Microsoft (MSFT) Faces AI Growing Pains: Redburn Cuts PT and Downgrades to Neutral

Microsoft Corporation (NASDAQ:MSFT) is one of the AI Stocks Analysts are Tracking Closely. On November 18, Rothschild Redburn downgraded the stock to “Neutral” and cut the price target to $500 from $560.

According to the firm, Azure has been the main growth engine for Microsoft till now, accounting for more than half of the company’s revenue growth. It has also been helping investors remain focused on cloud strength rather than the potential GenAI headwinds in the Office 365 Suite.

However, Microsoft is facing a two-fold challenge which makes the sustainability of its growth model under current AI economics rather concerning. First, generating revenue from AI now requires nearly six times more capital expenditure than traditional cloud services.

Image by Tawanda Razika from Pixabay

This makes the business more “capital intensive” and potentially may reduce long-term cash-flow.

“Firstly, value creation from Gen-AI-related revenues is far lower than under traditional cloud 1.0 economics. As detailed in this report, it now takes roughly six times more capex to generate the same level of value – making the business structurally more capital-intensive and weighing on long-term cash flow potential, with no clear end in sight.”

Second, there may be a potential “value leakage” within Microsoft’s Office 365 suite.

“Secondly, we see value leakage within Office 365, as the integration of third-party models such as OpenAI and Anthropic shifts value away from Microsoft.”

While the firm acknowledges that Microsoft is still one of the “key beneficiaries of Gen-AI,” these key structural concerns have led the firm to downgrade the stock.

Microsoft Corporation (NASDAQ:MSFT) provides AI-powered cloud, productivity, and business solutions, focusing on efficiency, security, and AI advancements.

READ NEXT: 10 AI Stocks in the Spotlight This Week and 10 AI Stocks Investors Are Watching. 

Disclosure: None.