Microsoft shares downgraded to Oppenheimer on Investing.com’s “too high” earnings estimates

Investing.com — Investment bank Oppenheimer downgraded shares of Microsoft (NASDAQ: ) from Outperform to Perform on Tuesday, citing high consensus estimates for revenue and earnings.

Company analysts point to potential losses from OpenAI, Microsoft’s AI technology development partner, as a key concern. OpenAI is expected to post a loss of around $5 billion this year, and with Microsoft owning a 49% stake, a substantial portion of that loss could hurt the company’s financials.

The firm also highlighted slow enterprise adoption of AI technologies, which can lead to disappointing associated revenues.

This is also compounded by the likelihood of increased capital expenditures (CapEx) for high-performance computing components such as GPUs and data center capacity.

Oppenheimer expects Microsoft CapEx to reach $63 billion in 2025, up 14% year-over-year and doubling from 2023, with depreciation and amortization expenses expected to rise 28% to 29 billions of dollars.

Furthermore, the Federal Reserve’s recent 50 basis point interest rate cut on September 18, 2024 will slightly reduce Microsoft’s net interest income from its $76 billion in cash reserves.

Analysts also believe that current market estimates for Microsoft’s financial performance, including gross margins and EBITDA margins, will decline due to higher depreciation and operating expenses related to AI investments.

“This will translate to 3% EPS growth in 1Q25 and we expect weak guidance for 2025. We also believe Street estimates for EPS growth are ~200 bps too high in FY26 and FY27,” they said in a note.

Other potential risks for Microsoft include insufficient data center capacity to support expected GPU shipments and increased competition in the AI ​​space, which has seen rivals close the gap with Microsoft’s offerings.

Still, Oppenheimer notes that Microsoft’s aggressive pricing and bundling strategies may help alleviate some of the financial pressures.

Microsoft stock currently trades in the middle of a five-year price-to-earnings (P/E) range of about 25x-35x, and could move toward the lower end of that spectrum.