Microsoft Stock Downgraded by Oppenheimer Due to Overly Optimistic Earnings Estimates

Investment bank Oppenheimer has downgraded Microsoft stock from Outperform to Perform, noting concerns regarding elevated consensus estimates for the company’s revenue and earnings.

Analysts highlighted potential losses from OpenAI, a key partner in Microsoft’s AI technology development. OpenAI is projected to experience a loss of around $5 billion this year. Given that Microsoft owns a 49% stake in OpenAI, a significant portion of these losses could adversely affect Microsoft’s financial results.

The analysts also pointed to the slow pace of enterprise adoption of AI technologies, which may lead to disappointing revenues associated with these innovations. This challenge is exacerbated by the anticipated rise in capital expenditures on high-performance computing, including GPUs and data center capacity.

Oppenheimer forecasts Microsoft’s capital expenditures could climb to $63 billion in 2025, representing a 14% increase from the previous year, effectively doubling expenditures from 2023. This increase in spending is expected to drive depreciation expenses up by 28%, reaching $29 billion.

In addition, the recent 50 basis points interest rate cut by the Federal Reserve is anticipated to modestly reduce Microsoft’s net interest income from its substantial cash reserves.

Analysts warned that current market estimates for Microsoft’s financial performance, including gross margins and EBITDA margins, are likely to decline due to rising depreciation and operating costs linked to AI investments. They predict a meager 3% EPS growth in the first quarter of 2025, with suggestions that Wall Street’s EPS growth projections for fiscal years 2026 and 2027 may be overly optimistic by approximately 200 basis points.

Other risks facing Microsoft include inadequate data center capacity to meet expected GPU shipments and intensified competition in the AI sector, where rivals are closing in on Microsoft’s offerings.

However, Oppenheimer acknowledged that Microsoft’s aggressive pricing and bundling strategies could alleviate some of the financial pressures. Currently, Microsoft stock is trading in the middle of its five-year price-to-earnings range of about 25x to 35x, with the potential to trend towards the lower end of that range.