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Rupert Hargreaves
Rupert Hargreaves
Articles (687)  | Author's Website |

Hedge Funds Set for Big Payoff With Microsoft

Microsoft could become the next $1 trillion company

Back in August, Apple (NASDAQ:AAPL) made history when the company became the first business ever to achieve a market capitalization of more than $1 trillion. Unfortunately, this marked a high-water point for the company. Since then the shares in the consumer tech company have declined considerably and are currently changing hands around 29% below the 52-week high of $233.47.

Apple has attracted plenty of attention over the past decade for many different reasons. Its product revolutionized the mobile phone industry, and ever since Tim Cook took over the company, it has become a poster child for shareholder returns accumulating hundreds of billions of dollars in cash, which is in the process of returning to investors.

In the background, peer Microsoft (NASDAQ:MSFT) has been slowly staging a recovery. A few years ago, it would have been difficult to believe that Microsoft would become the world's most valuable business again. Even though the company is virtually synonymous with computers, its core operating product, the Microsoft operating system, is no longer the only option consumers have. What's more, Google has eroded the company's monopoly for office software.

The road to $1 trillion

However, Microsoft has steadily been investing tens of billions of dollars, and building out its cloud offering in these efforts have now paid off. The company is closing in on a $1 trillion market capitalization. It recently overtook Apple as the world's most valuable company and has a market capitalization at the time of writing of $840 billion, compared to Apple's $811 billion.

According to analysts at Wedbush Securities, the company is on track to hit the important goal of the market capitalization of $1 trillion sometime in 2019 as its cloud computing business, Azure, continues to dominate the market. An article in Barron's, published at the end of November, noted that Wedbush's Daniel Ives believed, "Microsoft remains in an enviable position heading into 2019 on the heels of its cloud success and is firing on all cylinders around its Office 365 and Azure strategic vision based on our recent checks ... Our expectation [is] that the company will cross the trillion dollar market cap during 2019 based on its cloud strategy and growth."

Hedge funds set to profit

If the company does reach this illustrious goal, it could be a huge payoff for hedge funds.

According to SEC filings, Microsoft was one of the most popular stocks among hedge funds in the third quarter of 2018 (in fact, it was the most-bought stock among large hedge funds for the quarter).

The most notable investor was Steven Mandel, whose tech-focused Lone Pine Capital increased its holding in the tech giant by 10% to just under 14 million shares, roughly $1.6 billion worth of stock. This isn't the largest holding in the portfolio. It accounts for only 8.1% of his long portfolio.

Accounting for 8.3% of his long portfolio is Alibaba Group (NYSE:BABA). The holding here is just under 10 million shares. Adobe Systems (NASDAQ:ADBE) and Activision Blizzard (ATVI) are the third and fourth largest holdings. The top four positions of the portfolio together amount to 31% of the portfolio.

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Elsewhere, Chris Hohn's TCI Fund Management has devoted 7.9% of its portfolio to Microsoft Corp. This holding lags behind Alphabet, Charter Communications (NASDAQ:CHTR) and 21st Century Fox (NASDAQ:FOXA). At the end of the third quarter, these three positions alone accounted for around 70% of the portfolio.

The last notable hedge fund that has a significant position in the tech conglomerate is Lee Ainslie (Trades, Portfolio)'s Maverick Capital. At the end of the third quarter, approximately 5.4% of Maverick's portfolio were invested in this one company. The next most significant position was Walt Disney (NYSE:DIS) company making up 5.2% of the portfolio.

These hedge funds all look primed to profit significantly from Microsoft's march to $1 trillion over the next six months. It will be interesting to see who else is following this trend as the year progresses.

Disclosure: The author owns no share mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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