Why Is Paul Tudor Jones Selling Microsoft?

The hype around artificial intelligence stocks has already started to wane somewhat as concerns that the supercharged rise of stocks like Nvidia could be on the cusp of stalling. While there’s little doubt that AI technology will be instrumental going forward, the future where AI rules might be a little further out than expected.

Few AI-themed stocks have captured investors’ imaginations like Microsoft (NASDAQ: MSFT). The company made a $1 billion deal with OpenAI in 2019, the developer behind ChatGPT, which thrust Microsoft to the forefront of the AI revolution.

That visionary investment alongside the company’s cloud-computing success have powered Microsoft share price up by over 256% in the past five years.

It doesn’t hurt that Microsoft has beaten revenue and earnings expectations for every quarter in 2023. It also made a string of exciting announcements about its upcoming AI innovations.

So it’s a red flag that highly-respected investor Paul Tudor Jones sold a substantial stake in the company. Tudor Jones, after all, is most famous for correctly forecasting the “Black Monday” stock market crash in 1987. In Q4 of 2023, the billionaire sold 56% of his MSFT holdings.

But why did Paul Tudor Jones sell Microsoft stock, and should you follow suit?

Paul Tudor Jones Still Bullish On AI

Paul Tudor Jones hasn’t lost his faith in AI stocks, that seems clear. He runs the Tudor Investment Corporation, and in the 4th quarter of 2023 the fund increased its stake in Nvidia by over 810%. Nvidia is the fund’s 3rd largest holding, comprising 0.91% of its $7.2 billion portfolio.

Tudor Jones has also declared that AI will spark the next productivity boom. Those factors make it seem like Tudor Jones has identified a weakness in Microsoft particularly. That weakness was not readily apparent, however, when the company reported its earnings for the fiscal 2nd quarter of 2024 (ended December 31, 2023).

Revenue of $62 billion was an 18% improvement from the same quarter of 2022. Analysts were looking for $61.12 billion in sales, and Microsoft beat that mark by 1.46%. Net income of $21.9 billion was 33% higher year-over-year, leading to a diluted earnings per share (EPS) of $2.93, beating expectations by 5.83%.

The tech giant’s operations are split into three segments, and Microsoft increased revenue nearly across the board. That includes growth for Office, Xbox, and LinkedIn in addition to the Azure cloud platform. The only revenue decline was in device sales, a consistent trend across the industry.

Will Microsoft Stock Keep Going Up?

Microsoft is one of the few companies that have deployed AI on a large scale, so this earnings release was heavily scrutinized. Azure is one of the platforms through which Microsoft deploys AI, and the cloud platform had 53,000 subscribers at the end of 2023. Around 33% of those clients were added during the year.

There was exciting news that the company plans to produce chips of its own, putting Microsoft in direct competition with Nvidia. The chips are intended to run Azure, perhaps as soon as 2024.

The other AI avenue for the company is Microsoft CoPilot, a virtual assistant that integrates into Microsoft 365 software. CoPilot was just made available at scale on a $30 per month subscription basis. There have already been concerns raised that the software doesn’t deliver on its potential.

Microsoft leadership recently said that investors should temper their expectations for CoPilot. It may take longer for the software to be the revenue driver many hoped it would be.

Outside of AI, the long-delayed $69 billion acquisition of Activision Blizzard closed in the 4th quarter. The deal should bolster the company’s robust gaming division.

Analysts Opinion

Paul Tudor Jones may be pulling back on the stock, but Wall Street is still very bullish on Microsoft with 54 of the 57 analysts covering the stock rating it as a Buy.

6 of those analysts assess that MSFT can outperform the market, and the highest forecast has the stock taking a 42.6% leap to $600 over the next year. The average price target, however, calls for around a 12% increase to $470.89 per share.

There are no Sell ratings on the stock, but 3 analysts rate it as a Hold. The lowest price forecast has the stock trending down ever so slightly to $420 per share over the next year.

Is Microsoft Stock Overvalued?

Microsoft reported a healthy quarter, has exciting prospects for integrating artificial intelligence into its tool suite, and curries favor with analysts so perhaps Paul Tudor Jones is more concerned that valuation than any material issue.

The enterprise currently trades at a price-to-earnings (P/E) ratio of 38x, which is slightly higher the technology industry average PE ratio of 30x.

It’s far lower than Nvidia’s 75x P/E ratio, and Amazon’s 62x. However, Apple and Google have P/E ratios of 26x and 28x, respectively so Microsoft’s valuation doesn’t seem especially out of line given the company’s cloud and AI positioning.

Microsoft also offers a dividend, and the company paid back $8.4 billion in dividends in the 4th quarter of 2023 alone. The current annual dividend yield is 0.71%, equating to a $0.75 per share quarterly payout for MSFT holders.

Why Is Paul Tudor Jones Selling Microsoft?

Paul Tudor Jones is most likely selling Microsoft on valuation concerns and opportunity cost of investing in other higher potential stocks.

Microsoft has been one of the hottest stocks over the past few years, and heavy scrutiny surrounds the company whenever it releases earnings. It is possible that Tudor Jones was concerned about a disconnect between valuation and price in light of lofty expectations.

There are certainly concerns that Microsoft stock can continue at the pace of recent years. But the company is still making big acquisitions and releasing products that are at the forefront of technological innovation.

Microsoft is now the largest company in the world by market capitalization, and that success can also fuel fears that there’s no more room to rise. While Tudor Jones has been right before, it’s doubtful that Microsoft will crash like the market did on Black Monday.

Tudor Jones likely just feels that he can make more substantial gains elsewhere.

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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.