Wedgewood Partners Cites Microsoft Operating Income Growth in Q3 Letter

Wedgewood Partners identified Microsoft Corporation (NASDAQ: MSFT) as a top contributor to its third-quarter 2026 performance in an investor letter released by the firm. The investment management company reported that the Wedgewood Composite delivered a net return of 2.5% for the quarter, outpacing the Standard & Poor's 500 Index, which returned 2.3%, and the Russell 1000 Growth Index, which returned 0.9%. The Russell 1000 Value Index lagged slightly with a 2.6% return.

In the letter, Wedgewood Partners noted that Microsoft grew its operating income by approximately 18%. The firm estimates that Microsoft's average gross asset base grew in the low 20s, resulting in returns on invested capital of almost 30%. Wedgewood Partners stated that these returns are virtually unchanged from one year ago and two years ago, providing financial evidence that the company's capital allocation has delivered shareholder returns. Over the past 12 months, Microsoft generated an incremental $35 billion in gross cash flow on $115 billion in average incremental assets.

The firm observed that the market has struggled to grasp this value creation because Microsoft is reinvesting that gross cash flow into higher-earning assets, causing free cash flow to dip temporarily. Wedgewood Partners argued that markets penalize public companies when free cash flow declines, even when they capture high investment returns, while simultaneously favoring private AI labs that are hemorrhaging cash. The letter suggested this mispricing may be technical, as the issuance of "AI" stocks forces investors to sell established holdings like Microsoft to fund expensive, less-profitable IPOs.

Microsoft Corporation (NASDAQ: MSFT) closed at $539.44 per share on October 15, 2026, reflecting a market capitalization of $4.01 trillion. The stock posted a one-month return of 9.25% and gained 5.04% over the past 52 weeks. Wedgewood Partners recently added positions in Toll Brothers, Hermès, and TJX Companies while deploying capital into new opportunities.

According to data from Insider Monkey, Microsoft ranks second on a list of 40 most popular stocks among hedge funds. The database showed that 273 hedge fund portfolios held Microsoft shares at the end of the second quarter, down from 282 in the previous quarter. Despite acknowledging the potential of Microsoft as an investment, Wedgewood Partners stated it believes certain AI stocks offer greater upside potential and carry less downside risk.