OpenAI's losses and slow AI revenue, Oppenheimer downgrades Microsoft (MSFT.US) to "In-Line"

Oppenheimer downgrades its rating on Microsoft Corp. (MSFT.US) from "Outperform" to "Hold", citing over-optimistic expectations for the company's future revenue and earnings. The downgrade is mainly due to the significant losses expected from Microsoft's partner in the AI field, OpenAI, and the slow adoption of AI technology by enterprises, which could lead to lower-than-expected related revenue.

Oppenheimer's analyst Timothy Holland announced the rating change on Tuesday, expressing concern about the potential financial losses from Microsoft's partner in the AI field, OpenAI, which is expected to lose about $5 billion this year and between $2 billion and $3 billion in fiscal 2025, putting pressure on Microsoft, which holds a 49% stake in OpenAI.

In addition, the slower-than-expected adoption of AI technology by enterprises could lead to Microsoft's related revenue falling short of market expectations. The firm's analysts also noted that Microsoft's gross margin and EBITDA margin could decline in fiscal 2025 as the company increases its capital expenditure on high-performance computing components, with capital expenditure expected to rise 14% year-on-year to $63 billion, and depreciation expenses expected to increase 28% to $29 billion.

The Federal Reserve is expected to cut interest rates by 50 basis points on September 18, 2024, which could reduce the net interest income from Microsoft's $76 billion cash reserves. Analysts believe that the market's expectations for Microsoft's financial performance will decline due to the increase in depreciation and operating expenses related to its AI investments.

Despite these challenges, Microsoft's aggressive pricing and bundling strategies may help alleviate some financial pressures. Currently, Microsoft's stock is trading at the midpoint of its five-year price-to-earnings range, around 25 to 35 times, but could shift towards the lower end of the range.