The "Magnificent Seven" stocks generated billions of dollars in wealth for both professional and retail investors as the group of elite tech stocks soared last year. These seven stocks -- Microsoft (MSFT 1.82%), Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla -- more than doubled on average last year, earning the name "magnificent" along the way.
Not surprisingly, these stocks have been popular with professional investors, and hedge funds have piled into them in recent years. All seven are widely held among hedge funds, but according to Hedge Follow, the most widely held Magnificent Seven stock among the top hedge funds is Microsoft, which is owned by 177 of the top investment managers.
The stock's biggest holders are institutional investors like Blackrock and State Street, and the biggest funds that own the stock include the Bill and Melinda Gates Foundation, Ken Fisher's Fisher Asset Management, and Chris Hohn's TCI Fund Management. Here's why it's so popular.
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Why Microsoft is a hedge fund favorite
Hedge fund and professional investors typically favor large-cap stocks, and if the investing thesis is easy for their investors to understand, then that's a bonus.
Microsoft checks both of those boxes, and the stock's recent track record has been excellent as well -- shares are up roughly 1,000% in the last decade since CEO Satya Nadella took over.
Microsoft is more diversified than any of its big tech peers, as its empire spans everything from its Windows operating system, to its enterprise software divisions anchored by the Office software suite, to its Azure cloud computing division, to consumer products like the Xbox gaming system and Surface tablets; it also owns properties like Linkedin, Github, and the recently acquired Activision Blizzard.
The company is also well-positioned in the AI boom thanks to its multi-billion-dollar investment and strategic partnership with OpenAI, which has allowed Microsoft to use the same technology behind ChatGPT to power products in its Azure cloud computing service, its Office software suite, Github code repository, Bing search engine, and others. Because of its diversification, Microsoft seems to have more applications for generative AI technology than any of its big tech peers, which tend to make the vast majority of their revenue from just one or two businesses.
Forging a partnership with OpenAI was also a savvy move and one of many successful strategies the company has implemented under Nadella. Before he took over, Microsoft had missed the mobile revolution and had made several misguided acquisitions, including aQuantive and Skype. Nadella has modernized the company, bet big on the cloud, and ended its war with Apple, allowing its apps to integrate with Apple devices, which has improved utility and sales.
Nadella's leadership may be the best reason to own the stock today, as he's been unafraid to reinvent the company to evolve with new technology, giving it an advantage over slower-moving rivals.
Is Microsoft a buy?
As a business, it's hard to find fault with Microsoft these days. The company was able to close on the Activision acquisition in October. It's beating its rivals in artificial intelligence, and its growth is accelerating following the post-pandemic slump in the tech sector.
In its fiscal 2024 second quarter (ended Dec. 31, 2023) revenue jumped 18% year over year to $62 billion, and adjusted net income rose 26% to $21.9 billion, showing the business continues to generate wide profit margins and strong growth.
However, buying a stock is about more than the quality of the business. You also have to consider the price, and today Microsoft shares aren't cheap, trading at a price-to-earnings ratio of 40. That reflects the strength of the business, the resilience its diversification gives, and its growth potential through AI -- but it's also likely to rein in the stock's growth.
At the current price, I still think Microsoft will pay off over the long term, but the stock looks especially appealing if it happens to pull back from here. While the stock hasn't offered many of those opportunities recently, there is still plenty of uncertainty in the stock market.
Even if the stock doesn't fall from here, Microsoft deserves to trade at a premium and is well-positioned for long-term gains.
