Billionaires are preferring to invest in one stock over the other between Microsoft and Meta Platforms.
Wall Street is quite optimistic about both Microsoft (MSFT, dropping by 1.73%) and Meta Platforms (META, dipping by 0.59%). These stocks have a shared buy recommendation, and the average price predictions suggest a minimum 10% increase as of December 27th. Interestingly, two billionaire hedge fund managers exchanged their positions in these tech giants during the third quarter:
- Stephen Mandel of Lone Pine Capital divested 364,426 shares of Microsoft, lowering his stake by 18%, while simultaneously acquiring 496,900 shares of Meta Platforms, pushing his stake up by 36%. Meta Platforms has now become his largest holding, with Microsoft sliding to fifth place.
- Louis Bacon of Moore Capital Management sold off 93,922 shares of Microsoft, reducing his stake by 70%. Conversely, he purchased 128,207 shares of Meta Platforms, escalating his investment by 961%. Meta Platforms, along with options, is now his second-largest holding, while Microsoft no longer ranks among the top 50.
Investors should not blindly mimic these trades without proper examination. Both hedge funds have underperformed the S&P 500 (SNPINDEX: ^GSPC) over the past three years. It is essential to remember these transactions took place in the third quarter, which concluded three months ago.
However, there's no denying that Microsoft and Meta Platforms present attractive opportunities due to their involvement in artificial intelligence.
1. Microsoft
Microsoft reported impressive financial results in the first quarter of fiscal 2025, which covered the September period. The tech giant surpassed projections on both revenue and earnings, with a 16% revenue growth to $65 billion. This growth was primarily driven by boosts in enterprise software and cloud services, fueled by the demand for AI products. Revenue climbed to $3.30 billion in GAAP net income, marking a 10% increase.
Despite these positive outcomes, the stock experienced a decline following the news release. There were several factors causing this dip, including:
- Microsoft revealed details about their $13 billion investment in OpenAI. According to finance chief Amy Hood, the projected losses from OpenAI would amount to a $1.5 billion reduction in income in the current quarter. This negative impact may persist for the foreseeable future, but Microsoft will be entitled to a stake in OpenAI's earnings once it achieves profitability.
- Shareholders are concerned about Microsoft's aggressive AI investment strategy, as higher first-quarter expenses led to a 7% decrease in free cash flow. Microsoft also reported losing market share in cloud computing, and CFO Amy Hood expects capital expenditures to rise in the current quarter in response to "cloud and AI demand signals."
Despite these concerns, analyst Brent Bracelin at Piper Sandler maintains that worries about AI investments are unwarranted. Bracelin predicts that Microsoft's AI business could surpass a $10 billion annual revenue benchmark next quarter, which they reached twice as fast as their cloud business. Furthermore, AI revenue could increase tenfold, possibly reaching $100 billion annually in the future.
For now, Microsoft's share price is trading at 36 times earnings - a premium compared to the average five-year multiple of 33 times earnings. Even with an anticipated annual growth rate of 13%, this high multiple may be difficult to justify. The resulting PEG ratio stands at 2.7, which some investors consider expensive. New investors should wait for a more appealing entry point, while existing shareholders can wait and see if the cost decreases.
2. Meta Platforms
Meta Platforms reported favorable financial results in the third quarter, surpassing expectations on both revenue and earnings. Revenue climbed 19% to $40 billion, while operating margin expanded by 3 percentage points, and GAAP net income increased by 37% to $6.03 per share. Despite these profits, the stock dipped following the announcement due to slow user growth compared to analyst expectations.
Meta Platforms boasts control over four of the top seven most-popular social media platforms, providing them with a significant competitive edge. They can collect consumer data and tailor advertising content specifically to their audience, making them the second-largest adtech company behind Google's Alphabet and projected to gain market share until 2026, according to eMarketer.
Meta Platforms is also leveraging AI to boost consumer engagement, with CEO Mark Zuckerberg stating that AI-powered feed and video recommendations have led to an 8% uptick in time spent on Facebook and a 6% rise on Instagram. Over one million brands used its generative AI tools to create ad content within the last month.
Meta Platforms stocks currently trade at 28 times earnings, marking an increase from its five-year average of 25.5 times earnings. The valuation remains appealing since Wall Street anticipates annual earnings growth of 18% over the next three years, resulting in a PEG ratio of 1.6. This ratio is lower than Microsoft's, indicating that Meta Platforms is relatively undervalued in comparison.
The takeaway is that investors should explore the possibility of buying a small stake in Meta Platforms. However, the stock's premium relative to its historical average means a retraction may be on the horizon. If the price drops by around 15%, it could be a wise opportunity to raise your investment ratio.
- If you're considering investing in Microsoft (MSFT), you might want to keep an eye on its finances. In the first quarter of fiscal 2025, Microsoft reported impressive growth, with a 16% revenue increase to $65 billion. However, the stock experienced a decline following the news release due to concerns about Microsoft's aggressive AI investment strategy and a 7% decrease in free cash flow. Despite these challenges, analyst Brent Bracelin at Piper Sandler predicts that Microsoft's AI business could surpass a $10 billion annual revenue benchmark soon.
- Meta Platforms (META) also had a successful quarter, with revenue climbing 19% to $40 billion. Despite the profits, the stock dipped following the announcement due to slow user growth. However, Meta Platforms is leveraging AI to boost consumer engagement and is expected to gain market share in adtech until 2026. The stock currently trades at a premium of 28 times earnings, but Wall Street anticipates annual earnings growth of 18% over the next three years, making Meta Platforms relatively undervalued compared to Microsoft.
