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Microsoft Faces Downgrade as Analyst Questions AI Economics and Investment Returns

MarketDash Editorial Team
19 days ago
Rothschild & Co downgraded Microsoft to Neutral, slashing its price target as concerns grow over AI infrastructure costs and weaker returns compared to the early cloud computing era.

Microsoft Corp. (MSFT) shares slid on Tuesday as profit-taking and mounting questions about AI valuations rattled the tech sector. The selling pressure intensified after a prominent analyst downgraded the stock, questioning whether the artificial intelligence boom can deliver returns anywhere close to what investors are expecting.

The Downgrade That's Turning Heads

Rothschild & Co. analyst Alex Haissl downgraded Microsoft from Buy to Neutral and slashed the price target from $560 to $500. The reasoning? The generative AI story that's been driving tech stocks higher is starting to look shaky when you examine the underlying economics.

According to Bloomberg, Haissl said the argument for generative AI is no longer convincing, and hyperscalers need to be approached carefully. The analyst noted that the underlying economics are "far weaker than assumed," making the industry's "trust us—Gen-AI is just like early cloud 1.0" pitch increasingly unconvincing.

The Math Problem Nobody Wants to Talk About

Here's where it gets interesting. Tech companies are pouring tens of billions into AI infrastructure—servers, graphics processing units, and the like. The problem is these assets depreciate fast, and investors are starting to worry about whether the returns justify the spending.

"Gen-AI margins already assume longer depreciation schedules of 5-6 years, versus just three years in the early cloud era," Haissl explained. "On a like-for-like basis, this means capital intensity for Gen-AI is significantly higher, while pricing power is notably weaker."

Translation: Companies are spending more money on stuff that loses value, and they can't charge customers as much as they could during the cloud computing gold rush. That's not exactly a recipe for blockbuster profits.

Haissl also flagged a higher risk of overbuilding, noting that "cloud 1.0 scaled only after achieving efficiency, while Gen-AI scales on a bloated, inefficient stack."

Gates Foundation Heads for the Exit

Adding to the pressure, The Gates Foundation Trust dumped 17 million Microsoft shares in the third quarter, slashing its stake by 65% and removing $8.267 billion from its position.

What Other Analysts Are Saying

The analyst community remains divided on Microsoft. While Rothschild downgraded on November 18, Baird initiated coverage on November 14 with an Outperform rating and $600 target. Earlier, on October 30, JP Morgan maintained its Overweight rating with a target of $575, Citigroup held its Buy rating with a $690 target, and Bernstein kept its Outperform rating at $645.

Microsoft shares were down 2.7% at $493.70 at the time of publication on Tuesday.

Back to News

Microsoft Faces Downgrade as Analyst Questions AI Economics and Investment Returns

MarketDash Editorial Team
19 days ago
Rothschild & Co downgraded Microsoft to Neutral, slashing its price target as concerns grow over AI infrastructure costs and weaker returns compared to the early cloud computing era.

Microsoft Corp. (MSFT) shares slid on Tuesday as profit-taking and mounting questions about AI valuations rattled the tech sector. The selling pressure intensified after a prominent analyst downgraded the stock, questioning whether the artificial intelligence boom can deliver returns anywhere close to what investors are expecting.

The Downgrade That's Turning Heads

Rothschild & Co. analyst Alex Haissl downgraded Microsoft from Buy to Neutral and slashed the price target from $560 to $500. The reasoning? The generative AI story that's been driving tech stocks higher is starting to look shaky when you examine the underlying economics.

According to Bloomberg, Haissl said the argument for generative AI is no longer convincing, and hyperscalers need to be approached carefully. The analyst noted that the underlying economics are "far weaker than assumed," making the industry's "trust us—Gen-AI is just like early cloud 1.0" pitch increasingly unconvincing.

The Math Problem Nobody Wants to Talk About

Here's where it gets interesting. Tech companies are pouring tens of billions into AI infrastructure—servers, graphics processing units, and the like. The problem is these assets depreciate fast, and investors are starting to worry about whether the returns justify the spending.

"Gen-AI margins already assume longer depreciation schedules of 5-6 years, versus just three years in the early cloud era," Haissl explained. "On a like-for-like basis, this means capital intensity for Gen-AI is significantly higher, while pricing power is notably weaker."

Translation: Companies are spending more money on stuff that loses value, and they can't charge customers as much as they could during the cloud computing gold rush. That's not exactly a recipe for blockbuster profits.

Haissl also flagged a higher risk of overbuilding, noting that "cloud 1.0 scaled only after achieving efficiency, while Gen-AI scales on a bloated, inefficient stack."

Gates Foundation Heads for the Exit

Adding to the pressure, The Gates Foundation Trust dumped 17 million Microsoft shares in the third quarter, slashing its stake by 65% and removing $8.267 billion from its position.

What Other Analysts Are Saying

The analyst community remains divided on Microsoft. While Rothschild downgraded on November 18, Baird initiated coverage on November 14 with an Outperform rating and $600 target. Earlier, on October 30, JP Morgan maintained its Overweight rating with a target of $575, Citigroup held its Buy rating with a $690 target, and Bernstein kept its Outperform rating at $645.

Microsoft shares were down 2.7% at $493.70 at the time of publication on Tuesday.