Why Hedge Funds Are Bullish on Microsoft Corp (MSFT)

Microsoft Corp (MSFT) has been a favorite among hedge funds in recent years, with many prominent investors bullish on the tech giant's prospects. As of the latest 13F filings, 238 hedge funds held long positions in MSFT, a decrease of 5% from the previous quarter but still a significant number. This article explores the reasons behind hedge funds' increasing bullishness on Microsoft and the primary catalysts they anticipate will drive the stock price higher in the near to medium term.



Strong Financial Performance and Growing Demand for Cloud Services

Microsoft has consistently delivered strong financial results, with revenue and earnings growth driven by its cloud computing platform, Azure. In Q3 2021, Azure's revenue jumped 35% to $20.33 billion, demonstrating the platform's growth potential. The increasing adoption of cloud services by businesses and consumers has fueled Microsoft's growth, with the global public cloud services market expected to grow at a CAGR of 16.7% from 2021 to 2026, reaching $927.5 billion (Source: Gartner).

Expansion into New Markets and Robust Results

Microsoft's acquisition of Activision Blizzard, if approved, will significantly bolster its gaming business and expand its reach into the fast-growing video gaming industry. The deal is expected to add a huge base of new customers and create long-term value for shareholders. Despite a weaker macro picture and currency headwinds, Microsoft reported upbeat results for Q1 2023. EPS of $2.35 beat by $0.04, and revenues grew 16% on a constant currency basis. The company's cloud revenues grew 31%, with Azure and other cloud services registering an impressive 42% growth (Source: Microsoft's Q1 2023 earnings report).

Attractive Valuations and Change in Perception

Microsoft's current valuation is relatively high compared to its historical averages and industry peers, with a P/E ratio of 35. However, hedge funds believe that the stock is still undervalued given its strong competitive positioning and growth potential in areas such as cloud computing and AI. Hedge funds expect a change in investor sentiment towards Microsoft, from viewing it as a company in secular decline to a growth company, driven by the company's recent strategic moves and growth prospects.



Primary Catalysts for Microsoft's Stock Price

Hedge funds anticipate several primary catalysts that could drive Microsoft's stock price higher in the near to medium term:

1. Change in Perception from a Secular Decliner to a Growth Company: Hedge funds expect a shift in investor sentiment towards Microsoft, from viewing it as a company in secular decline to a growth company.
2. Accelerated Share Repurchases and Dividend Hike: Microsoft has a history of buying back a significant amount of stock, which can lead to EPS growth even if revenues remain flat. Additionally, a dividend hike could attract income-oriented investors, further boosting the stock price.
3. Nokia's Windows Phone 7 Products: The partnership between Microsoft and Nokia for Windows Phone 7 products is expected to increase Microsoft's share in the smartphone market. As Nokia begins to roll out WP7 phones, potentially between late 2011 and early 2012, this could significantly increase Microsoft's WP7 share and drive the stock price up.
4. Migration of Windows Users to Paid Versions: As developing economies grow and demand higher reliability and cloud services, the 400+ million Windows users currently using unauthorized versions are expected to migrate to paid versions. This could lead to a significant increase in Microsoft's revenue and stock price.
5. Growth of Cloud Computing: Microsoft is well-positioned to be a market leader in cloud computing, which is expected to grow rapidly in the coming years. As Microsoft's cloud services, such as Azure, continue to grow, this could drive the stock price higher.
6. Continued Success of Xbox/Kinect Product: The Xbox and Kinect products have been successful for Microsoft, and continued growth in this segment could contribute to the company's overall revenue and stock price.
7. Growth of Bing: Bing has been gaining market share in the search engine space, and continued growth in this area could lead to increased revenue and a higher stock price for Microsoft.
8. Release of Tablet Solutions: Microsoft is expected to release tablet solutions, which could further diversify the company's product offerings and drive revenue growth.

In conclusion, hedge funds are bullish on Microsoft Corp (MSFT) due to its strong financial performance, growing demand for cloud services, expansion into new markets, and attractive valuations. The primary catalysts they anticipate will drive the stock price higher in the near to medium term include a change in perception, accelerated share repurchases, the success of Nokia's Windows Phone 7 products, migration of Windows users to paid versions, and growth in cloud computing, Xbox/Kinect, Bing, and tablet solutions. While Microsoft's current valuation is relatively high compared to its historical averages and industry peers, hedge funds believe that the stock is still undervalued given its strong competitive positioning and growth potential.