Microsoft Corp (NASDAQ:MSFT) stock rose 1.17% (As on October 9, 11:49:41 AM UTC-4, Source: Google Finance) after Oppenheimer has downgraded the company stock from Outperform to Perform, citing concerns over higher-than-expected losses from its OpenAI investment and slower enterprise adoption of AI technology. The firm indicated that Microsoft’s revenue and EPS estimates might be too optimistic, with potential OpenAI losses in the range of $2-3 billion for FY25, which were not previously accounted for.
The report by Oppenheimer suggests that despite Microsoft’s significant investment in what it considers “once-in-a-generation technology,” the anticipated expansion in margins is not expected to be a short-term focus. This is attributed to several factors, including the impact of increased capital expenditures leading to higher depreciation, reduced interest income, and elevated operational expenses to support AI initiatives.
Microsoft is currently trading at the midpoint of its five-year price-to-earnings (P/E) ratio range of approximately 25x-35x. However, due to the mentioned concerns, the stock could potentially trade towards the lower end of this spectrum. The analyst pointed out that while Microsoft holds a 49% stake in OpenAI, the latter is projected to incur a loss of around $5 billion this year, with about half of that loss impacting Microsoft’s financials.
Furthermore, the firm has adjusted its projections for Microsoft’s Azure cloud computing service, reducing estimates by approximately 100 basis points on a normalized basis for 2025 going forward. This revision reflects the belief that the market may be overestimating near-term AI revenues, as enterprise adoption and the necessary infrastructure for AI are still developing and may pose as bottlenecks.
Meanwhile, Microsoft has also entered a strategic partnership with Rezolve AI to enhance digital engagement in the retail sector with AI-powered commerce solutions. Furthermore, Microsoft is part of an agreement with Constellation Energy to support the revival of a unit at the Three Mile Island nuclear plant.
OpenAI, backed by Microsoft, has successfully completed a funding round, securing $6.6 billion and reaching a post-money valuation of $157 billion. Microsoft has also announced a significant $4.8 billion investment to expand its artificial intelligence and cloud services infrastructure in northern Italy. These are all part of recent developments for Microsoft.
On the other hand, the company called for fiscal first-quarter revenue between $63.8 billion and $64.8 billion, implying 13.8% growth at the middle of the range. Analysts polled by LSEG were looking for $65.24 billion in revenue. The forecast included $15.25 billion in operating expenses at the middle of the range, under the StreetAccount consensus of $16.10 billion.