Stan Druckenmiller ran a very successful hedge fund between 1981 and 2010. He never had a single losing year, and he returned an average of 30% per year to his clients. Very few Wall Street money managers have a track record half as good, making Druckenmiller a great case study for investors.
Today, he manages his multibillion-dollar fortune through the Duquesne Family Office. In the quarter ended December, Druckenmiller had 21.1% of his portfolio invested in two stocks from the “Magnificent Seven.” Nvidia (NASDAQ:NVDA) represented 9.1% and Microsoft (NASDAQ:MSFT) represented 12% of its invested assets. The magnitude of these positions is a clear sign of strong conviction.
Are Nvidia and Microsoft still profitable investments?
1.Nvidia
Nvidia reported phenomenal fourth-quarter financial results, crushing estimates for both revenue and bottom line. Total revenue soared 265% to $22.1 billion on triple-digit sales growth in the data center and professional visualization segments. In the meantime, non-GAAP net income soared 486% to $5.16 per diluted share, as gross margin increased more than 10 percentage points due to pricing power and a growing software business, which comes with even higher margins than Nvidia hardware.
The company is best known for its graphics processing units (GPUs), which set the benchmark for handling computer graphics and complex data center workloads like artificial intelligence (AI). Indeed, Nvidia holds a market share of more than 95% in workstation graphics and more than 80% in AI chips.
But the company is truly formidable because it has expanded into adjacent data center markets for high-performance networking equipment, central processing units (CPUs), subscription software and cloud services, all specially designed for AI.
CEO Jensen Huang highlighted this strategy at the annual GPU Technology Conference (GTC) the company recently hosted. “Nvidia doesn’t make chips. Nvidia builds data centers,” Huang said. He continued: “Nvidia’s opportunity is not GPUs. A lot of people are making GPUs. We are chasing the data center market.”
This strategy not only creates monetization opportunities beyond GPUs, but also reduces friction for customers. As Huang explains, Nvidia essentially sells off-the-shelf data centers specifically designed to power AI workloads.
With this in mind, Nvidia values its addressable market at $1 trillion, and Wall Street expects the company to grow its earnings per share by 35% annually over the next five years. While impressive, this consensus estimate nevertheless makes its current valuation of 77 times earnings quite expensive.
Personally, I would wait for a much cheaper entry point before buying Nvidia stock, and I say this as a current shareholder.
2.Microsoft
This tech giant reported strong second-quarter financial results, beating expectations for both revenue and bottom line. Revenue rose 18% to $62 billion on solid growth in sales of commercial software and cloud computing services. Meanwhile, non-GAAP net income jumped 26% to $2.93 per diluted share thanks to disciplined expense management. Management expects revenue growth of 14% to 15% in the third quarter, and investors can expect similar results in the future as the company moves toward AI.
Microsoft dominates the software-as-a-service market largely due to the success of its office productivity (Microsoft 365), enterprise resource management (Dynamics 365), and cybersecurity products. The company has introduced generative AI co-pilots that automate tasks in these software categories. For example, Microsoft 365 Copilot can write text in Word, create presentations in PowerPoint, and analyze data in Excel. Management expects these generative AI co-pilots to contribute more significantly to revenue in the future.
At the same time, Microsoft is also gaining market share in cloud computing. Its Azure unit accounted for 24% of spending on cloud infrastructure and platform services in the fourth quarter, up nearly 2 percentage points from a year earlier. Satya Nadella, CEO attributes these share gains to investments in AI, notably its partnership with OpenAI. Specifically, Microsoft is the exclusive cloud provider for OpenAI, and Azure customers can build custom generative AI applications using large OpenAI language models like GPT-4, the cognitive engine behind ChatGPT Plus.
Going forward, the software as a service market is expected to grow at an annual rate of 13.7% and the cloud computing market is expected to grow at an annualized rate of 14.1% over the same period. This gives Microsoft a good chance of generating annual revenue growth in the mid-teens through the end of the decade. Investors can expect slightly faster earnings growth due to share buybacks and continued focus on cost controls.
Indeed, Wall Street expects Microsoft to grow its earnings per share by 16% annually over the next five years. But this consensus forecast makes the current valuation of nearly 39 times earnings look quite expensive. Microsoft is a great company with strong growth prospects, but I would be surprised to see this Magnificent Seven stock beat the market over the next five years from its current price.
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Trevor Jennevine has positions at Nvidia. The Motley Fool ranks and recommends Microsoft and Nvidia. 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.
Billionaire Stan Druckenmiller has 21% of his portfolio invested in 2 “Magnificent Seven” stocks was originally published by The Motley Fool
