We recently published a list of 8 Most Profitable Tech Stocks Right Now. In this article, we are going to take a look at where Microsoft (NASDAQ:MSFT) stands against other most profitable tech stocks right now.

Technology Sector’s ‘High Bar’

In an interview with CNBC on October 10, Drew Pettit, Director of US Equity Strategy at Citi Research, shared his thoughts about the upcoming earnings season and its potential impact on the market. With the Dow and S&P 500 reaching new closing highs, Pettit raised the question of whether earnings would justify the current valuations. The technology sector has been on a tear, with many software names running up significantly in recent weeks. However, Pettit’s warning suggests that investors should be cautious about getting too caught up in the hype. He noted that when there’s a high bar, investors should be prepared for potential disappointments.

Pettit sounded a note of caution when it came to the tech sector, particularly software stocks. He noted that software has the highest bar within tech, not just in terms of growth expectations but also in terms of monetization. Many software companies are not seeing the expected growth in the next three years, which is already priced into their valuations. This mismatch between expectations and reality could create volatility in the sector.

In terms of specific guidance, Pettit expects companies to use the current uncertainty as an excuse to walk down expectations for Q4. This is a typical trend in US markets, where companies tend to set low expectations and then beat them. Pettit advises investors to focus on companies that can deliver on their promises.

Overall, Pettit’s comments suggest that investors should be cautious about the tech sector, particularly software stocks, and focus on companies that can deliver on their promises. He also emphasizes the importance of looking beyond the current quarter and focusing on long-term growth prospects.

Tech Sector Will Thrive Despite Short-term Challenges

Dan Flax, Senior Research Analyst at Neuberger Berman is bullish on the technology sector, with a focus on companies that are well-positioned to capitalize on the next generation of workloads and are executing well on their product cycles. Flax expects concerns about cyclical headwinds to remain a factor but also sees select opportunities in the sector. He also noted that enterprise customers are looking to adjust to changes in the landscape cyclically and invest in transforming their organizations, which will drive technology spending in the second half of the decade.

As investors navigate the current market landscape, it is essential to approach the tech sector with a sense of caution. While the sector has been experiencing a significant upswing, investors should focus on companies that have a proven track record of delivering on their promises, rather than getting caught up in the hype surrounding certain stocks.

Our Methodology

To compile our list of the 8 most profitable tech stocks right now, we used the Finviz and Yahoo stock screeners to compile an initial list of the 40 largest technology companies by market cap. From that list, we narrowed our choices to companies with positive TTM net income and 5-year net income growth informed by reputable sources, including SeekingAlpha, which provided insights into 5-year growth rates, and Macrotrends, which supplied information on trailing twelve-month (TTM) net income. Then we sorted the stocks in ascending order, according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds, as of Q2 of 2024.

Why do we care about what hedge funds do? 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).

Microsoft (NASDAQ:MSFT)  

Number of Hedge Fund Holders: 279  

TTM Net Income: $88.13 Billion  

5-Year Net Income CAGR: 17.57%

Microsoft (NASDAQ:MSFT) is a technology giant offering a diverse range of products and services, including its Windows operating system, Office productivity suite, Azure cloud platform, and Xbox gaming console. Microsoft (NASDAQ:MSFT) is also a leader in AI, enterprise software, and cloud computing, with its Azure being a key growth driver.

Microsoft (NASDAQ:MSFT) is accelerating its data center capacity expansion plans and is poised to overcome capacity constraints for AI training and inferencing, due to its strategic partnerships with Oracle and other hyper scalers, In March, Microsoft (NASDAQ:MSFT) and Oracle announced to expand their partnership to meet the growing demand for Oracle Database Azure. The service will now be available in 15 regions globally, with 5 new regions added this year. Oracle Database Azure is now available in Germany and will allow customers to run Oracle database services on hardware in Azure data centers.

This collaboration helps Microsoft (NASDAQ:MSFT) offset some pressure while its investments in data centers, CPUs, and GPUs will support the growing demand for AI applications. In the financial year 2024, Microsoft (NASDAQ:MSFT) increased its capital investments by 58% to $44.5 billion. The company is well-positioned to capture the rapidly growing market for AI training and inferencing. Microsoft (NASDAQ:MSFT) plans to construct 20 data centers globally, in addition to its existing 300+ data center footprint spanning 60+ regions. This expansion will enable the company to increase its capacity and provide more efficient and scalable services to its customers.

Microsoft’s (NASDAQ:MSFT) dominant position in the cloud and AI and significant investments in data center expansion make it an attractive investment opportunity. The company’s earnings are projected to increase by 10.21% in the current year. With a consensus Buy rating from industry analysts, the stock has a target price of $495.97, which represents a 17.57% upside potential from its current level.

Overall, MSFT ranks 1st on our list of most profitable tech stocks right now. While we acknowledge the potential of MSFT to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an 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.