This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
The "Magnificent Seven" includes some of the most profitable and dominant tech companies in the world. These are financially strong companies with a long history of delivering market-beating returns for shareholders, which is why they have earned the label "magnificent."
The most recent quarterly Form 13Fs revealed two notable fund managers buying more shares of Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN) in the first quarter. Let's explore why these billionaires may favor these stocks in 2025.
1. Microsoft
One of the most widely held stocks by investment managers is Microsoft. Billionaires Stephen Mandel of Lone Pine Capital and Chase Coleman of Tiger Global Management have held large stakes in Microsoft for several years, and both investors were buying more shares in the first quarter.
One reason that may explain why billionaire fund managers like Microsoft right now is the momentum in the company's cloud computing business. Revenue from Microsoft Azure grew 33% year over year in the first quarter, accelerating over the prior quarter's 31% growth rate. "We continue to see strong demand for our cloud and AI offerings as they help customers drive productivity, increase efficiencies, and grow their businesses," Microsoft CFO Amy Hood said.
Microsoft Azure is one of the top cloud services providers, and it is building a solid competitive advantage. It continues to expand its data center capacity worldwide. This is helping Azure offer superior regional availability for companies using popular enterprise software vendors like Oracle and SAP.
Microsoft has certainly lived up to its label as a Magnificent Seven stock. Its dominance in the software market with Windows and Office has made it one of the most profitable companies in the world, and its growth opportunity in cloud services points to a bright future. Over the last five years, its revenue and earnings per share have roughly doubled, sending its stock higher.
However, Microsoft will need to prove to investors that it can translate booming demand for cloud services into higher profits down the road. The capital required to build these data centers has weighed on the company's margins and earnings growth over the past year. On that note, Microsoft came through last quarter, delivering year-over-year earnings growth of 18%.
The stock traded as low as 26 times this year's earnings during Q1, when Lone Pine Capital and Tiger Global may have been buying shares. The current forward earnings multiple of 34 is at the high end of the stock's previous trading history. Investors may want to wait for a better price before opening a position. But more results like Microsoft posted last quarter could support new highs.
2. Amazon
Stephen Mandel and Chase Coleman also bought more shares of Microsoft's competitor in the cloud market. Amazon dominates the e-commerce market while also operating the leading cloud business with Amazon Web Services. There are a few reasons why these investors like Amazon.
Like Microsoft, Amazon Web Services (AWS) has seen strong demand for cloud services. Revenue from AWS accelerated over the past year and grew 17% year over year in Q1. AWS is now generating trailing-12-month revenue of $112 billion, or 19% of Amazon's business.
Demand for AI-related services has been growing at triple-digit rates. Amazon is leading the cloud market for similar reasons to why it dominates the U.S. e-commerce market. It is focused on making AI more affordable for businesses by offering its proprietary AI chips, such as Trainium3, that help reduce costs. It also offers tools for building AI applications, such as Amazon Bedrock.
Perhaps the most important reason billionaires are buying Amazon shares is that it is growing profits at high rates. Amazon's earnings per share grew 62% year over year in Q1. This primarily reflects cost-saving measures, such as the use of robotics in warehouses to streamline Amazon's retail operation.
Amazon has a strong competitive advantage based on over 200 million Prime members, a delivery network, and data center infrastructure to support growing cloud demand. While Microsoft Azure is growing faster than Amazon Web Services, the cloud market is growing around 20% year over year. The insatiable demand for AI services is a rising tide that can lift all boats.
On the basis of Amazon's operating cash flow, the stock is trading at a multiple of 19, which is at the lower end of Amazon's trading history. Barring a sudden downturn in the stock market, investors should expect Amazon's stock to deliver solid returns in 2025 and beyond.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
