Billionaire Philippe Laffont bought these 2 “Magnificent Seven” shares. Should I?

Billionaire hedge fund manager Philippe Laffont of Coatue Management was busy in the second quarter, adding to his investment firm’s positions in Amazon (AMZN 0.52%) and Microsoft (MSFT 0.30%). Amazon is Laffont’s second largest position, while Microsoft is its fifth largest position.

Let’s look at what might have attracted Laffont to these two “Magnificent Seven” stocks, and whether investors should be picking up shares, too.

Leaders in cloud computing

Amazon’s AWS and Microsoft’s Azure are the two market leaders in the cloud computing space. AWS has a market share of around 32%, while Azure is around 23%, although estimates vary slightly by source. Cloud computing is a fixed-cost business, so size and scale matter, and these two companies have just that.

The cloud computing space is experiencing strong growth due 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 use these cloud service providers to help build their own AI applications, which are often based on models or tools that these cloud companies provide as a starting point. Microsoft led the way, with Azure posting 29% year-over-year growth last quarter and a 60% increase in AI customers. Meanwhile, Amazon has seen strong growth, with year-over-year AWS growth accelerating to nearly 19% in the latest quarter from 17% in Q1.

While both companies are ramping up their AI capex (capex) to meet demand, they should continue to benefit from the long-term trends in AI.

Dominant positions in their markets

Another common trait between Amazon and Microsoft is that both have dominant market positions in their core businesses.

Amazon is the market leader in the e-commerce space with a share of nearly 40%. The company is still experiencing solid growth, with its North American sales up 9% year-over-year and international sales up 10% on a constant currency basis. Meanwhile, the company still has solid growth opportunities ahead. It has less than a 7% share of the global US retail market, so it should continue to benefit from the move to more online shopping. Improvements such as AI-based recommendations should also help drive sales in the future.

Image source: Getty Images.

Meanwhile, Microsoft is a leader in productivity software and operating systems (OS) for personal computers. The company has been a leader in these areas for decades and should continue to dominate both spaces. On the software side, the company is seeing good growth due to the introduction of AI copilots, which have been integrated into its Microsoft 365 software platform. These AI copilots can do things like summarize a document or rewrite text in Word, analyze 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 that would help boost the Windows operating system. To that end, it has introduced some new AI-powered PCs that will incorporate its Copilot AI chatbot. While Microsoft is seeing strong AI-driven growth in the cloud computing space, it still has many advantages 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 price-to-earnings (P/E) ratio of under 28, while Amazon clocks in at 31, based on analysts’ earnings estimates for next year.

AMZN PE report data (1 year ago) by YCharts

These are reasonable valuations for two market-leading companies that still have plenty of growth opportunities ahead of them. Both companies are embracing AI, and both seem poised to be AI’s long-term winners. Microsoft has been at the forefront of AI by partnering and investing in OpenAI, while Amazon has always shown its 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 holding both of these Magnificent Seven stocks as core long-term holdings.