Investment bank Oppenheimer has revised its stock rating for Microsoft Corporation (MSFT.US) from "Outperform" to "Perform," driven by concerns about overly optimistic projections related to Microsoft's future revenue and earnings. The primary reasons for this downgrade include significant expected losses from OpenAI, Microsoft's AI partner, as well as the slow adoption of AI technologies by enterprises, potentially resulting in lower than anticipated revenue.
Oppenheimer analyst Timothy Horan announced the rating adjustment on Tuesday, highlighting worries about the financial losses that OpenAI might incur. OpenAI is projected to lose approximately $5 billion this year and between $2 billion to $3 billion by fiscal year 2025, posing a potential financial strain on Microsoft, which owns a 49% stake in the company.
The slower-than-expected uptake of AI technology by businesses could lead to Microsoft's related revenues not meeting market expectations. Additionally, Oppenheimer's analysts pointed out that as Microsoft increases its capital expenditure on high-performance computing components, its gross and EBITDA margins may decline in the 2025 fiscal year. Capital expenditures are expected to rise to $63 billion, marking a 14% year-over-year increase, with depreciation costs projected to grow by 28% to $29 billion.
Moreover, the Federal Reserve is anticipated to lower interest rates by 50 basis points on September 18, 2024, potentially reducing the net interest income from Microsoft's $76 billion cash reserves. Analysts suggest that due to rising depreciation and operating expenses linked to AI investments, market expectations for Microsoft's financial performance may decrease.
Despite these challenges, Microsoft's aggressive pricing and bundling strategies could help alleviate some of the financial pressure. Currently, Microsoft shares are trading around the midpoint of their five-year price-to-earnings range, about 25 to 35 times, but may shift towards the lower end of this range.