MSFT Downgraded : Invest / Avoid / Wait ?
Double Whammy !
Whenever a US stock receives a “downgrade” rating, it will always have a knock-on effect on the stock price.
To receive two “downgrades”, one day apart - the impact will be compounded.
That was what happened to $Microsoft(MSFT)$ on Mon, 23 Sep & Tue, 24 Sep respectively. (see below)
What Happened.
Wealth management firm, DA Davidson’s analyst Gil Luria downgraded Microsoft as:
Rating : To “Neutral” from “Buy”.
Price target: $475 per share, status quo.
Reasons & Notes:
Competition has caught up with Microsoft on AI front.
Justifications for MSFT’s premium valuation (current) needs to be adjusted accordingly.
Since Luria’s January 2023 initiation, the stock has increased by +92%, versus S&P 500 that managed a +49% gain for the same period.
MSFT accelerated growth and extended margins over the last few quarters could be attributed to :
The IT giant’s timely early investment in OpenAI.
Being the first to embrace and commercialize generative AI.
When OpenAI unveiled ChatGPT in Novemeber 2022, it took the IT world by storm and shook $Alphabet(GOOG)$ to its core, not forgetting.
By deploying the AI-capabilities within Azure and GitHub, MSFT took a significant lead over $Amazon.com(AMZN)$ Web Services (AWS) and Google Cloud; as evident in its “fantastic” earnings over the prior 4 - 6 quarters.
Fast Forward to Sept 2024.
The analyst noted that MSFT’s lead has diminished, making it difficult for MSFT to continue to outperform:
In the Cloud business.
And the code generation businesses.
Competitors’ Progress.
Equally important,
AWS is already adding nearly as much cloud business as Azure after a few quarters of Microsoft adding more business.
Google Cloud Platform’s expansion has also seen its business accelerate to comparable growth rates as Azure prior quarter.
Luria’s new proprietary “hyperscaler semiconductor” analysis report shows that:
AWS and GCP are far ahead in deploying their AI-chip into their respective data centers.
Giving these 2 IT giants a significant advantage over Azure in the future.
As for MSFT’s Maia chips, Luria noted:
It is years behind Amazon and Google.
Also it seems MSFT will (only) be using it to run Azure OpenAI Services workloads.
This imply MSFT has been escalating an arms race it may not be able to prevail.
In the process, this makes MSFT beholden to Nvidia’s chips.
Meaning - it will continue to shift wealth from its shareholders to Nvidia shareholders.
MSFT Capital Expenditure.
Financially, Luria has noted the followings:
In 2023, MSFT made more money per dollar spent.
In 2024, MSFT is expected to spend more on hardware and capital expenditure (Capex) has been projected to increase from 12% (2023) to 21% (2024) of revenue. (see below)
As a result, MSFT won’t make as much.
This is because they’re using more powerful Nvidia chips (also more expensive), that will be “eating” into its profits.
Repercussions.
MSFT spends more on these computers and servers than Amazon & Google and hurting their profits by at least 1.0%.
To offset the margin drag, Microsoft would need to lay off about 10,000 employees for every year of over-investment.
While Nvidia and others say these large scales data centres are worth it, Luria thinks the benefits might not last long.
The analyst noted Azure’s growth could be boosted by self-funded revenue, eg. from OpenAI, assuming MSFT is able to achieve that without objections.
Technically,
MSFT has also lost much of the lead for GitHub Copilot.
Amazon and Gitlab have almost caught up to GitHub Copilot’s capabilities.
In fact, Gitlab’s visual editor - Cursor has become the new standards.
MSFT’s Quarterly earnings - Forecast.
Luria projected MSFT’s fiscal first-quarter 2025 earnings :
Earnings per share (EPS) forecast: $2.96 vs $2.99 (Q1 2024).
Revenue forecast : $64.2 billion vs $56.52 billion (Q1 2024).
MSFT - Buy Point.
Based on IBD MarketSurge chart (see above), MSFT has formed a cup base (formation) with a “buy point” of $468.35.
MSFT - Past 5 days.
Incidentally, MSFT stock price has been on the dip, for the past 5 days. (see above)
It has lost about -1.45% to $429.17 {as of 24 Sep 2024).
With RSI at “55”, MSFT is neither oversold or overbought.
When faced with a Technical Analysis dilemma, do we buy while MSFT the stock ($429.17) while it is below “buy point” ($468.35) or wait patiently to see if it will fall further to close off this week?
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We have others like Avgo, NVdia,
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