Billionaire Peter Thiel is an entrepreneur and venture capitalist that co-founded Palantir Technologies, where he still serves as chairman and owns a substantial stake in the company.
Thiel also runs a hedge fund (Thiel Macro) that made some interesting trades in the fourth quarter. The fund sold its positions in Apple (AAPL 2.10%) and Microsoft (MSFT 0.36%), despite the fact that most Wall Street analysts think the stocks are undervalued.
- Among 52 analysts, Apple has a median target price of $303 per share. That implies 11% upside from its current share price of $273.
- Among 60 analysts, Microsoft has a median target price of $600 per share. That implies 49% upside from its current share price of $402.
The fourth quarter ended about two months ago, so investors should reassess Apple and Microsoft before copying Thiel's trades. Here is the salient information.
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Apple: 11% upside implied by Wall Street's median target price
Apple reported encouraging first-quarter financial results. Revenue increased 16% to $144 billion, driven by double-digit sales growth in the iPhone and services segments. Demand for the iPhone 17 was especially pronounced in Greater China, where sales soared 38%, the fastest growth in four years. Meanwhile, generally accepted accounting principles (GAAP) net income jumped 18% to $2.84 per diluted share.
The investment thesis revolves around the company's strength in consumer electronics, especially its leadership in smartphones. With 2.5 billion active devices worldwide, Apple has a key opportunity to expand its high-margin services business (advertising, payments, cloud storage, and subscriptions). The company is also well positioned to monetize artificial intelligence (AI) at the consumer level.
Integrated generative AI features (Apple Intelligence) were not a major selling point for most iPhone buyers in the recent quarter, but that may soon change. Apple recently said it would use Alphabet's Gemini models to develop future AI features, including the long-awaited update for the personal assistant Siri, which is expected to launch later in 2026.
Here's the big picture: Apple reported solid financial results, with particularly impressive numbers in the iPhone segment and Greater China region. And its decision to build future AI features around Gemini models is a step forward for the company, as it may finally let Apple monetize artificial intelligence in a meaningful way.
So, why did Peter Thiel exit his position? I see two potential reasons. The margin on Apple products is likely to shrink in the coming quarters due to the soaring price of memory chips. Additionally, the stock currently trades at 34 times earnings, a very expensive valuation for a company whose earnings are projected to increase at 11% annually during the next three years. I agree with Thiel's decision to avoid Apple.
NASDAQ: MSFT
Key Data Points
Microsoft: 49% upside implied by Wall Street's median target price
Microsoft reported strong financial results in the December-ended fiscal quarter. Revenue increased 17% to $81 billion on solid momentum in commercial software, consumer software, and cloud services. And non-GAAP net income increased 24% to $4.14 per diluted share. CFO Amy Hood said, "We exceeded expectations across revenue, operating income, and earnings per share."
The investment thesis for Microsoft centers on strength in enterprise software and cloud computing. The company's strategy of integrating AI assistants and agents across popular software products (low-code development, office productivity, and enterprise resource planning) lays the foundation for sales growth to accelerate in the future. Indeed, paid Microsoft 365 Copilot seats increased 160% and daily active users climbed tenfold in the recent quarter.
Meanwhile, Microsoft Azure has steadily gained market share in cloud infrastructure and platforms services, and demand for compute capacity continued to exceed the available supply in the recent quarter. That also hints at strong future sales growth. Adding to my conviction, Morgan Stanley's latest CIO survey shows Microsoft as the company most likely to gain share in cloud computing and generative AI over the next three years.
So, why did Thiel exit his position? Software stocks have been hammered because investors are worried AI code generation tools will disrupt the industry. Microsoft is also investing a lot of money in AI, and despite management touting Copilot adoption and strong demand for cloud services, some investors are worried Microsoft will not earn a reasonable return on that invested capital.
However, I think those investors are missing the big picture. AI will almost certainly be the most transformative technology of the next few decades, and Microsoft is likely to be one of the primary beneficiaries because its software products and cloud services are already integral to countless enterprises.
Additionally, Microsoft currently trades at 26 times earnings, which is a fair valuation for a company whose earnings are forecast to increase at 15% annually through fiscal 2027 (which ends in June). Rather than selling this stock, investors should consider buying a small position today.
