fund investors with these stocks. 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: 293
Microsoft Corp (NASDAQ:MSFT) is the biggest holding of the QQQ ETF, which is overbought based on the fund’s RSI, according to BTIG research. Microsoft Corp’s (NASDAQ:MSFT) RSI is 71.81, worse than 95.24% of 2921 companies in the Software industry.
However, many Wall Street analysts are still bullish on the stock. 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.
Mar Vista Focus strategy stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its first quarter 2024 investor letter:
“Microsoft Corporation (NASDAQ:MSFT) continues to occupy a strong position, poised to capture market share as businesses navigate the transition to a digital-first landscape and embrace generative AI-driven solutions. The company’s commanding presence in the enterprise arena, combined with its comprehensive product portfolio encompassing Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS), establishes it as a crucial provider of IT solutions for companies of all sizes.
Microsoft is effectively executing its strategy in a sizable market by offering a roadmap for digital transformation and adoption of AI-driven solutions, such as ChatGPT, while enhancing productivity and reducing costs. Consequently, we anticipate that Microsoft’s solutions should exhibit resilience even in a more challenging macroeconomic environment, supporting low double-digit growth in intrinsic value within our investment horizon.”
Overall, Microsoft Corp (NASDAQ:MSFT) ranks 2nd on Insider Monkey’s list titled Top 10 Overbought AI Stocks in 2024. 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.
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Disclosure: None. This article is originally published at Insider Monkey.
