Wall Street is very bullish on Microsoft(NASDAQ: MSFT) and Meta Platforms (NASDAQ: META). Both stocks have a consensus rating of buy, and the median target prices imply at least 10% upside as of Dec. 27. However, two hedge fund billionaires sold Microsoft and bought Meta Platforms in the third quarter:
Stephen Mandel of Lone Pine Capital sold 364,426 shares of Microsoft, reducing his position by 18%. He also bought 496,900 shares of Meta Platforms, increasing his position by 36%. Meta Platforms is now his largest holding, and Microsoft dropped from second to fifth.
Louis Bacon of Moore Capital Management sold 93,922 shares of Microsoft, cutting his stake by 70%. He also bought 128,207 shares of Meta Platforms, increasing his position by 961%. Meta is now his second-largest holding aside from options, and Microsoft no longer ranks in the top 50.
Investors should not copy those trades without due diligence. Both hedge funds underperformed the S&P 500(SNPINDEX: ^GSPC) during the last three years. And the trades were made in the third quarter, which ended three months ago. That said, Microsoft and Meta Platforms do warrant further consideration, given that artificial intelligence could supercharge their profits in the future.
1. Microsoft
Microsoft reported solid financial results for the first quarter of fiscal 2025, which ended in September, beating estimates on the top and bottom lines. Revenue rose 16% to $65 billion on strong momentum in enterprise software and cloud services driven by demand for artificial intelligence (AI) products. Meanwhile, generally accepted accounting principles (GAAP) net income increased 10% to $3.30. But the stock declined following the report for a few reasons.
First, management, for the first time, gave insight into the accounting of its $13 billion investment in OpenAI. CFO Amy Hood said the expected loss at OpenAI would be a $1.5 billion drag on income in the current quarter. That headwind will likely persist in the near term. But Microsoft is entitled to a portion of OpenAI's earnings once the start-up reaches profitability.
The stock also fell because investors are concerned about how aggressively Microsoft is investing in AI. Indeed, higher spending in the first quarter led to a 7% decline in free cash flow, even as Microsoft lost three points of market share in public cloud spending. And CFO Amy Hood says capital expenditures will increase again in the current quarter due to "cloud and AI demand signals."
However, Brent Bracelin at Piper Sandler says concerns related to investments in AI are overblown. Microsoft's AI business is expected to surpass an annual revenue run rate of $10 billion next quarter, just two-and-a-half years after its launch, which is four times faster than the cloud business reached the same milestone. Also, Bracelin thinks AI revenue could grow tenfold to reach $100 billion annually in the future.
Even so, Microsoft still has a valuable problem. The stock trades at 36 times earnings, a premium to the five-year average of 33 times earnings. That multiple is hard to justify when Wall Street expects earnings to grow at 13% annually in the next three years. Those figures give a price-to-earnings-to-growth (PEG) ratio of 2.7, and conventional wisdom says values above 2 are expensive.
Here is the bottom line: Prospective investors should wait for a better entry point before buying Microsoft stock. But shareholders don't necessarily need to trim their positions, provided they are comfortable with the possibility of a double-digit decline in the price.
2. Meta Platforms
Meta Platforms reported strong financial results in the third quarter, beating estimates on the top and bottom lines. Revenue rose 19% to $40 billion, operating margin expanded 3 percentage points, and GAAP net income surged 37% to $6.03 per diluted share. The stock declined following the report because active users increased more slowly than analysts anticipated, but investors who sold may have missed the big picture.
Meta Platforms operates four of the seven most popular social media platforms on the planet, a significant competitive advantage that lets it source consumer data and target advertising content. Consequently, Meta Platforms is the second-largest adtech company in the world behind Alphabet's Google, and it's projected to gain market share through 2026, according to eMarketer.
Meta Platforms is also effectively using AI to boost engagement. CEO Mark Zuckerberg said on the third-quarter earnings call, "AI-driven feed and video recommendations have led to an 8% increase in time spent on Facebook and a 6% increase on Instagram this year alone." He also said more than a million brands used its generative AI tools to create ad content in the last month.
Meta Platforms stock currently trades at 28 times earnings, a premium to the five-year average of 25.5 times earnings. But the valuation is still attractive because Wall Street expects the company's earnings to grow at 18% annually in the next three years. Those figures give a PEG ratio of 1.6, making the stock much cheaper than Microsoft.
Here is the bottom line: Patient investors should consider buying a small position in Meta Platforms today. However, with the valuation above the historical average, a pullback is certainly possible. If the stock falls by 15% or so, that would be a good time to buy a slightly larger position.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
