We recently compiled a list of the 10 Best Technology Stocks to Buy for Long Term. In this article, we are going to take a look at where Microsoft Corporation (NASDAQ:MSFT) stands against the other technology stocks.
An Analysis of the Technology Industry
The technology industry is one of the key drivers of the global economy. According to MGI research, the global technology industry was valued at $8.51 trillion in 2022 and is forecasted to grow at a compound annual rate of 7.75% to reach $11.47 trillion by 2026. In the United States alone the information technology industry drives more than one-third of the national economy.
One of the latest trends in the tech industry has been the increasing investments in artificial intelligence by both tech giants and start-up companies. According to a July 3 report by Reuters, the US venture capital funding surged to $55.6 billion during the second quarter of 2024. The funding surged more than 47% on a quarterly basis and was mainly driven by significant investments in artificial intelligence companies including $6 billion raised by Elon Musk’s xAI.
However, over the past few months, the technology sector has seen a major sell-off due to what analysts call an “AI bubble”. The sell-off initiated with investors raising concerns over return on investment regarding the premium they have been paying as capital expenditure on artificial intelligence. On August 5, CNBC reported that the “Magnificent Seven” US tech companies lost a combined $1 trillion market value at the start of the trading day. As a result, NASDAQ was down 3%, marking the index’s steepest three-week slide in two years.
We recently covered the AI tech bubble in detail in 10 Tech Stocks to Monitor Amid Market Volatility According to Bernstein Analyst. Here’s a glimpse of the article:
“In the past few weeks, a major selloff in the technology sector, mostly over concerns about return on investments amid ballooning capital expenditures on artificial intelligence (AI), has hit the stock market, sending valuations crashing and igniting fears of an AI bubble at the marketplace that might be about to burst. However, Stacy Rasgon, who has covered semiconductor stocks, one of the most prominent sectors in the AI world, for over fifteen years, has advised investors to stay the course, terming fears of a bubble as overblown. Rasgon claims that even though chances of an air pocket, used to refer to stock plunges, are 100%, he is confident the time for them is not now. He pointed to the very real and massive AI data center build as an example, predicting it would go on for a few years, helping push AI stocks higher.”
Michael Landsberg, Landsberg Bennett Private Wealth CIO appeared on a CNBC interview to talk about the AI bubble. He believes that the AI bubble hasn’t popped yet and what we saw recently was a reset of the market, where the market resets out-of-sync factors, and does not mean that the analysts are not positive about AI. He further added that a lot of AI companies have had a great past six months and are growing their earnings. He believes that ultimately earnings drive any stock and as far as AI stocks are concerned their earnings are growing and will continue to grow, thereby increasing the price.
Moreover, Steve Eisman, Neuberger Berman Senior Portfolio Manager appeared on another CNBC interview termed the recent events as a “Psychological Rotation”. He mentioned that this was not a fundamental rotation, which could have been troublesome, rather it is a psychological rotation that will not hold for long. He further mentioned that Artificial intelligence is here to stay for years and he still sees massive growth opportunities for companies investing in AI.
Our Methodology
To compile the list of 10 best technology stocks to buy for the long term we used the Finviz and Yahoo Finance stock screeners. We searched for technology stocks and sorted them based on their market capitalization. From these stocks, we selected technology stocks that have been in business for 20 years or more and are expected to stay in business for several decades. Once we had the consolidated list, we ranked the stocks that were the most widely held by institutional investors, as of Q2 2024. The list is in ascending order of the number of hedge fund holders for each stock.
Why do we care about what hedge funds do? 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).
A development team working together to create the next version of Windows.
Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 279
Microsoft Corporation (NASDAQ:MSFT) started as a Windows operating system, after 40 years it is renowned for its cloud computing, Office productivity suite, gaming, advertisement, and taking significant leaps in artificial intelligence.
It is one of the best technology stocks and was held by 279 hedge funds in Q2 2024, with total stakes worth $89.07 billion. Bill & Melinda Gates Foundation Trust is the top shareholder of the company with a position worth $15.59 billion.
The fiscal Q4 2024 was a success for Microsoft Corporation (NASDAQ:MSFT). The company grew its revenue by 15% to reach $64.7 billion. Revenue growth was boosted by exceptional performance across the board. Azure and other cloud service segments was the top contender with its segment revenues growing 30% during the year.
Robust revenue growth boosted the net income to $22.0 billion, increasing 10% year-over-year. Microsoft Corporation (NASDAQ:MSFT) leverages its strategic edge of being a highly profitable company. We have already seen how its revenues and net income increased across the board. In addition, the company also improved its operating income by 24% year-over-year to reach $109.4 billion again advocating its profitability. Microsoft Corporation (NASDAQ:MSFT) also pays a dividend to its investors. It has a payout ratio of 25.40% and a 5-year growth rate of 10%.
Should you invest in Microsoft Corporation (NASDAQ:MSFT)?
We have already seen how the company posted impressive growth figures during its recent quarter. To get a long-term perspective, if you look at the past 10-year performance the company has grown its revenue by 11%, net income by 15%, and levered free cash flow by 9%. This topped with its quarterly results makes MSFT an attractive investment opportunity for growth investors.
Baron Opportunity Fund stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter:
“Microsoft Corporation (NASDAQ:MSFT) is the world’s largest software and cloud computing company. Microsoft was traditionally known for its Windows and Office products, but over the last five years it has built a $135 billion run-rate cloud business, including its Azure cloud infrastructure service and its Office 365 and Dynamics 365 cloud-delivered applications. The stock contributed to performance because of continued strong operating results and investor enthusiasm regarding Microsoft’s leadership across the secular megatrends of AI and cloud computing. Recent business momentum continued to show evidence of the strength and attractiveness of Microsoft’s product portfolio among its customer set: (1) Azure OpenAI – its suite of AI services – is now used by 65% of the Fortune 100 and contributed 7% of Azure revenue (an annualized run rate of $5.2 billion); (2) GitHub Copilot – its AI code writing service – is bending the productivity curve for developers (reports of 40%- plus improvements in developer efficiency) and now has 1.8 million paid subscribers, with growth accelerating to over 35% quarter-over-quarter; and (3) Copilot Studio – its AI application service that makes it easier for anyone to build an application, automate a workflow, or create a Copilot using natural language. 30,000 organizations across every industry have used Copilot Studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter-over-quarter. In the March quarter, Microsoft again reported better-than-expected financial results, highlighted by Microsoft Cloud growing 23% year-over-year, with the fastest commercial bookings in six quarters, and Azure accelerating to 31% constant currency growth, up from 28% in the previous quarter. June quarter guidance came in-line with consensus, but the company provided higher guidance for the most important segment, Intelligent Cloud, on the back of continued strong trends across Azure and Azure OpenAI. We remain confident that Microsoft is one of the best-positioned companies across the overlapping software, cloud computing, and AI landscapes.”
Overall MSFT ranks 2nd on our list of the best technology stocks to buy for long term. While we acknowledge the potential of MSFT as an investment, 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.