Shrinking Lead in AI Industry
DA Davidson analyst Gil Luria recently lowered the rating on Microsoft Corp to Neutral from Buy, citing fierce competition in the AI sector. He maintained a price target of $475, highlighting that rivals like Amazon and Google have made significant strides in catching up with Microsoft in the AI space.
The Magnificent Six Ranking
Despite Microsoft’s stock soaring by 92% since January 2023, outperforming the S&P500 by 43%, Luria now ranks it fourth within the Magnificent Six. This shift is a result of fierce competition and diminishing market dominance in the AI industry.
Challenges in Cloud and Code Generation
Amazon Web Services (AWS) and Google Cloud have rapidly closed the gap with Microsoft Azure in cloud and code generation businesses, posing challenges for Microsoft to sustain its competitive edge. Luria emphasized that AWS and GCP are ahead in deploying their silicon into data centers, providing them with a strategic advantage over Azure in the future.
Concerns Over Margin Expansion and Operating Costs
Microsoft’s declining operating margins, coupled with increased data center capital expenditures, have raised concerns among analysts. Luria highlighted that the company’s overinvestment rates annually could lead to cumulatively diminishing margins and necessitate significant layoffs to counterbalance the margin drag.
Future Outlook and Market Response
Luria projected Microsoft’s fiscal first-quarter 2025 revenue to be $64.2 billion with an EPS of $2.96. Despite these projections, MSFT stock was down 0.50% at $433.10 as of the latest check on Monday, indicating investor caution in response to the revised outlook.