Microsoft (NASDAQ:MSFT) was the first of the Mega Caps to clock the opportunity in AI but that does not mean it can claim permanent top dog AI status.
In fact, according to D.A. Davidson analyst Gil Luria, the head start it got in the space is no longer relevant.
“We believe competition has largely caught up with Microsoft on the AI front, which reduces the justification for the current premium valuation,” Luria opined.
Microsoft’s early investment in OpenAI, along with the swift integration of AI tools into Azure and GitHub, initially gave the company a solid edge over AWS and Google Cloud. This advantage was particularly evident over the last 4-6 quarters. However, Luria argues that lead has now “diminished,” making it difficult for the company to keep on outperforming. “AWS already is adding nearly as much cloud business as Azure after a period of a few quarters of MSFT adding more business,” notes Luria. “GCP’s growth has also seen its business accelerate to comparable growth rates as Azure last quarter.”
But there’s another concern. Luria points out that AWS and GCP are far ahead when it comes to deploying custom silicon in their data centers, a critical factor that gives them a substantial advantage moving forward. While Microsoft has introduced its Maia chips, it is “years behind” Amazon and Google, and it seems these chips are currently being used only to support Azure OpenAI Service workloads. What this means is that Microsoft has been “escalating an arms race it may not be able to win.”
Adding to Microsoft’s challenges is its forecasted decline in operating margins. After significant margin expansion last year, Microsoft now expects a drop due to rising data center capital expenditures, increasing from 12% to 21% of revenue. This rate of increase surpasses that of Amazon and Google, largely due to Microsoft’s heavier reliance on Nvidia. “We believe this makes Microsoft beholden to NVIDIA,” says Luria, “which means it will continue to shift wealth from its shareholders to NVDA shareholders.”
As a result, Luria has downgraded his rating on MSFT from Buy to Neutral, though he maintains a $475 price target, implying a potential upside of 9.5%. (To watch Luria’s track record, click here)
While Luria joins another cautious analyst on the sidelines, the majority remain bullish, with 28 analysts rating MSFT stock a Buy. This consensus results in a Strong Buy rating, with an average price target of $501.15, implying potential 12-month returns of ~17%. (See Microsoft stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
