Microsoft (MSFT) suffered a rare Wall Street downgrade on Monday amid concerns that the company’s artificial intelligence (AI) dominance has eroded and it has become overly reliant on Nvidia (NVDA) for its AI infrastructure.
Analysts at DA Davidson downgraded the stock from a buy recommendation to a neutral recommendation and maintained their price target at $475, which still suggests an upside of about 8% from current levels.
The company noted that Microsoft’s early investment and commercial product rollout gave it an initial advantage over Amazon (AMZN) and Google (GOOGL, GOOG), both of which were “caught off guard.”
Since then, Amazon and Google have “been investing to catch up with Microsoft, and I think they’re now in a position to say they have caught up,” Gil Luria, a managing director at DA Davidson, told Yahoo Finance on Monday (video above).
“Going forward, I think AWS (Amazon Web Services) and GCP (Google Cloud Platform) will have a real advantage over (Microsoft) Azure because they have the ability to bring their own chips into their own data centers, which can cost a fraction of the cost of Nvidia GPUs. Microsoft hasn’t done that yet with its own chips.”
Citing their own hyperscaler semiconductor data, DA Davidson analysts said Microsoft is “beholden to” AI chip supplier Nvidia.
“Microsoft is so dependent on Nvidia that it is essentially transferring wealth from its shareholders to Nvidia shareholders,” Luria said.
As Yahoo Finance’s Dan Howley recently reported, Microsoft has embarked on a broad effort to incorporate AI capabilities into its vast portfolio of business software products, aiming to beat competitors in the space and monetize its huge investment in AI technology.
The company has been pouring money into building out its AI data centers, with capital expenditures in the latest quarter reaching $19 billion, up 35% from the previous quarter.
Microsoft pointed to some bright spots in its AI business, noting that AI contributed 8 percentage points to its cloud Azure revenue growth, up from 7 percentage points in the third quarter and 1 percentage point in the fourth quarter last year.
Microsoft shares traded roughly flat despite Monday’s downgrade. The company’s shares hit a record high in July and are up about 15% this year.
Ines Ferre is a senior business reporter at Yahoo Finance. Follow her on X at @ines_ferre.
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