We recently published a list of 10 Best Innovative Stocks to Invest in According to Hedge Funds. In this article, we are going to take a look at where Microsoft Corporation (NASDAQ:MSFT) stands against other best innovative stocks to invest in according to hedge funds.
Technology is a Big Deal, Strategist Highlights
The Magnificent Seven continues to grasp a sizeable market share of the market gains over the past few years. That said, investors and analysts are excited to see what this earnings period has to offer for the magnificent seven and how much of an influence they have on the market. On October 31, Christian Dery, head of macro strategy at Capital Fund Management, appeared in an interview on Yahoo Finance to discuss the impact of the magnificent seven on the market.
Dery suggested that these companies have grown to become large entities and their market capitalization often fluctuates by $2 billion to $400 billion on earnings events. Looking at the dispersion of the index, Dery adds that individual stocks within the S&P are very diverse and more independent, hinting towards a very low correlation in the index.
He adds that generative AI and LLMs are very different from the traditional software business. Therefore, the hyperscaling model that is conventionally taken from software can not be applied here. For every new customer in the software business, the marginal cost often goes down to nearly zero. However, if you look at the “tech incumbents”, they have to increase their capital expenditures to develop compute clusters and scale their operations, suggests Dery.
In 2023, the chips industry generated revenue of about $3 billion, reflecting that we are yet to find a killer use case or see results of generous AI spending. Dery adds that the market is more likely to be “discerning” on the path to profitability since companies are going to focus more on capital expenditures and projections for capital expenditures. He is particularly interested in the CapEx projections of the Magnificent Seven and shares that if they miss there could be a negative reaction among those stocks.
Dery reiterated that the market is yet to see the investments pay off multiple times but maintains his interest in capital expenditures by these companies playing out. While he is bullish on technological innovation and believes artificial intelligence is disruptive and a “big deal”, he fails to see viable results as of now. Dery also emphasizes that these companies are directing their investments to AI because they do not want to fall behind competitors, with no proper timeline for AI monetization.
That said, some companies are investing heavily in innovation and are at the forefront of a technological revolution.
Our Methodology
To come up with the 10 best innovative stocks to invest in according to hedge funds, we went over multiple similar rankings on the internet from credible financial websites. We then examined the hedge fund sentiment of each stock and picked the most popular ones. Our list is in ascending order of the number of hedge fund holders as of the end of Q2 2024.
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) is a technology giant that is spending generously on artificial intelligence and data. As the company ventures into new technologies and AI, it does represent a breakthrough stock that can influence the future.
Microsoft Corporation (NASDAQ:MSFT) is part of the list because of its strategic investments, positioning it as a leader in AI. On October 31, Brent Bracelin, Piper Sandler equity research analyst of cloud software and analytics, appeared in an interview on Yahoo Finance to analyze the performance of MSFT. Bracelin suggests that the company’s AI business will cross $10 billion in revenue in only two and a half years, becoming its fastest-growing product yet. He adds that its AI business “has legs” to become the next $100 billion business for MSFT. While he agrees that MSFT is pouring a lot into AI, he highlights that more than half of it is dedicated to building land investments. The land investments will eventually “be filled with capacity” driving incremental revenue and profit for the company.
On the AI front, the company closed deals with startups and technology companies to run their workloads on Microsoft Azure, its cloud platform. On October 10, the company revealed several breakthrough AI capabilities in healthcare that offer medical imaging, clinical records management, and genomics. Previously on October 3, Microsoft Corporation (NASDAQ:MSFT) closed a partnership with Rezolve AI to develop innovative AI-backed online retail solutions.
Microsoft Corporation (NASDAQ:MSFT) is a long-standing company with immensely strong fundamentals. This coupled with its investments in AI and data make it one of the best innovative stocks to buy according to hedge finds.
Overall, MSFT ranks 2nd on our list of best innovative stocks to invest in according to hedge funds. While we acknowledge the potential of MSFT to grow, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. 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.
