1. Microsoft Corp (NASDAQ:MSFT)
Number of Hedge Fund Investors: 279
Barclays recently highlighted what Microsoft Corp (NASDAQ:MSFT) could gain in the search market in certain scenarios of the outcome of the DoJ’s case against Google.
“With Bing being a small part of the Microsoft top-line (5% of total revenue in FY24), the ramifications of any developments here seem to have been largely ignored based on our investor discussions, particularly with many software investors not having the context of the ongoing trial,” analyst Raimo Lenschow wrote in a note to clients. “However, following the Department of Justice’s long-awaited Proposed Final Judgment, we think that Microsoft investors should pay closer attention to any final rulings that come from the case.”
Lenschow, who has an Overweight rating and a $475 price target on Microsoft Corp (NASDAQ:MSFT), noted that if the remedies include ending revenue-sharing agreements between Google and other parties, or if Google starts syndicating its search offering, Bing could gain market share. This might force Google to make some of its technology stack available to partners and offer search text ads for one year to U.S. partners while keeping just 10% of gross revenue.
“In tandem with this, Google is only allowed to syndicate 25% of search text ads, meaning that partners (like an Apple) would need to backfill their remaining search ads either through their own tech stack or through a new partner like Bing,” Lenschow added. “This, in theory, would open up a unique opportunity for Microsoft to capture share for a period of time.”
Alger Spectra Fund stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q3 2024 investor letter:
“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 detracted from performance after Microsoft reported weaker-than-expected fiscal fourth-quarter revenue growth in its Azure cloud segment. Additionally, management’s fiscal first[1]quarter 2025 Azure revenue guidance came in slightly below estimates. Despite this shortfall, management highlighted that AI contributed 7% to cloud growth, up from 6% last quarter and 3% a year ago. We continue to believe that Microsoft is well-positioned to maintain a leadership role in AI, given its innovative approach and significant growth potential.”
While we acknowledge the potential of Microsoft Corporation (NASDAQ:MSFT), 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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