Microsoft's investment in OpenAI could result in significant financial losses, as indicated by Oppenheimer's recent downgrade of the tech giant's stock. The brokerage lowered its rating on Microsoft to 'perform' from 'outperform', suggesting that the current consensus estimates for revenue and earnings may be overly optimistic.
Oppenheimer analyst Timothy Horan highlighted the sluggish pace of enterprise adoption of artificial intelligence, which is expected to lead to disappointing revenue figures. Microsoft, which holds a 49% stake in OpenAI - the parent company of the generative AI chatbot, ChatGPT - could see losses attributed to OpenAI ranging between $2 billion and $3 billion for the fiscal year 2025.
Horan admitted that these potential losses had not been included in his previous analyses. Furthermore, OpenAI is reportedly anticipating a staggering $5 billion loss for the current year, according to the insights from Oppenheimer. In response to these findings, Oppenheimer has adjusted its projections for Microsoft's cloud computing service, Azure.
The estimates for 2025 have been reduced by 100 basis points on a normalized basis, as slow enterprise adoption continues to pose challenges, compounded by what Horan describes as a 'bottleneck' in infrastructure. The adjustment in estimates extends to Microsoft's earnings-per-share (EPS) projections as well.
Oppenheimer has revised its fiscal 2025 EPS forecast down to $12.91 from a previous estimate of $13.24, now falling below the consensus estimate of $13.21. Additionally, it maintains a revenue forecast of $275.91 billion for the current fiscal year, slightly lower than the Street's expectation of $278.91 billion.
The brokerage also reduced its free cash flow estimate for the year by 3%, bringing it down to $73.77 billion. Looking ahead to fiscal 2026, Horan revised his EPS model down to $14.77, compared to his prior forecast of $15.03, which is also notably lower than the consensus estimate of $15.37. Several contributing factors have prompted these updated projections, including increased depreciation, diminished interest income, and a rise in operating expenses aimed at bolstering AI initiatives.
Horan emphasized that expanding profit margins are unlikely to be prioritized in the short term. As Microsoft navigates these challenges, vigilance and strategic adjustments will be essential in mitigating potential losses from its ambitious AI investments..