We recently compiled a list of the 8 Best Wide Moat Stocks to Buy According to Analysts. In this article, we are going to take a look at where Microsoft Corporation (NASDAQ:MSFT) stands against the other wide moat stocks.
Undoubtedly, global and domestic investors have mastered the art of riding out the highs and lows of the US stock market. They tend to believe that fluctuations in the stock market are short-term, and should be dealt with accordingly.
McKinsey & Company highlighted that, in 2001, the market cap of the companies making up the S&P 500 stood at ~$10 trillion. As of mid-June 2022 (despite the bearish opening), S&P 500 market capitalization touched ~$32 trillion. Also, the mean total yearly returns (including dividends) of the S&P 500 between 1996 to mid-June 2022 was ~9% in nominal terms, or ~6.8% in real terms.
The investors have seen significant fluctuations. S&P 500 saw a strong decline in 2000, 2001, and 2002, with a ~37% decline in 2008 and a ~22% fall in 1H 2022. That being said, between 1996 and mid-June 2022, S&P 500 returns only declined 5 times annually. While there can be significant fluctuations in the US markets, the macroeconomic indicators can help provide a broader overview of the expected performance of equities.
US Fed Rate Cut – It Finally Happened
The decision on the rate cut by the US Federal Reserve was indeed a closely watched one. The apex bank decided to go for a larger 50-bps reduction in interest rates, instead of a more traditional 25-bps rate cut. This decision was more consequential than normal for 2 reasons. Firstly, this rate cut marked the initiation of a long-awaited easing cycle. Therefore, the US Federal Reserve shifted its focus away from the risks related to inflation and towards protecting the labor market and economic expansion.
Secondly, the rate cut decision itself was much more critical and engaging than normal. History suggests that the US Fed provides greater transparency when it comes to decision-making. This means the financial markets are not surprised by the decision as people know what the US Fed is going to do. However, the recent one was not like this, with markets pricing the 25-bps rate cut decision. The move to cut the key rates by 50 basis points should help the US Fed normalize rates more quickly and be ahead of the emergent slowness in the broader labor market. That being said, the US Fed’s forecasts (the dots) don’t reflect this pace continuing beyond September.
The recent report by Russell Investments highlighted that the company expects the US Fed to cut rates by 25 basis points at each of the remaining meetings in 2024. Furthermore, this pace should be sustained into 2025. If the trajectory continues, the US Fed will be down to the company’s expectations of the normal or equilibrium rate of interest of between 3%-3.25% by this time of the next year.
Equity Market Outlook Post Rate Cut
The implications for the rate cut onto equities hang mainly on the fundamental backdrop—i.e., corporate earnings and whether the US economy is heading for a soft or hard landing. In case of a soft landing, Russell Investments believes that the combination of lower rates and resilient fundamentals should benefit select areas of the market such as real estate and small caps. Regarding small caps, in particular, the investment firm expects a ripe environment for skilled active managers to pick quality businesses at more attractive valuations.
In the remainder of 2024 and 2025, the US Fed cuts are expected to have a positive effect on the economy and markets. Analysts at Wells Fargo believe that the global economy should also benefit, as major central banks around the world have already announced the cut rates or will be announcing soon.
Market experts believe that the Fed rate cut expectations have led to the investors rejigging their portfolios and pivoting towards public companies that are interest-rate sensitive. These include dividend companies, telecommunication giants, utilities, and REITs, among others.
Wall Street also believes that the rate cuts should help well-established and financially stable companies to increase their spending and investments, which are likely to reflect in their stock prices in the remainder of 2024 and early 2025.
Our methodology
To list the 8 Best Wide Moat Stocks to Buy According to Analysts, we conducted an extensive online search and sifted through online rankings and VanEck Morningstar Wide Moat ETF. Next, we considered average analysts’ price targets of the selected stocks. Finally, we ranked the stocks according to their potential upside, as of September 21. We also included the hedge fund sentiment around these stocks, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A development team working together to create the next version of Windows.
Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 279
Analysts’ Average Price Target: 14.30%
Microsoft Corporation (NASDAQ:MSFT) is engaged in developing and supporting software, services, devices, and solutions worldwide.
Microsoft Corporation (NASDAQ:MSFT) has a wide economic moat, backed by 2 segments specifically: productivity and business processes and intelligent cloud. Experts believe that customers value the company’s products as stand-alone solutions and its immense product breadth. Moreover, Microsoft Corporation (NASDAQ:MSFT)’s applications are tightly integrated, making the products even more sticky and appealing.
Microsoft Corporation (NASDAQ:MSFT) has adopted a subscription model for its Microsoft 365 software. Therefore, anyone who wants to use the company’s wildly popular suite of apps – such as Word, PowerPoint, and Excel – will be tied into its ecosystem for several years. Experts opine that the company’s revenues should continue to be supported by repeated customer engagement. This engagement helps generate revenue from the initial sale of services, which then allows Microsoft Corporation (NASDAQ:MSFT) to upsell and cross-sell other ones too.
Microsoft Corporation (NASDAQ:MSFT) has plans to raise its capital expenditures, with a majority of this going to the company’s cloud business and towards building its AI infrastructure. The company spent $55.7 billion in FY 2024, which includes ~$19 billion in 4Q 2024.
For FY 2025, the company expects continued double-digit growth in revenue and operating income. Regarding gaming, the Activision acquisition continues to support the company’s strategy of delivering content throughout all of its platforms and building a subscription business.
Analysts at Tigress Financial upped their price target on the shares of Microsoft Corporation (NASDAQ:MSFT) from $475.00 to $550.00, giving it a “Buy” rating on 13th June. Fred Alger Management, an investment management company, released a second-quarter 2024 investor letter. Here is what the fund said:
“Microsoft Corporation (NASDAQ:MSFT) is a beneficiary of corporate America’s transformative digitization. The company operates through three segments: Productivity and Business Processes (Office, LinkedIn, and Dynamics), Intelligent Cloud (Server Products and Cloud Services, Azure, and Enterprise Services), and More Personal Computing (Windows, Devices, Gaming, and Search). During the quarter, shares contributed to performance after the company reported strong fiscal third quarter results, underscoring its leadership position in the cloud and highlighted its role as a primary facilitator and beneficiary of AI adoption. Company revenue growth, operating margin, and earnings growth surpassed consensus expectations. The utility scale Azure cloud business grew 31% in constant currency of which 7% was AI related versus 3% two quarters ago. Further, management noted most of the AI revenue continues to stem from inference rather than training indicating high quality AI applications by Microsoft’s clients. Management also indicated that the significant cost-cutting programs in corporate America are done, suggesting that the cost optimization headwinds previously impacting Azure’s growth are over. Separately, management provided color on their new AI-productivity tool, Copilot, noting that approximately 60% of Fortune 500 companies are already using Copilot, and that the quarter witnessed a 50% increase in Copilot assistance integration within Teams. We continue to believe that Microsoft has the potential to hold a leading position in AI, given its innovative approach and demonstrated high unit volume growth opportunity.”
Overall MSFT ranks 4th on our list of the best wide moat stocks to buy according to analysts. While we acknowledge the potential of MSFT as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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