Microsoft's Stock Downgraded Amid AI Investment Concerns and High Earnings Estimates

Microsoft's Stock Has One Fewer 'Buy' Rating on Wall Street Today

That's rare on Wall Street, with nearly all of the analysts currently tracking the software giant holding "buy" or equivalent ratings. Optimism about AI-related growth has helped shares of Microsoft (MSFT) this year, but at least one investment bank is urging caution about what might come next. Oppenheimer analysts on Tuesday downgraded shares of Microsoft to "perform" from "outperform." That's rare on Wall Street, with nearly all of the analysts currently tracking the software giant holding "buy" or equivalent ratings, according to Visible Alpha. Shares of Microsoft were recently up about 1%, slightly outperforming the broader market. The stock is up more than 11% for the year. "Open AI losses are the primary concern and could be in the $2-3B range in FY25, which we were not previously modeling," the analysts wrote Tuesday. Open AI is an independent company, but it has a "strategic partnership" with Microsoft. "Enterprises have been slow to adopt AI and associated revenues will likely disappoint." In a September report, Oppenheimer said it was "tweaking down near term AI revenue, but tweaking up CapEx spending, mostly for Microsoft." The company is investing in "once-in-a-generation technology," the analysts wrote, so "we don't believe expanding margins will be a short-term priority." Oppenheimer also said that Microsoft's shares are trading near the midpoint of the five-year range for its price-to-earnings ratio and "could trade to the lower end" down the line.

Microsoft stock downgraded at Oppenheimer on 'too high' earnings estimates By Investing.com

Investing.com -- Investment bank Oppenheimer downgraded Microsoft (NASDAQ:MSFT) stock from Outperform to Perform on Tuesday, citing high consensus estimates for revenue and earnings. The firm's analysts point to potential losses from OpenAI, Microsoft's partner in AI technology development, as a key concern. OpenAI is expected to incur a loss of approximately $5 billion this year, and with Microsoft holding a 49% stake, a substantial portion of this loss could impact the company's financials. The firm also highlighted slow enterprise adoption of AI technologies, which may result in disappointing associated revenues. This is further compounded by the likelihood of increased capital expenditures (CapEx) on high-performance computing components like GPUs and data center capacity. Oppenheimer anticipates Microsoft's CapEx to reach $63 billion in 2025, marking a 14% year-over-year increase and doubling from 2023, with associated depreciation expenses expected to rise by 28% to $29 billion. Moreover, the recent interest rate cut of 50 basis points by the Federal Reserve on September 18, 2024, is projected to slightly lower Microsoft's net interest income from its $76 billion in cash reserves. Analysts also believe that the market's current estimates for Microsoft's financial performance, including gross margins and EBITDA margins, are set to decrease due to higher depreciation and operating expenses related to AI investments. "This will translate into 3% EPS growth in 1Q25 and we expect weakish guidance for 2025. We also think the Street estimates for EPS growth are ~200bps too high in FY26 and FY27," they said in a note. Other potential risks for Microsoft include insufficient data center capacity to support expected GPU shipments and increased competition in the AI space, which has seen rivals close the gap with Microsoft's offerings. Still, Oppenheimer notes that Microsoft's aggressive pricing and bundling strategies may help to mitigate some of the financial pressures. Microsoft stock is currently trading at the midpoint of its five-year price-to-earnings (P/E) range of approximately 25x-35x and could potentially shift towards the lower end of this spectrum.