We recently compiled a list of the 10 Best Growth Stocks to Buy According to Billionaire Dan Loeb and in this article we will discuss the activist investor’s position in Microsoft Corporation (NASDAQ:MSFT).
Billionaire investor Dan Loeb’s hedge fund Third Point had a strong start to 2024 after its offshore fund posted returns of 7.8% in the first quarter chugging along with the broader market’s 10.6% gain. AI has been one of his top investing themes for some time now and the activist shareholder maintains his bullish view on the technology. In the first quarter, he initiated a position in Alphabet and also increased his position in Amazon by 22% to about $920 million.
Loeb Thinks Vistra’s Capital Allocation Strategy is “Brilliant”
Loeb’s also bullish on the energy transition and one of his favorite stocks that is expected to benefit from the AI-driven electricity demand is Vistra, one of the largest independent power producers and retail electricity providers in the US. Though Vistra’s core markets have experienced volatility due to weak domestic electricity demand, the power company’s “capital allocation strategy has been brilliant”, he stated in his Q1 2024 letter to shareholders, seen by Insider Monkey. In the weak demand environment for fossil fuels, Vistra made smart moves by shutting down its unprofitable coal plants and instead buying back 33% of its shares between 2018 and 2023. Additionally, its acquisition of nuclear generation assets of Ohio-based energy company, Energy Harbor, was right on time as governments are turning to nuclear fuel sources to meet the world’s growing energy demands. Loeb expects Vistra to be a direct beneficiary of AI-driven electricity demand and is bullish on the company’s unique position of holding both renewable and fossil fuel-based assets under its belt.
Loeb’s Bullish on LSEG, and For Good Reason
Another AI play Loeb is increasingly bullish on is UK-based stock exchange and financial data company London Stock Exchange Group. The activist investor likes the company’s unique market position as a data provider that is democratizing and making financial data accessible to consumers without the use of additional third-party software. He sees London Stock Exchange Group benefitting from generative AI as information retrieval systems in financial services become more powerful. He also expects the company to develop “a powerful Research Assistant application” with Microsoft to reduce both human resources and time needed to process financial data. He thinks London Stock Exchange Group is at the forefront of capitalizing on the transition of the financial services industry “from manual data processing via clunky desktop terminals to machine-assisted data processing”.
Pixabay/Public Domain
Our Methodology
We scanned Third Point’s Q1 portfolio and picked growth stocks from the fund’s top 13F holdings. Additionally, we’ve also added overall hedge fund sentiment, as of Q1 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).
Note: All pricing data is as of June 6.
Why Microsoft is Among Dan Loeb’s Top Growth Stock Picks
Microsoft Corporation (NASDAQ:MSFT)
Third Point’s Stake Value: $742,570,800
Number of Hedge Fund Holders: 293
Microsoft Corporation (NASDAQ:MSFT) accounts for 9.5% of Third Point’s Q1 2024 portfolio. According to Loeb, Microsoft Corporation (NASDAQ:MSFT) is a “best run legacy” company that has built clear moats in its industry and has established itself as a leader. The billionaire has held MSFT since Q4 2022 and holds a position worth over $742.5 million, as of Q1 2024. In total, there were 293 hedge funds with long positions in MSFT at the close of Q1 2024 with stakes worth over $88 billion. Microsoft Corporation (NASDAQ:MSFT) is one of Dan Loeb’s top growth stock picks.
Microsoft Corporation (NASDAQ:MSFT) generated $61.9 billion, up 17% year over year, and reported net income of $21.9 billion, up 20% year over year. The company’s Azure and cloud services revenue increased 31% year over year, outpacing its rivals’ Amazon Web Services’ and Google Cloud’s revenue growth rates of 17% and 28%, respectively. The company also returned $8.4 billion to shareholders through dividends during the quarter.
Azure continues to gain market share, driven by a broad portfolio of AI and cloud services. The Azure OpenAI Service is being used by over 65% of Fortune 500 companies and the introduction of the Models as a Service API and partnerships with major players including Nvidia and AMD for AI hardware accelerators are all driving the company’s cloud business’ growth. Moreover, Microsoft’s Copilot offerings are revolutionizing productivity across various domains. With Copilot now integrated into Microsoft 365, Dynamics 365, and GitHub, the company is democratizing AI-powered capabilities and capturing further market share in office productivity tools.
Microsoft Corporation (NASDAQ:MSFT) stands to benefit from multiple markets including AI, cloud, and office productivity. The company has grown its revenue by a CAGR of 11% over the past 10 years and its net income by 14.4%. The company also has a solid dividend profile and has grown its dividends for the past 2 decades. Is it too late to buy MSFT and are all its near-term growth prospects priced in? The stock has gained 32% over the past 12 months and analysts’ 1-year median price target implies an upside of 13% from current levels, however the Street-high target implies an upside of 41%. Analysts expect MSFT’s EPS to grow by 20% in 2024 and 35% in 2025, compared to 2023 levels. We think MSFT is attractive while it trades at 31.6 times its forward earnings, close to its 5-year average multiple of 31x.
Microsoft Corporation (NASDAQ:MSFT) ranks 2nd on our list. To discover Dan Loeb’s top growth stock picks, check out our free report on of the 10 Best Growth Stocks to Buy According to Billionaire Dan Loeb. While we acknowledge the potential of Microsoft, our conviction lies in the belief that there are other AI stocks that 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.
READ NEXT: Michael Burry Is Selling These Stocks and Jim Cramer is Recommending These Stocks.
Disclosure. None. This article is originally published on Insider Monkey.
