Goldman Sachs analyst Kash Rangan lowered the price target on Microsoft from $515 to $500, which can be attributed to several key factors:
- Revised Free Cash Flow (FCF) Projections and Increased Capital Expenditure (CapEx): The downgrade reflects revised FCF projections and increased CapEx estimates for fiscal years 2026 and 2027, particularly related to artificial intelligence (AI) developments1. These adjustments suggest that Goldman Sachs may have become more cautious about Microsoft's financial performance due to higher capital expenditures that could impact gross margins.
- Azure Growth and Earnings Expectations: Despite the price target adjustment, Goldman Sachs maintains a positive outlook on Microsoft, expecting strong performance with a projected 14% revenue growth matching the consensus. However, the downgrade may also reflect concerns over a quarter of Azure growth that didn't meet expectations1. Additionally, the anticipated increase in capacity following the release of Blackwell in November and clearer interest rate and U.S. election outcomes may provide tailwinds for Microsoft's earnings in the second fiscal quarter of 2025 and the second half of the fiscal year.
- Investor Concerns and Stock Performance: The downgrade could also be influenced by investor concerns over the impact of increased AI-related CapEx on gross margins1. Microsoft's stock has seen an 11 percentage point underperformance compared to the NASDAQ year-to-date, which analysts attribute to these concerns. The anticipated reacceleration of Azure growth and the potential for outperformance in the future may not have been enough to fully address these concerns, leading to the price target reduction.
In summary, the downgrade reflects a combination of factors including revised financial projections, growth expectations, and investor sentiment, particularly regarding the impact of increased capital expenditures on margins and the performance of the Azure cloud segment.
10/14/2024 12:15am
