Investment bank Oppenheimer has downgraded its rating on Microsoft (MSFT, Financial) from "Outperform" to "Perform," citing overly optimistic expectations for future revenue and earnings. The downgrade primarily stems from anticipated significant losses by Microsoft's AI partner, OpenAI, and the slower-than-expected adoption of AI technology by enterprises, potentially leading to lower-than-expected related revenue.
Analyst Timothy Horan highlighted concerns that OpenAI, in which Microsoft holds a 49% stake, might incur financial losses estimated at $5 billion this year and between $2 billion and $3 billion by fiscal year 2025. These potential losses could put pressure on Microsoft's finances.
Furthermore, businesses adopting AI technologies at a slower rate may result in revenues falling short of market expectations. The report also noted that Microsoft's increased capital expenditure on high-performance computing components might lead to reduced gross margins and EBITDA margin in fiscal year 2025. Capital expenditure is projected to rise by 14% to $63 billion, while depreciation could increase by 28% to $29 billion.
The Federal Reserve is expected to cut interest rates by 50 basis points in September 2024, which might reduce the net interest income from Microsoft's $76 billion cash reserves. Analysts believe that increased depreciation and operating expenses related to AI investments will lower market expectations for Microsoft's financial performance.
Despite these challenges, Microsoft's aggressive pricing and bundling strategies may help alleviate some financial pressures. Currently, Microsoft shares are trading at the midpoint of its 5-year P/E ratio range, approximately 25 to 35 times, but they could trend towards the lower end of this range.
