Microsoft Corporation (NASDAQ) is a leading global technology company known for developing a range of productivity and business software, cloud services, and personal computing products.

In fiscal Q4 2024, Microsoft reported $64.7 billion in revenue, a 15% increase year-over-year. Microsoft Cloud contributed $36.8 billion to this total, marking a 21% growth. Additionally, the company's productivity and business processes segment generated $20.3 billion in revenue, while the intelligent cloud division posted $28.5 billion.
 

A leading investor in artificial intelligence technology

In July, Microsoft partnered with Lumen Technologies to modernize Lumen's workloads by migrating them to Microsoft Azure. In August, Microsoft teamed up with Palantir Technologies, a data analytics company, to integrate its product suite with Azure. Just last week, the company announced a partnership with Rezolve AI to revolutionize the online retail space using AI-driven solutions.

Microsoft's collaborations extend further. The company, alongside BlackRock, Global Infrastructure Partners, and MGX, secured a $100 billion deal aimed at improving data centers and AI operations. Additionally, Microsoft is expanding its presence by establishing engineering development centers in Abu Dhabi, UAE. The company also made a significant investment of EUR 4.3 billion to enhance AI infrastructure and cloud services in Italy.
 

Microsoft Downgraded by Oppenheimer

Oppenheimer analysts have downgraded Microsoft (NASDAQ: MSFT) from Outperform to Perform, citing concerns over elevated consensus expectations for revenue and earnings.

A significant issue identified by the analysts is the potential impact of losses from Microsoft’s AI partner, OpenAI, which is projected to incur a loss of around $5 billion this year. With Microsoft holding a 49% stake in OpenAI, the financial repercussions could be considerable.

The downgrade also highlighted the slower-than-anticipated adoption of AI technologies by enterprises, which may result in lower revenue from AI-related services than previously expected.

Additionally, Oppenheimer pointed out increasing capital expenditures (CapEx), particularly in high-performance computing areas like GPUs and data centers. The firm estimates Microsoft's CapEx could reach $63 billion by 2025, representing a 14% year-over-year increase and double the amount spent in 2023. Depreciation is also projected to rise by 28%, hitting $29 billion.

The analysts noted that the Federal Reserve's recent 50 basis point interest rate cut in September is likely to have a modest effect on Microsoft's net interest income derived from its $76 billion cash reserves.

Oppenheimer raised concerns about declining gross and EBITDA margins, anticipated due to rising depreciation and operational costs associated with AI investments. They expect this to translate into just 3% EPS growth in Q1 2025, coupled with weak guidance for 2025. They also believe that current Street estimates for EPS growth in FY26 and FY27 are approximately 200 basis points too optimistic.

Rsks include potential bottlenecks in data center capacity to accommodate expected GPU shipments and increasing competition in the AI sector, with other companies beginning to close the gap on Microsoft.

Currently, Microsoft share trades within its five-year price-to-earnings range of 25x-35x, though Oppenheimer suggests it may drift toward the lower end of that range.
 

Microsoft Corporation’s (NASDAQ:MSFT) financial strength 

Overall, Microsoft Corporation (NASDAQ) demonstrates robust financial strength and strategic partnerships across various industries, positioning it as one of the safest long-term investment options. In the second quarter, 279 hedge funds reported holding positions in Microsoft, with their combined stakes totaling $89.07 billion. As of June 30, the Bill & Melinda Gates Foundation Trust emerged as the largest shareholder, with a position valued at $15.6 billion, according to the Insider Monkey database.

Fred Alger Management’s Alger Spectra Fund stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter:
 

“Microsoft Corporation (NASDAQ:MSFT) is a beneficiary of corporate America’s transformative digitization. The company operates through three segments: Productivity and Business Processes (Office, LinkedIn, and Dynamics), Intelligent Cloud (Server Products and Cloud Services, Azure, and Enterprise Services), and More Personal Computing (Windows, Devices, Gaming, and Search). During the quarter, shares contributed to performance after the company reported strong fiscal third quarter results, underscoring its leadership position in the cloud and highlighted its role as a primary facilitator and beneficiary of AI adoption. Company revenue growth, operating margin, and earnings growth surpassed consensus expectations. The utility scale Azure cloud business grew 31% in constant currency of which 7% was AI related versus 3% two quarters ago. Further, management noted most of the AI revenue continues to stem from inference rather than training indicating high quality AI applications by Microsoft’s clients. Management also indicated that the significant cost-cutting programs in corporate America are done, suggesting that the cost optimization headwinds previously impacting Azure’s growth are over. Separately, management provided color on their new AI-productivity tool, Copilot, noting that approximately 60% of Fortune 500 companies are already using Copilot, and that the quarter witnessed a 50% increase in Copilot assistance integration within Teams. We continue to believe that Microsoft has the potential to hold a leading position in AI, given its innovative approach and demonstrated high unit volume growth opportunity.”

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.