Why Did Stanley Druckenmiller Buy Microsoft?

Stanley Druckenmiller is a long-time hedge fund manager who amassed a $6.4 billion fortune over a stellar career. Now managing his own money, Druckenmiller made waves earlier this month when his Duquesne Family Office purchased 729,040 shares of Microsoft (NASDAQ:MSFT), an investment of over $210 million.

The tech giant’s stock should be on every investor’s radar, if not in their portfolio. Even after a hard year for tech stocks, MSFT was able to post gains of 23.8% over the past year.

The positive trend has continued into the current year, with MSFT shares up over 31% year-to-date. Even though the company has strong financials, consistent growth, and a bright future, detractors believe that the stock is overvalued. Bears feel that the future is already priced in and that there is not much upside at the current price.

Aside from valuation concerns, Microsoft has been rock-solid. Rapid growth in its cloud computing segment has driven revenue growth. And the company has an early, yet significant, position in AI technology that could shape the future of tech, and maybe even the future of the human experience.

So should you follow Druckenmiller’s example and buy MSFT?

Microsoft Overview

Microsoft is so much more than Windows and Office for which its famous. The Redmond, WA-based technology company currently operates across seven segments:

• Server Products and Cloud Services
• Office Products and Cloud Services
• Windows
• Gaming
• LinkedIn
• Search Advertising
• Enterprise Services

The Productivity and Business Processes segment includes Microsoft 365 (formerly known as Office 365), Dynamics 365 business solutions software, and the LinkedIn platform. This segment accounted for $17.5 billion of the company’s revenue in the first quarter of 2023, 32.5% of $52.9 billion total revenue.

The Intelligent Cloud segment is the fastest-growing and most profitable segment for the company. Microsoft’s Azure cloud platform is continuing to flourish, even as the software gets more powerful. This segment brought in $22.1 billion in the first quarter, accounting for 41.8% of the company’s revenue.

The More Personal Computing segment includes personal computing software like Windows, but it also includes physical devices like the Microsoft Surface tablet and the Xbox series of gaming consoles. This segment brought in $13.3 billion in the first quarter, or 25.1% of the company’s revenue.

Both the Cloud and the Productivity and Business Processes segments delivered increased year-over-year revenue of 16% and 11% respectively. The More Personal Computing segment, on the other hand, decreased by 9% from last year.

MSFT Q1 Financials

The quarter’s total revenue was a 7% year-over-year increase. Net income of $18.3 billion was up 9% from $16,728 billion last year. Diluted earnings per share also increased 10% from $2.22 to $2.45.

Revenue from Microsoft 365, Dynamics 365, and LinkedIn all increased in the Productivity and Business Processes segment. Dynamics 365 experienced the most rapid growth, as the cloud-based CRM and ERP software increased revenue by 25% from the same quarter last year.

Cloud computing and Azure revenue increased by 27%. Microsoft has been able to carve out a strong niche in spite of heavy competition from Amazon Web Services (AWS) and Google Cloud Platform (GCP). Even though AWS is still the top cloud company in terms of market share, Azure is right behind it and is scaling faster.

Bears will be quick to point to the company’s 34.87 P/E ratio as evidence that the stock is overvalued. But compared to Amazon’s P/E of 287.87, MSFT looks pretty attractive. The company’s P/E value is more in line with competitors Google at 27.93 and Apple at 29.47.

Why Buy Microsoft Now?

The stock has delivered a 5-year return of over 233%, even after a year where tech stocks took a beating. But that only fuels the debate that MSFT doesn’t have much room to grow. Given valuation concerns, why would Druckenmiller invest so much in Microsoft now?

The answer is AI.

ChatGPT was a game-changer that opened the world’s eyes to AI’s possibilities. Microsoft is one of the few companies that is uniquely poised to take advantage of the disruptive opportunities AI offers. Azure OpenAI software is also fully integrated with Microsoft’s Office and Cloud platforms.

The company’s large-scale, generative AI models are geared toward creating productivity wins. This stunning technology makes it easy to automate tasks that were previously unattainable. And Microsoft’s models are only becoming more advanced, taking in massive amounts of data and sifting through it to create unique insights.

But there are also major concerns with AI. Some tech leaders recently called for a pause on AI development to determine the ramifications the technology might cause.

Microsoft’s leadership has persuaded technology and government leaders that Azure OpenAI has been developed responsibly. And the company’s extensive cybersecurity measures should prevent bad actors from meddling with the models.

Future Outlook

Despite the massive success of Microsoft, the best may be yet to come. Overvaluation is a concern, but with the company’s established brand and cutting-edge technology, the stock’s positive trend should continue in 2023.

In the first quarter, Microsoft rewarded its investors by buying back shares in the amount of over $9.7 billion.

And the company has continued to raise its dividend, with the current offering of $0.86 representing a 9.7% increase from the same quarter last year. While a 0.86% annual yield may not raise any eyebrows, it’s still much better than what the company’s big-tech competitors offer.

Stanley Druckenmiller purchased a healthy amount of MSFT because he believes the company’s cloud and AI software will shape the future of technology. Given Microsoft’s history and performance, it’s an investment that’s likely to pay off.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.