Microsoft shares edged lower in Thursday trading following a price target change from a top Wall Street analyst tied to the tech giant’s capital-spending plans.
Microsoft (MSFT) has been the worst performer of the so-called Magnificent 7 stocks over the past year, falling around 8%. And it has continued to trail its megcap tech rivals this year amid concern that its massive AI investments will take longer to translate into bottom-line profit.
The group said it planned to spend around $80 billion to build out its AI-enabled data centers over its current fiscal year, which ends in June. Chief Executive Satya Nadella cited “exponentially more demand” from customers during an investor call in January.
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Since then, reports have suggested that Microsoft is canceling some leases with private data-center operators, and slowing the pace of converting other agreements, indicating that it could be oversupplied with data-center capacity.
Microsoft’s massive AI investments have yet to translate into bottom-line profit for the world’s second-largest tech company.
Amazon (AMZN) , Microsoft’s larger cloud-computing rival, also appeared to trim at least some of its near-term spending plans when it updated investors last month. The company suggested an annual pace over the whole of the year that’s largely in line with the $26.3 billion it spent over the three months ended in December.
Microsoft capital-expenditure rethink?
D.A. Davidson analyst Gil Luria said evidence suggesting Microsoft’s more “rationalized” approach to spending could protect its profit margins and boost its broader capital returns in an economy where consumer sentiment is starting to fade.
“We believe that Microsoft has decided to reduce capacity for OpenAI training in its data centers, as it recognizes their gains from pretraining have begun to hit a wall,” said Luria, who boosted his Microsoft price target by $25 to $450 a share in a note published Thursday.
Microsoft also holds a 49% profit-sharing agreement with OpenAI and backed the ChatGPT creator early in its development phase, enabling it to leapfrog its rivals when the AI race began in late 2022.
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Luria also noted that Microsoft was also likely using Coreweave, the AI startup that’s likely to be the biggest IPO of the year, as “overflow for workloads it is either not ready for or is not interested in.”
Beyond AI capacity and capital-spending issues, Luria cited the lack of Microsoft’s exposure to consumer spending as a catalyst for the stock heading into the coming year.
Microsoft to weather consumer slowdown
“We see Microsoft as the best positioned Mag 6 for a consumer slowdown, which will make it a key shelter in the storm,” Luria said. “Apart from Nvidia, Microsoft has the least consumer exposure out of the Mag 6.”
(Many analysts have removed Tesla (TSLA) from their megacap tech sector groupings and now refer to the remaining names as the Mag 6.)
“While the extent of the consumer slowdown may still be unclear, we believe some slowdown is more likely than not,” Luira added. “This would mean less risk for Microsoft’s earnings estimates than the rest of the megacaps, making it the most likely of the Mag 6 to become defensive.”
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Longer term, however, Microsoft could be vulnerable to the outcome of a Federal Trade Commission probe, which is likely to focus on its software-licensing and cloud-computing businesses.
Bloomberg News reported yesterday that new FTC Commissioner Andrew Ferguson would reopen the investigation into Microsoft, launched in the final weeks of the Biden administration.
Microsoft shares were last marked 1% lower at $379.28.
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