Analysts are starting to turn negative on Microsoft as the software giant’s stock has missed a rally in tech shares since the start of the year. Some are worried the software giant may not be as resistant to a potential recession as expected, Bloomberg reported.
Microsoft last week joined the wave of tech company layoffs, announcing that it would release 10,000 workers by the end of March. While some observers have suggested the industry’s mass layoffs reflect rightsizing after the pandemic-induced hiring glut, looking under the hood at Microsoft has many concerned about its prospects for the rest of the year.
Guggenheim Partners analyst John DiFucci slapped a “sell” recommendation on Microsoft shares, the first time an analyst hit the company with that rating in three years, Bloomberg said. DiFucci cited worries about growth at the company’s Windows and Azure cloud computing businesses.
Bloomberg noted DiFucci’s downgrade followed a warning from UBS Group, which also cut its view on the stock this month, writing that Azure “is entering a steep growth deceleration” that could be worse than most investors expect for the next two years.
Microsoft attributed $25.7 billion, or 50% of its fiscal first quarter revenue, to its cloud operations when it last reported in October. Azure and other cloud services alone saw revenue growth of 42%, the company said. It’s slated to report its fiscal second quarter after the market closes Tuesday.
But Bloomberg reported that investors are worried cloud operations are cooling off.
Analysts expect Azure sales to increase 34% this year and then slow to 27% next year. The report noted Microsoft warned in October that Azure sales would rise by about 37% for the fiscal second quarter that ended in December, a decline from the prior three months.
Not everyone on the Street is in warning mode. Wedbush analyst Dan Ives said Tuesday that while the stock has reflected a slowdown in cloud and the poor PC market in recent quarters, the shift to the cloud in business overall provides a “massive opportunity” for Microsoft, even amid the current downturn. He kept an “outperform” or “buy” rating on the stock.
Redmond, Washington-based Microsoft is still investing in Azure, and said Monday it is investing $10 billion in OpenAI, the artificial intelligence technology behind ChatGPI. That comes after an initial $1 billion investment in 2019 and a second round in 2021. The fast-growing technology is seen as a major growth avenue.
Microsoft shares slipped a fraction in morning trading, down 43 cents to $242.15, as the tech-focused Nasdaq Composite edged slightly higher.
The stock is up less than 1% since the start of the year and fell about 22% last year, in line with the broader markets. But the Nasdaq has rallied this month, rising nearly 10%, gains that Microsoft investors have not seen.
