We recently published a list of Hedge Funds are Buying and Selling These 10 AI Stocks. Since Microsoft Corporation (NASDAQ:MSFT) ranks 1st on the list, it deserves a deeper look.
The AI-led rally in the stock market is expected to ripple through other sectors and smaller tech companies, but analysts believe for now large-cap companies are still the key focus of money managers. Morgan Stanley in its August key themes report said that while small-cap stocks rebounded on rate-cut hopes, the window for their outperformance is “too narrow.”
“Historically small cap outperformance depended primarily on economic growth acceleration. Greater risk exposure to a “higher-for-longer” rate environment has added inverse rate correlation to the mix. While periods of growth acceleration with lower rates are plausible (e.g. end-2023), we see this combination as relatively unlikely in the current inflation environment. The recent decline in interest rates was a tailwind to small cap stocks, but softer economic data likely limits the durability of this trade,” the firm said.
The latest earnings season showed that ROI on the huge AI spending by major companies is small in the short term, but long-term gains seem promising. Many companies have already started seeing monetization on their AI investments. Goldman Sachs analysts Joseph Briggs, Kash Rangan, and Eric Sheridan said in a June report titled GEN AI: TOO MUCH SPEND, TOO LITTLE BENEFIT? that they remain more optimistic about AI’s economic potential even if we don’t see immediate benefits for now.
Hedge funds are one step ahead of average individual investors due to the sheer scale of resources and capital they have. That’s why it’s always interesting to see which stocks they are buying and selling. In this article we take a look at the 10 most important AI stocks which were on the radar of elite money managers based on their second-quarter filings. 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)
Total Number of Hedge Fund Investors as of the End of Q2: 279
Total Number of Hedge Fund Investors as of the End of Q1: 293
Billionaire investor Philippe Laffont’s Coatue Management’s stake in Microsoft Corp (NASDAQ:MSFT) inched up by 0.6% to about $1.7 billion during the second quarter. Rajiv Jain’s GQG Partners decreased its stake by 22% while Michael Platt and William Reeves’ BlueCrest Capital Mgmt. increased their hold on Microsoft Corp (NASDAQ:MSFT) by over 1,000%. Billionaire Dalio’s Bridgewater increased its take in MSFT to 1.09 million shares from 580K.
Microsoft Corp (NASDAQ:MSFT) shares recently fell following its latest quarterly results which showed the company’s Cloud business growth was lower than expected. For the ongoing quarter, Microsoft Corp (NASDAQ:MSFT) expects revenue in the range of $63.8B and $64.8B, compared to the $65.07B estimate. Microsoft Corp (NASDAQ:MSFT) Azure revenue is expected to grow by 28% and 29% year over year.
But what about AI? While Microsoft does not mention specific AI numbers, analysts believe Copilot is already playing a key role in growth at several segments of the company. Microsoft Corp (NASDAQ:MSFT) Office’s commercial customer sales soared to $48 billion, significantly up from last year’s 10% growth, likely driven by Copilot Pro subscriptions. Office for individual users also saw a boost, with sales reaching $6.2 billion, a 4% increase compared to last year’s 2% growth, indicating accelerating growth from Copilot integration. Dynamics ERP and CRM software sales hit $6.3 billion, up 19%, surpassing last year’s 16% growth. This uptick is likely due to customers switching to Dynamics for the Copilot integration in the Dynamics Contact Center platform, which provides automated customer service chatbots and significant cost reductions. Bing sales jumped 3% year over year as more users switched to the search engine from Google Search, thanks to AI features.
While Microsoft Corp (NASDAQ:MSFT) expenses are expected to remain elevated, its investments are working and would bear fruit in the long term. The stock is down about 11% over the past month. It trades 26x next fiscal year’s earnings. MSFT could be an attractive buy on the dip for long-term investors.
Polen Focus Growth Strategy stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter:
“The top absolute contributors were Alphabet, Microsoft Corporation (NASDAQ:MSFT), and Amazon. Microsoft was another top absolute contributor in the quarter, speaking to a growing appreciation for all the ways the company has an opportunity to monetize GenAI, be it in its Office suite or Azure cloud business. In the latter case, it contributed 7% to Azure’s revenue growth in the most recent quarter. We believe Microsoft remains a highly advantaged business with many secular tailwinds driving durable growth for the foreseeable future, even at its immense scale.”
Overall, Microsoft Corporation (NASDAQ:MSFT) ranks 1st on Insider Monkey’s list titled Hedge Funds are Buying and Selling These 10 AI Stocks. While we acknowledge the Microsoft Corporation (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 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.