The “Magnificent Seven” stocks, consisting of Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla, have garnered significant attention and investment from both professional and retail investors due to their remarkable performance in the market. These tech giants experienced extraordinary growth over the past year, more than doubling in value on average, thus earning the moniker “magnificent.”
Among professional investors, hedge funds have shown particular interest in these stocks, with many of them significantly increasing their holdings in recent years. According to Hedge Follow, Microsoft stands out as the most widely held stock among the top hedge funds, with 177 of the leading investment managers including it in their portfolios.
Institutional investors such as Blackrock and State Street are among the largest holders of Microsoft stock, further emphasizing its widespread appeal in the investment community. Additionally, prominent funds like the Bill and Melinda Gates Foundation, Ken Fisher’s Fisher Asset Management, and Chris Hohn’s TCI Fund Management are notable investors in Microsoft, contributing to its popularity among institutional investors.
There are several reasons why Microsoft has become such a favored investment choice:
- Strong Financial Performance: Microsoft has consistently delivered robust financial results, with steady revenue growth and impressive profitability, making it an attractive investment option for institutional investors seeking stable returns.
- Diverse Business Segments: Microsoft’s diversified business model spans across various sectors, including cloud computing, productivity software, gaming, and hardware, providing investors with exposure to multiple high-growth areas of the technology industry.
- Leadership Position in Cloud Computing: Microsoft’s Azure cloud computing platform has emerged as a leading competitor to Amazon Web Services (AWS), contributing significantly to the company’s revenue growth and profitability.
- Commitment to Innovation: Microsoft has demonstrated a commitment to innovation through strategic acquisitions, research and development initiatives, and partnerships, ensuring its competitiveness in rapidly evolving markets.
- Long-Term Growth Potential: With ongoing digital transformation trends driving demand for technology solutions, Microsoft is well-positioned to capitalize on long-term growth opportunities in areas such as artificial intelligence, cybersecurity, and hybrid work solutions.
Why Microsoft is a hedge fund favorite
Microsoft’s appeal to hedge fund and professional investors stems from its status as a large-cap stock with a straightforward investing thesis, coupled with its impressive track record of performance. Under the leadership of CEO Satya Nadella, Microsoft has experienced remarkable growth, with shares soaring approximately 1,000% over the last decade.
One of Microsoft’s key strengths is its unparalleled diversification across various business segments, distinguishing it from its big tech peers. From its Windows operating system to enterprise software divisions like Office and Azure cloud computing, to consumer products such as Xbox and Surface tablets, Microsoft’s empire encompasses a wide range of offerings. Additionally, its acquisitions of properties like LinkedIn, GitHub, and Activision Blizzard further bolster its portfolio.
In the realm of artificial intelligence (AI), Microsoft has positioned itself as a leader through its multi-billion-dollar investment and strategic partnership with OpenAI. This partnership enables Microsoft to leverage cutting-edge AI technology across its diverse product ecosystem, including Azure, Office, GitHub, and Bing. This broad application of generative AI technology sets Microsoft apart from competitors who rely heavily on revenue from a few core businesses.
Satya Nadella’s leadership has been instrumental in Microsoft’s transformation and success. Under his guidance, the company has embraced innovation, pivoting towards cloud computing and forging alliances with former rivals like Apple. Nadella’s strategic vision and willingness to adapt to evolving technologies have positioned Microsoft as an agile and forward-thinking organization, giving it a competitive edge in the rapidly evolving tech landscape.
Is Microsoft a buy?
Microsoft’s recent performance and strategic positioning undoubtedly make it a standout business in today’s market landscape. With successful acquisitions like Activision and leadership in artificial intelligence, Microsoft is demonstrating its ability to drive growth and maintain competitive advantage.
In its fiscal 2024 second quarter, Microsoft delivered impressive financial results, with revenue surging 18% year over year to $62 billion and adjusted net income rising 26% to $21.9 billion. These figures underscore Microsoft’s robust profitability and ability to sustain strong growth momentum.
However, investors must also weigh the stock’s valuation when considering an investment. With a price-to-earnings ratio of 40, Microsoft shares may appear pricey by traditional metrics. While this valuation reflects the company’s formidable business strength, diversification, and growth potential in AI, it may also temper the stock’s future upside potential.
Nevertheless, even at current levels, Microsoft remains an attractive long-term investment opportunity. Its premium valuation is justified by its exceptional business quality and resilience, making it a solid choice for investors seeking stability and growth prospects. Moreover, any potential pullback in the stock price could present an opportune entry point for investors looking to capitalize on Microsoft’s long-term potential.
In summary, while Microsoft’s current valuation may appear rich, its premium reflects the company’s exceptional performance and growth prospects. Investors should consider the stock’s long-term potential and be prepared to capitalize on any market uncertainties or pullbacks that may arise.