Microsoft (MSFT) Remains a High-Quality AI Leader

Wedgewood Partners, an investment management company, released its third-quarter 2026 investor letter. The letter can be downloaded here. Wedgewood Composite delivered a net return of 2.5% in the quarter, compared to 2.3% for the Standard & Poor's 500 Index, 0.9% for the Russell 1000 Growth Index, and 2.6% for the Russell 1000 Value Index. Surging Treasury yields and macro headwinds have heavily pressured rate-sensitive stocks and market breadth, driving equal-weighted S&P 500 underperformance. However, AI resilience and mega-cap tech pushed the NASDAQ 100 to record highs. While rising inflation, energy price spikes, and higher interest rates continue to pressure broader equities, the firm is actively deploying capital into compelling new positions, recently adding Toll Brothers, Hermès, and TJX Companies.

In its Q3 2026 investor letter, Wedgewood Partners highlighted Microsoft Corporation (NASDAQ:MSFT) as a top contributor. Microsoft Corporation (NASDAQ:MSFT) is a multinational software company that develops and supports software, services, devices, and solutions, holding dominant positions in software, cloud infrastructure, generative AI, and gaming. On October 15, 2026, Microsoft Corporation (NASDAQ:MSFT) closed at $539.44 per share, reflecting a market capitalization of $4.01 trillion. Microsoft Corporation (NASDAQ:MSFT) posted a one‑month return of 9.25%, while its shares gained 5.04% over the past 52 weeks.

Wedgewood Partners stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q3 2026 investor letter

"Microsoft Corporation (NASDAQ:MSFT) was a top contributor to third-quarter outperformance. The Company grew operating income by about 18%, and we estimate its average gross asset base grew in the low 20s, leading to continued healthy returns on invested capital of almost 30%. These returns are virtually unchanged from a year ago and even from two years ago, when the AI buildout was in its infancy. This is strong financial evidence that Microsoft's capital allocation has delivered exceptional shareholder returns so far. For example, Microsoft has generated an incremental $35 billion in gross cash flow on $115 billion in average incremental assets over the past 12 months. The market has struggled to grasp this value creation, as the Company is rationally reinvesting that gross cash flow into higher-earning assets, causing free cash flow to dip for now. On the one hand, markets seem to love private AI labs hemorrhaging cash; on the other, markets penalize public companies when free cash flow declines, even when they can capture very high, obvious investment returns. This mispricing may be mostly technical, as the flood of "AI" stock issuance is forcing investors (including index huggers) to sell the next best thing (Microsoft) to fund expensive, less-profitable IPOs. We continue to view Microsoft as an excellent business that has executed extremely well during this AI buildout, and we expect more upside as it reaps returns on capex."

Microsoft Corporation (NASDAQ:MSFT) ranks second on our list of 40 Most Popular Stocks Among Hedge Funds. According to our database, 273 hedge fund portfolios held Microsoft Corporation (NASDAQ:MSFT) at the end of the second quarter, compared to 282 in the previous quarter. While we acknowledge the potential of Microsoft Corporation (NASDAQ:MSFT) as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

In another article, we discussed Microsoft Corporation (NASDAQ:MSFT) and shared a list of the most active blue-chip stocks to buy. In addition, please check out our hedge fund investor letters Q3 2026 page for more investor letters from hedge funds and other leading investors.

READ NEXT: 33 Stocks That Should Double in 3 Years and 15 Stocks That Will Make You Rich in 10 Years.

This article is originally published at Insider Monkey.