On the heels of last year's historic downturn, 2023 has been a very different animal. Each of the major stock market indexes has gained more than 20% from their bear market lows, with the gains fueled by easing inflation and the expectation that the Federal Reserve Bank may be done raising interest rates. Finally, at just 5% off its previous all-time high, the S&P 500 is on the verge of checking the final box signifying the arrival of the next bull market. Improving macroeconomic conditions have lit a fire under investors, who have been moving from the sidelines to take part in the recovery.
Not wanting to be left out in the cold, some of the world's most successful hedge fund billionaires have been sharpening their pencils, pouring over the prospects of rebounding growth stocks, and looking to profit from the recovery. Here are two magnificent growth stocks billionaires are buying hand over fist as we close out 2023.
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1. Sea Limited
Legendary investor Chase Coleman is one of the original whiz kids of Wall Street. When he was 24 years old, Coleman founded Tiger Global Management with seed money from his fabled mentor and hedge fund manager, Julian Robertson, Jr. From those humble beginnings, he parlayed starting capital of $25 million into a hedge fund empire with roughly $13.5 billion in assets under management.
Coleman was named the top hedge fund manager of 2020, generating gains of 48%, 3 times the 16% return of the S&P 500. Coleman established his credentials by making early investments in Facebook (now Meta Platforms), Spotify, and LinkedIn, now owned by Microsoft (MSFT 1.82%). He's currently ranked as the world's 496th richest person by Forbes, worth an estimated $5.7 billion.
Coleman also bet heavily on global consumer internet company Sea Limited (SE 0.05%). The company is among the flagship digital providers in Southeast Asia -- which provided the inspiration for its name. It expanded from mobile games to e-commerce and digital payments and financial services to become a technology powerhouse. During the downturn after the peak of the COVID-19 pandemic, the stock was punished, losing as much as 90% of its value.
This suggests Tiger Global Management sees significant rebound potential for Sea Limited. The fund significantly increased its holdings during the third quarter, buying an additional 8.33 million shares, an increase of 247%. This brings its total stake to 11.7 million Sea Limited shares worth nearly $430 million (as of Wednesday's close), making it a top 10 holding at nearly 4%.
After being taken out to the woodshed by investors, Sea Limited's management turned its focus from unbridled revenue growth to profitability, and the company is beginning to deliver on that promise. In the third quarter, revenue grew 5% year over year to $3.3 billion while cutting its loss by 75% to $144 million. On a non-GAAP (adjusted) basis, Sea Limited's total adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was $35.3 million, swinging from a loss of $358 million in the prior-year quarter. The company also generated more than $1.8 billion in operating cash flow, though it continues to invest heavily in its expansion.
To be clear, this is a turnaround play, but management has made great strides toward profitability. Given its success thus far and the company's vast market opportunity, it's little wonder Tiger Global Management is buying Sea Limited hand over fist.
2. Microsoft
Billionaire Jim Simons is an enigmatic figure on Wall Street. He founded Renaissance Technologies in 1982 on the then-novel idea that mathematics, mounds of data, and sophisticated algorithms could generate above-average investing returns. That simple notion marked the birth of quantitative investing, cementing Simons' place in investing history and making him one of the most successful fund managers ever.
Don't take my word for it. The Medallion Fund -- the secretive fund available only to Renaissance employees -- reportedly increased at a compound annual growth rate of 62% from 1988 to 2021 (the latest figures available), generating an annualized rate of return of 37%, even after the sizable management fees imposed. Simons is ranked by Forbes as the world's 46th richest person, worth an estimated $30.7 billion. He has since stepped away from the day-to-day running of Renaissance Technologies, but his mark on the hedge fund is undeniable.
Renaissance already had a nominal investment in Microsoft but added a considerable stake in the third quarter, buying more than 1.1 million additional shares, increasing its stake by 2,569%. This brings its total holdings to 1.16 million Microsoft shares worth roughly $439 million (as of Wednesday's close), making it one of the fund's top 20 holdings.
Since Renaissance Technologies uses complex mathematical formulas and models to analyze stocks and make automated trades, there's no way to know for sure what prompted the sizable purchase. That said, recent developments at Microsoft suggest it has a long runway ahead.
One of the biggest opportunities for the company is the strong demand for artificial intelligence (AI). During its fiscal 2024 first quarter (ended Sept. 30, 2023), Microsoft's Azure Cloud revenue grew 29% year over year, with 3 percentage points of those gains resulting from strong demand for AI and related services. Azure was also the fastest-growing of the big three cloud infrastructure providers, outpacing both Amazon Web Services and Alphabet's Google Cloud, which grew cloud revenue by 12% and 22%, respectively. This shows Microsoft is stealing market share from its rivals.
Helping drive those gains is the recent release of its Microsoft 365 AI Copilot. The company said it will charge $30 per user per month and suggested that demand is off the charts during its early access program. Evercore ISI's Kirk Materne postulates that AI will generate $100 billion in incremental revenue for Microsoft by 2027.
Given its increasing cloud market share and the rapid adoption of AI, even quant-based systems like those used by Renaissance are adding Microsoft stock hand over fist.
