Tuesday - Oppenheimer has downgraded Microsoft (NASDAQ:MSFT) stock from Outperform to Perform, citing concerns over higher-than-expected losses from its OpenAI investment and slower enterprise adoption of AI technology. The firm indicated that Microsoft's revenue and EPS estimates might be too optimistic, with potential OpenAI losses in the range of $2-3 billion for FY25, which were not previously accounted for.
The report by Oppenheimer suggests that despite Microsoft's significant investment in what it considers "once-in-a-generation technology," the anticipated expansion in margins is not expected to be a short-term focus. This is attributed to several factors, including the impact of increased capital expenditures leading to higher depreciation, reduced interest income, and elevated operational expenses to support AI initiatives.
Microsoft is currently trading at the midpoint of its five-year price-to-earnings (P/E) ratio range of approximately 25x-35x. However, due to the mentioned concerns, the stock could potentially trade towards the lower end of this spectrum. The analyst pointed out that while Microsoft holds a 49% stake in OpenAI, the latter is projected to incur a loss of around $5 billion this year, with about half of that loss impacting Microsoft's financials.
Furthermore, the firm has adjusted its projections for Microsoft's Azure cloud computing service, reducing estimates by approximately 100 basis points on a normalized basis for 2025 going forward. This revision reflects the belief that the market may be overestimating near-term AI revenues, as enterprise adoption and the necessary infrastructure for AI are still developing and may pose as bottlenecks.
In other recent news, Microsoft has been the focus of multiple developments. Truist Securities reiterated a Buy rating for Microsoft, citing the company's strength in the cybersecurity sector. The firm's analysis suggests Microsoft's cybersecurity offerings could provide an upside to current market expectations. In addition, BMO Capital Markets maintained its Outperform rating on Microsoft shares, reflecting ongoing confidence in the tech giant's performance.
Microsoft has also entered a strategic partnership with Rezolve AI to enhance digital engagement in the retail sector with AI-powered commerce solutions. Furthermore, Microsoft is part of an agreement with Constellation Energy to support the revival of a unit at the Three Mile Island nuclear plant.
OpenAI, backed by Microsoft, has successfully completed a funding round, securing $6.6 billion and reaching a post-money valuation of $157 billion. Microsoft has also announced a significant $4.8 billion investment to expand its artificial intelligence and cloud services infrastructure in northern Italy. These are all part of recent developments for Microsoft.
InvestingPro Insights
Recent InvestingPro data provides additional context to Oppenheimer's downgrade of Microsoft. Despite the concerns raised, Microsoft's financial metrics remain robust. The company boasts a substantial market capitalization of $3.04 trillion and has demonstrated strong revenue growth of 15.67% over the last twelve months, with quarterly revenue growth of 15.2% in Q4 2024.
Microsoft's profitability remains impressive, with a gross profit margin of 69.76% and an operating income margin of 44.64% for the last twelve months. These figures suggest that the company maintains a strong financial position, even as it navigates potential challenges related to AI investments and adoption.
InvestingPro Tips highlight Microsoft's consistent dividend growth, having raised its dividend for 19 consecutive years. This track record of increasing shareholder returns could provide some stability for investors amid concerns about near-term AI-related expenses and potential market overestimation of AI revenues.
It is worth noting that Microsoft is trading at a P/E ratio of 34.6, which aligns with Oppenheimer's observation about the company's valuation. This relatively high multiple reflects market expectations for future growth, particularly from AI initiatives. However, as the analyst report suggests, these expectations may need to be tempered in the short term.
For investors seeking a more comprehensive analysis, InvestingPro offers 14 additional tips for Microsoft, providing a broader perspective on the company's financial health and market position.
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