OpenAI has been an asset for Microsoft. Now it could mean risk for the stock.

By Emily Bary

Oppenheimer downgrades Microsoft's stock, warning that OpenAI losses could weigh on Microsoft earnings, all while AI revenue might trail expectations

Microsoft Corp.'s investment in ChatGPT creator OpenAI has seemed like a smart move, giving the company access to top artificial-intelligence technology.

But now Oppenheimer analyst Timothy Horan worries that the investment could pose some risk for Microsoft's stock (MSFT) in the near term, owing to OpenAI's steep financial losses. He downgraded Microsoft's stock to perform from outperform on Tuesday, warning that Wall Street may be too upbeat about Microsoft's earnings prospects.

"OpenAI losses are the primary concern," Horan rote, noting that about half of OpenAI's losses will flow through to Microsoft given the company's 49% stake. OpenAI could lose $5 billion this year without accounting for payouts for equity compensation, the New York Times reported late last month.

Microsoft shares are down fractionally in premarket trading Tuesday.

Read: How Microsoft's dividend hike and new $60 billion buyback program stack up

Horan doesn't just worry that OpenAI losses could mean that consensus earnings expectations for Microsoft are too high. He also worries that revenue estimates may be elevated, as AI might not be delivering financial benefits as quickly as investors would have hoped.

"We reiterate the Street is likely overestimating near-term AI revenues as enterprise adoption and infrastructure remains a bottleneck," Horan wrote.

What's more, with AI viewed to be a "once-in-a-generation technology," Horan and his team "don't believe expanding margins will be a short-term priority." He cites the potential for higher operating expenses required to support AI initiatives.

Horan is now part of a small group on Wall Street showing some skepticism about Microsoft's stock. Of the 58 analysts tracked by FactSet who follow the stock, 53 have buy ratings, four have hold ratings and one has a sell rating. The average price target is $497.38, about 21% above current levels.

Microsoft is now the third most valuable U.S. company, having fallen behind Nvidia Corp. (NVDA) as of Monday's close. Before that, Microsoft hadn't closed with a market capitalization below Nvidia's since Aug. 28, according to Dow Jones Market Data.

Don't miss: Yet another bullish call on Nvidia's stock? Don't ignore this one.

-Emily Bary

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10-08-24 0832ET

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