OpenAI's losses + slow realization of AI performance, Oppenheimer downgrades Microsoft's rating to "in line with the market"
Investment bank Oppenheimer has downgraded Microsoft's stock rating from "outperforming the market" to "in line with the market", mainly due to overly optimistic expectations for future revenue and profit. Reasons for the downgrade include significant expected losses from OpenAI and slow adoption of AI technology by enterprises, which may result in lower-than-expected revenue. Analysts are concerned that OpenAI's losses will pressure Microsoft, while also expecting an increase in capital expenditures and depreciation expenses, impacting financial performance. Despite facing challenges, Microsoft's pricing strategy may help alleviate financial pressure
According to the financial news app Smart Finance, the investment bank Oppenheimer has downgraded its rating on Microsoft Corporation (MSFT.US) from "outperform" to "market perform", mainly due to the high expectations for Microsoft's future revenue and profit. The main reasons for the downgrade include the significant expected losses from Microsoft's AI partner OpenAI in the field of artificial intelligence, as well as the slow adoption of AI technology by enterprises, which may result in lower-than-expected revenue.
Analyst Timothy Holland of Oppenheimer announced this rating adjustment on Tuesday. They are concerned about the potential financial losses that Microsoft's AI partner OpenAI may bring. OpenAI is expected to incur losses of around $5 billion this year, and could range from $2 billion to $3 billion by the 2025 fiscal year, these potential losses could put pressure on Microsoft, which holds a 49% stake in OpenAI.
Furthermore, the slower-than-expected adoption of AI technology by enterprises may lead to Microsoft's related revenue falling short of market expectations. The analysts also pointed out that as Microsoft increases its capital expenditure on high-performance computing components, the gross margin and EBITDA profit margin for the 2025 fiscal year may decrease, with capital expenditure expected to increase to $63 billion, a 14% year-on-year increase, and depreciation expenses expected to increase by 28% to reach $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 due to the increase in depreciation and operating expenses related to AI investments, market expectations for Microsoft's financial performance will decline.
Despite these challenges, Microsoft's proactive pricing and bundling strategies may help alleviate some financial pressure. Currently, Microsoft's stock is trading at the midpoint of the 5-year P/E ratio range, around 25 to 35 times, but it may shift towards the lower end of that range