We recently published a list of 10 Trending AI Stocks to Watch in September. Since Microsoft Corp (NASDAQ:MSFT) ranks 2nd on the list, it deserves a deeper look.
Sam Stovall, chief investment strategist at CFRA Research, said while talking to CNBC in a latest program that since 1990, the market on average gains about 18% between the last rate hike and the first rate cut. However, during the 30 days after the first rate cut, the market historically “tread water,” gaining less than “one half of one percent.”
“Most of the action is below surface however, in the sectors, areas where a lot of the leaders be in the defensive areas but I have to add technology in there because investors don’t want to be giving up on the growth,” Stovall said.
Stovall pointed to another important historical data point regarding election years. He said that usually August and September are slow months in the stock market, but during election years the trend shifts to September and October, with markets historically rebounding in November and December once the uncertainty around the election subsides. The analyst recommended investors to position for a post-election rally which he believes buoys growth stocks.
For this article, we chose the top 10 AI stocks currently on investors’ radar following important news, earnings and analyst ratings. With each stock, we have mentioned the number of hedge fund investors. 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).
Photo by Microsoft 365 on Unsplash
Microsoft Corp (NASDAQ:MSFT)
Number of Hedge Fund Investors: 279
Wedbush analyst Dan Ives has yet again reiterated his claim that the AI boom represents the fourth industrial revolution and the AI party is just getting started.
“While we recognize the bumpy macro/job data and the drumroll for the US Presidential elections into November, we view this sell-off in tech stocks as a buying opportunity for our core winners in this AI Revolution,” said Wedbush analysts, led by Daniel Ives, said in a note.
Microsoft Corp (NASDAQ:MSFT) is one of the top stocks Ives believes can benefit from the AI wave.
“While investors may fret about this massive spending wave and frustrated that top-line growth/margins from these investments could take time to materialize, this ultimately speaks to our view this is a 1995 (almost 1996) start of the Internet Moment, and not a 1999 Tech Bubble-like moment despite bears getting louder during some of these head for the elevators tech sell-offs,” Ives added.
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.
Alger Spectra Fund stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q2 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 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, Microsoft Corp (NASDAQ:MSFT) ranks 2nd on Insider Monkey’s list titled 10 Trending AI Stocks to Watch in September. While we acknowledge the potential of Microsoft Corp (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.
