We recently compiled a list of the 7 Best Big Company Stocks to Buy Now. In this article, we are going to take a look at where Microsoft Corporation (NASDAQ:MSFT) stands against the other big company stocks.
Mega-cap stocks—major technology companies to be precise—continued to drive a disproportionate share of the total US stock market returns. Market experts believe that from 2023 beginning to May 2024 end, only a handful of the biggest and most well-established technology companies drove ~60% of the S&P 500’s 40%+ gain.
FactSet reported that, for 2Q 2024 (with 93% of S&P 500 companies publishing actual results), ~79% of the S&P 500 companies reported positive EPS surprises. On the other hand, ~60% of S&P 500 companies reported positive revenue surprises. In 2Q 2024, semiconductor companies’ stocks were the critical drivers for the S&P 500 Index. The AI themes supported other sectors, like utilities, seeking support from higher electricity demand for AI data centers.
3Q 2024 Earnings Season – A Preview
Wall Street experts believe that estimates for 3Q 2024 have seen a decline and the magnitude of estimate cuts seems to be significantly bigger than compared to the comparable periods of the first 2 quarters of 2024. Market participants opine that total S&P 500 earnings should see an increase of 3.9% from the same period of last year on 4.7% revenue growth. These estimates have come down since the beginning of the period, as the current 3.9% growth had fallen from 6.9% at the beginning of July.
The decline in estimates stems from the risks associated with economic downside, slower disinflation, expectations for higher-for-longer rates, and increased geopolitical risks. Apart from these risks, the uncertainty around the US Presidential elections remains the most important factor responsible for the decline in estimates.
Wall Street analysts believe that uncertainty surrounding the US presidential election is expected to rise as the November vote draws closer. This can act as an additional headwind in the environment already demonstrating signs of losing momentum.
Reuters reported that populism, polarization, and an expected tight race can result in a surge in the economic policy uncertainty index (EPU). This is a news-headline-based index, which was created by economics professors Steven J. Davis, Scott R. Baker, and Nick Bloom. The rise in EPU takes place when an uncertain outlook about government policy prompts consumers to delay their spending and forces businesses to put a halt on investment and hiring.
Brandywine Global Investment Management (A Franklin Templeton Company), an investment management firm, believes that this might be happening in the current environment. The firm noted that the University of Michigan’s current economic conditions index remains below the expectations index. Notably, this is a rare occurrence, suggesting that consumers are anxious.
Amidst Worries, Investors Should Stick to Big Company Stocks
Analysts at Brandywine Global believe that this year’s election cycle, whether warranted or not, continues to impact the US consumer, which in turn, is impacting the corporate sector.
In the 2020 follow-up working paper, Davis (the co-founder of the EPU index) and his colleagues revealed that the EPU index tends to increase by ~18% in the month of November during a Presidential election. When elections come close, and there is a winning margin of less than 5%, and polarized, the EPU index can jump by ~28% in election month.
Political uncertainty can be a more powerful factor in asset prices, with investors focusing on the US Presidential elections. A JPMorgan survey revealed that investors continue to see political risk in the US and abroad as the top destabilizing metric for equities.
AI fever coupled with strong earnings has supported broader equities in 1H 2024, and gains have been concentrated in technology and growth stocks. Analysts opine that some investors are still looking for areas of the market that have underperformed, and they expect that the recent rally in tech might spread into other sectors as well. Most investors welcomed the signs of a slowdown in inflation and moderation in growth. As a result, the US Fed has hinted to cut key interest rates. With uncertainties looming, market experts believe that investors should stick to the big stocks, which have a healthy track record of delivering strong gains.
Our methodology
To select the 7 Best Big Company Stocks to Buy Now, we used the Yahoo Finance and Finviz stock screeners to filter stocks with biggest market caps from different industries. Next, we narrowed our list by selecting the big and well-established companies that were the most popular among elite hedge funds. Finally, the stocks were ranked in the ascending order of their 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).
A development team working together to create the next version of Windows.
Microsoft Corporation (NASDAQ:MSFT)
Number of hedge fund holders: 279
Microsoft Corporation (NASDAQ:MSFT) develops and licenses consumer and enterprise software. The company is known for its Windows operating systems and Office productivity suite.
Given its investment in OpenAI, Microsoft Corporation (NASDAQ:MSFT) emerged as a leader in AI. The company continues to upsell users on premium-priced Office 365 versions to include advanced telephony features. The company transitioned to a subscription model for its Microsoft 365 software. Therefore, if anyone wants to use its suite of apps – such as Word, PowerPoint, and Excel – they will be tied in its ecosystem for several years.
Microsoft Corporation (NASDAQ:MSFT)’s cloud business is the largest and fastest-growing segment, and this business is well-placed to drive total growth as AI capacity comes online.
Cost-cutting initiatives in corporate America have also been implemented. This means that cost optimization headwinds, which were impacting Azure’s growth, are now over. Separately, its new AI-productivity tool, Copilot, is being employed by ~60% of Fortune 500 companies. Therefore, it should be able to hold a leading position in AI.
Microsoft Corporation (NASDAQ:MSFT) has announced results for 4Q 2024, with revenue reaching $64.7 billion, up by 15% (and up 16% in constant currency) and operating income coming at $27.9 billion (up 16% in constant currency). The company’s quarterly results were aided by revenue increases across Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
Analysts at Truist Financial reaffirmed a “Buy” rating on the shares of Microsoft Corporation (NASDAQ:MSFT), giving the company a price target of $600.00 on 17th June. According to our database, 279 hedge funds held stakes in the company in the second quarter, with positions worth $89.06 billion.
Fred Alger Management, an investment management company, released its second quarter 2024 investor letter. Here is what the fund said:
“Microsoft Corporation (NASDAQ:MSFT) is a beneficiary of corporate America’s transformative digitization. The company operates through three segments: Productivity and Business Processes (Office, LinkedIn, and Dynamics), Intelligent Cloud (Server Products and Cloud Services, Azure, and Enterprise Services), and More Personal Computing (Windows, Devices, Gaming, and Search). During the quarter, shares contributed to performance after the company reported strong fiscal third quarter results, underscoring its leadership position in the cloud and highlighted its role as a primary facilitator and beneficiary of AI adoption. Company revenue growth, operating margin, and earnings growth surpassed consensus expectations. The utility scale Azure cloud business grew 31% in constant currency of which 7% was AI related versus 3% two quarters ago. Further, management noted most of the AI revenue continues to stem from inference rather than training indicating high quality AI applications by Microsoft’s clients. Management also indicated that the significant cost-cutting programs in corporate America are done, suggesting that the cost optimization headwinds previously impacting Azure’s growth are over. Separately, management provided color on their new AI-productivity tool, Copilot, noting that approximately 60% of Fortune 500 companies are already using Copilot, and that the quarter witnessed a 50% increase in Copilot assistance integration within Teams. We continue to believe that Microsoft has the potential to hold a leading position in AI, given its innovative approach and demonstrated high unit volume growth opportunity.”
Overall MSFT ranks 1st on our list of the best big company stocks to buy. While we acknowledge the potential of MSFT as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued 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.
