Billionaire hedge fund manager Philippe Laffont of Coatue Management was busy in the second quarter, adding to his investment firm’s positions in Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT). Amazon is Laffont’s second-largest position, while Microsoft is his fifth-biggest holding.
Let’s look at what may have attracted Laffont to these two “Magnificent Seven” stocks and if investors should be scooping up shares as well.
Cloud computing leaders
Amazon’s AWS and Microsoft’s Azure are the two market leaders in the cloud computing space. AWS has about a 32% market share, while Azure is around 23%, although estimates vary slightly depending on the source. Cloud computing is a very fixed-cost business, so size and scale matter, and these two companies have just that.
The cloud computing space is seeing strong growth thanks to the expansion of artificial intelligence (AI) services as well as the continued efforts of companies to move their computing operations from on-premise servers to the cloud.
On the AI side, customers are using these cloud service providers to help build out their own AI applications, which are often based on models or tools that these cloud companies provide as a starting point. Microsoft has been leading the way, with Azure seeing 29% year-over-year growth last quarter and a 60% increase in AI customers. Amazon, meanwhile, has also seen strong growth, with AWS year-over-year growth accelerating to nearly 19% last quarter from 17% in Q1.
While both companies ramp up their AI capex (capital expenditures) spending to meet demand, they should continue to benefit over the long run from the long-term trends in AI.
Dominant positions in their markets
Another common trait between Amazon and Microsoft is that they both have dominant market positions in their core businesses.
Amazon is the market leader in the e-commerce space, with a nearly 40% share. The company is still seeing solid growth, with its North American sales up 9% year over year last quarter and international sales climbing 10% on a constant currency basis. Meanwhile, the company still has solid growth opportunities ahead. It has less than a 7% share of the overall U.S. retail market, so it should continue to benefit from the movement toward more online shopping. Improvements such as AI-powered recommendations should also help drive increased sales in the future.
Microsoft, meanwhile, is the leader in productivity software and personal computer operating systems (OS). The company has been the leader in these fields for decades and should continue to dominate both spaces. On the software side, the company is seeing nice growth stemming from its introduction of AI copilots, which have been integrated throughout its Microsoft 365 software platform. These AI copilots can do things like summarizing a document or rewriting text in Word, analyzing trends in Excel, or creating more visually stunning presentations in PowerPoint, among other tasks.
Meanwhile, with the introduction of AI features, the company is looking to benefit from a hardware refresh cycle, which would help Windows OS growth. On that end, it has introduced several new AI-based PCs that will incorporate its Copilot AI chatbot. While Microsoft sees strong AI-powered growth in the cloud computing space, it still has a lot of upside in other areas as well.
Both stocks have reasonable valuations
Neither Amazon nor Microsoft are in the bargain bin when it comes to valuation. Microsoft trades at a slightly lower forward price-to-earnings (P/E) ratio of under 28, while Amazon checks in at 31 based on their respective analyst earnings estimates for the coming year.
Those are reasonable valuations for two market-leading companies that still have a lot of growth opportunities in front of them. Both companies embrace AI, and both look poised to be long-term AI winners. Microsoft has been at the forefront of AI with its partnership and investment in OpenAI, while Amazon has always shown a willingness to spend money to be a long-term winner.
As such, investors should feel comfortable following billionaire Laffont’s lead here and buying and owning both of these Magnificent Seven stocks as core holdings over the long term.
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Billionaire Philippe Laffont Bought These 2 “Magnificent Seven” Stocks. Should You? was originally published by The Motley Fool
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