D.A. Davidson’s Gil Luria is now one of the 5% of analysts covering Microsoft who aren’t bullish
Microsoft’s stock gets downgraded to a rare neutral rating due to concerns it’s losing ground to Amazon and Alphabet.
Shares of Microsoft Corp. leaned lower in early Monday trading, after D.A. Davidson’s Gil Luria became one of the rare Wall Street analysts who isn’t enthusiastic about the software giant and artificial-intelligence play.
Luria cut his rating on the stock to neutral, after being at buy since January 2023. He kept his price target at $475, which still implies a 9.1% upside from Friday’s closing price of $435.27.
The stock slipped 0.4% in premarket trading.
Luria acknowledged that Microsoft has accelerated growth and expanded margins over the past few quarters, as the company benefited from being the first to embrace and commercialize generative AI. With its early investment in OpenAI, Microsoft’s cloud-computing platform Azure took a “significant lead” over Amazon.com Inc.’s AWS and Alphabet Inc.’s Google Cloud Platform.
So why is Luria no longer bullish?
“We believe that Microsoft’s lead is now diminished in both the cloud business and code generation business, which will make it hard for [Microsoft] to continue to outperform,” Luria wrote in a note to clients.
Of the 59 analysts surveyed by FactSet who rate Microsoft’s stock, 56 are bullish, two are now neutral and one is bearish. The average price target on the stock is $497.43.
PHOTO: FACTSET
Luria said AWS is now adding nearly as much cloud business as Azure, and GCP has also seen its business accelerate to comparable growth rates as Azure last quarter.
And importantly, he said D.A. Davidson’s proprietary hyperscaler semiconductor analysis shows that AWS and GCP are far ahead of Microsoft in using their own chips in their data centers, which should give them an advantage over Azure going forward.
Microsoft’s Maia chips are “years behind” those of Amazon and Google. That makes Microsoft reliant on chips made by Nvidia Corp., Luria said, which in turn means Microsoft “will continue to shift wealth from its shareholders to [Nvidia] shareholders.”
“We believe this means Microsoft has been escalating an arms rate it may not be able to win,” Luria wrote.
He noted that after margins expanded significantly in the past year, Microsoft expects operating margins to decline in fiscal 2025.
That’s because Microsoft has to boost the percentage of revenue it allocates for data-center capital expenditures to a higher rate than both Amazon and Google, given its reliance on a third party — Nvidia — for its chips.
Every year that Microsoft “over invests” in its datacenters, at current rates, it will reduce operating margins by at least one percentage point.
“Microsoft would need to lay off ~10,000 employees for every year of over-investment in order to offset the margin drag,” Luria wrote.
Microsoft’s stock has gained 15.8% year to date through Friday, while Amazon shares have run up 26.1% and Alphabet’s stock has advanced 17.1%. The S&P 500 index has rallied 19.6% this year.
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