We recently compiled a list of the 10 Best Stocks to Buy According to Billionaire D.E. Shaw. In this article, we are going to take a look at where Microsoft Corporation (NASDAQ:MSFT) stands against the other stocks.
Equity market pricing is never perfect due to supply and demand imbalances, emotional reactions, and errors. Billionaire investor David Elliot Shaw excels at detecting and exploiting these inefficiencies to generate shareholder value. Unlike most hedge fund managers who rely on intuition, Shaw uses sophisticated mathematical models and algorithms for investment decisions. Over the years, he has developed software and hardware to gain an edge in investment opportunities.
Born in 1951, David E. Shaw became a successful billionaire scientist and hedge fund manager. After earning a PhD from Stanford in 1980, he founded D.E. Shaw & Co. in 1988 with six employees and $28 million in capital. The hedge fund has averaged a 12.5% return since inception, with only one down year. Shaw’s firm uses powerful computers and advanced algorithms for quick market responses and risk management, returning over $51 billion to investors. Likewise, it generated a net return of 11.88% between 2001 and 2011. While Shaw’s firm was down by 9% at the height of the financial crisis in 2008, it bounced back to profitability with a 21% return in 2009.
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D.E. Shaw is expanding and launching new funds. In 2023, they raised money for D.E. Shaw Alkali Fund VI, the newest in their Alkali group. By November 2024, they had secured $1 billion for this fund, focusing on corporate debt, structured credit, and synthetic securitizations.
Last year, the firm also raised $1.1 billion for two new private investment vehicles: D.E. Shaw Voltaic Fund and D.E. Shaw Diopter Fund. In June 2024, D.E. Shaw announced it was raising its second fund in 16 months to target bank capital deals. They filed a private placement notice for D.E. Shaw Diopter Fund II, but the amount wasn’t disclosed.
Bloomberg reported that D.E. Shaw’s largest hedge fund, the D.E. Shaw Composite Fund, gained 9.6% in 2023, outperforming the HFR Global Hedge Fund Index, which was up about 2.5% through December 15. Reuters added that D.E. Shaw’s macro-oriented fund, the Oculus Fund, gained 7.8% in 2023, beating its macroeconomic peers. According to Bloomberg, the Oculus Fund has never had a negative year since it started.
Diversification is another vital arsenal that D.E. Shaw & Co. relies on to spread risk and reduce market volatility. The firm is highly diversified with a portfolio value of about $116.49 billion. While technology stocks account for the most significant share in the equity market at 24.6%, the hedge fund also has stakes in Services at 17.5% and the financial sector at 7.7%. In addition to diversifying holdings, Shaw relies on a multi-strategy approach to squeeze optimum value in the market.
Billionaire D.E. Shaw suggests investing in resilient companies, even as the US Federal Reserve signals fewer interest rate cuts in 2025. Despite three cuts reducing the benchmark rate to 4.25%-4.5%, economic slowdown concerns persist, especially in the labor market. Job growth is mainly in government and health care, while growth in manufacturing, business, and professional services has stagnated.
Our Methodology
To make the list of best stocks to buy according to billionaire D.E. Shaw, we scanned D.E. Shaw & Co investment portfolio. We then settled on the hedge fund’s largest holdings analyzing why they stand out and the number of hedge funds that hold stakes in them. Finally, we ranked the stocks in ascending order based on D.E. Shaw & Co stake value.
At Insider Monkey, we are obsessed with 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).
A development team working together to create the next version of Windows.
Microsoft Corporation (NASDAQ:MSFT)
D.E. Shaw & Co’s Stake Value: $1.71 Billion
Number of Hedge Fund Holders: 279
Microsoft Corporation (NASDAQ:MSFT) is a technology giant that develops and supports software, services and solutions. It is one of the best stocks to buy, according to billionaire D.E. Shaw, amid the artificial intelligence race. The company has been investing in generative AI to strengthen its software offerings, cloud unit, and search engine.
Likewise, the company has cemented its position as the second-largest cloud computing company with a 25% market share. While Microsoft Corporation (NASDAQ:MSFT) does not release revenue numbers for its Azure platform, revenue for Azure and other cloud services was up by 33% in its fiscal fourth quarter. The company spent $55.7 billion in its fiscal 2024. A majority of the investment went to building the AI infrastructure, which is expected to be a key growth driver.
In fiscal Q4, Microsoft Corporation (NASDAQ:MSFT) notes that the number of paid customers doubled from quarter to quarter, demonstrating the impressive traction of its models-as-a-service offering. Customers can rent a variety of models from the tech giant to help them create and implement AI applications. Therefore, Microsoft should see further acceleration in its Azure revenue as the demand for AI services in the cloud is expected to grow significantly in the upcoming years.
Growing demand for Microsoft 365 office collaboration and productivity tools, cloud computing solutions and a 9% increase in search and news-advertising revenue affirm the tech giant is well poised for long-term growth.
RiverPark Large Growth Fund stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q3 2024 investor letter:
“Microsoft Corporation (NASDAQ:MSFT): MSFT was a top detractor in the third quarter following a fiscal fourth quarter earnings report that featured inline operating metrics but mixed guidance. Positively, the company reported strong revenue (+15%) and earnings growth (+10%), powered by Azure (+30%), and operating margins of 43%. Guidance however calls for lower than expected fiscal first quarter Azure revenue as infrastructure constraints limit growth, and higher capital expenditures throughout the company’s fiscal 2025 to alleviate these constraints. The company expects growth to reaccelerate in the back half of fiscal 2025 as more AI capacity comes online.
Cloud-based services have become the company’s largest revenue and earnings producer. The company’s Azure platform alone has the potential to grow to more than $200 billion in annual revenue over the next decade. Overall, we believe that the company will continue to deliver double-digit revenue and EPS growth and generate an enormous amount of free cash flow to return to shareholders and use for acquisitions.”
Overall MSFT ranks 3rd on our list of the best stocks to buy according to Billionaire D. E. Shaw. While we acknowledge the potential of MSFT as an investment, 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.