We recently published a list of Top 10 Favorite AI Stocks of Brad Gerstner. Since Microsoft Corporation (NASDAQ:MSFT) ranks 4th on the list, it deserves a deeper look.
Brad Gerstner, the founder of Altimeter Capital, has been a major believer in AI and tech stocks in general. Recently, the 53-year-old hedge fund manager shared some interesting data points highlighting the importance of tech stocks during an interview with Scott Galloway’s YouTube channel.
“Since 2014 technology earnings have compounded at 16% and technology stocks have compounded at 18%. Non-tech earnings have compounded at about 4% and stocks at about 6%. So if you look at the long run of technology since 2005 it’s gone from 5% of global GDP to 15% of global GDP,” Gerstner said.
Gerstner, whose firm manages about $10 billion in assets, emphasized during the interview that the risk of not investing in AI is higher than the risk of investing. He was addressing the market concerns about ROI on AI spending.
“As a professional investor, we’re just trying to determine what level of asymmetry what level of enthusiasm or exuberance is baked into these stocks and what are we seeing day to day in terms of usage and revenues out of the consumer,” he said.
For this article we scanned Altimeter Capital’s Q2 portfolio and discussed its biggest AI stock picks. 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 Edge on Unsplash
Microsoft Corp (NASDAQ:MSFT)
Brad Gerstner’s Stake: $726,579,798
Microsoft is among the top AI picks of Altimeter as of Q2.
However, some believe OpenAI was the only key edge Microsoft Corp (NASDAQ:MSFT) had in the AI race and it’s quickly fading away.
DA Davidson recently downgraded the stock, with analyst Gil Luria saying the company’s advantages in the cloud and code generation sectors have diminished, making it difficult for Microsoft Corp (NASDAQ:MSFT) to maintain its previous performance. He highlighted that Amazon Web Services is now nearly matching Azure in cloud growth, while Google Cloud is also gaining momentum.
Luria downgraded Microsoft Corp (NASDAQ:MSFT) from Buy to Neutral, maintaining a $475 price target. He pointed out that Amazon and Google have made significant strides in integrating custom silicon into their data centers, putting Microsoft at a disadvantage. This reliance on NVIDIA (NVDA) for technology means Microsoft is effectively transferring wealth from its shareholders to NVIDIA’s, according to Luria.
Following a year of margin expansion, Microsoft Corp (NASDAQ:MSFT) is now projecting a decline in operating margins due to increased data center capital expenditures rising from 12% to 21% of revenue. This increase outpaces that of Amazon and Google, largely due to Microsoft’s dependence on NVIDIA.
Luria said that if Microsoft Corp (NASDAQ:MSFT) continues to overinvest at the current rate, margins could drop by at least 1 percentage point cumulatively, potentially necessitating layoffs of around 10,000 employees each year to maintain margins.
The analyst also thinks Microsoft Corp (NASDAQ:MSFT) has lost much of its edge with GitHub Copilot, as Amazon and GitLab (GTLB) have caught up in capabilities.
The concerns voiced by the analyst are not unfounded. Microsoft is also losing its edge in open-source models as enterprises shift toward cost-effective, transparent open-source solutions like Meta’s Llama 3.1.
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 Corporation (NASDAQ:MSFT) ranks 4th on Insider Monkey’s list titled Top 10 Favorite AI Stocks of Brad Gerstner. While we acknowledge the potential of Microsoft Corporation (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.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These Stocks.
Disclosure: None. This article is originally published at Insider Monkey.
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