Microsoft (NASDAQ:MSFT) remains one of the key forces driving the AI revolution, but Rothschild & Co Redburn analyst Alex Haissl believes the stock now warrants a more cautious view. He argues that investors should move past the comforting idea that Gen-AI will follow the same trajectory as early cloud 1.0, a comparison he sees as increasingly off the mark.
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Essentially, Haissl’s analysis indicates that Gen-AI’s “underlying economics” aren’t nearly as strong as assumed: GPU deployments need about six times more capital to produce the same value as “cloud 1.0,” with risks “skewed to the downside.”
Microsoft, says Haissl, is still viewed as a major beneficiary of Gen-AI, while Azure continues to be a primary driver of growth. This has so far helped shift investor focus toward the strength of the cloud business, rather than potential Gen-AI-related challenges in Office 365.
According to Haissl, the stock now faces two main challenges. First, value creation from Gen-AI revenue is significantly lower than what was achieved under traditional cloud 1.0 economics. That makes the business “structurally more capital-intensive” and puts pressure on long-term cash flow prospects, with “no clear end in sight.”
Using electricity-based capacity estimates, Haissl reckons revenue per GW has fallen from roughly $17 billion pre-Gen-AI to about $11 billion per GW under the current GPU-heavy model. Unlike broad cloud services, renting GPUs to a few AI labs offers less pricing power, and raising revenue per unit would require monetizing Microsoft’s own IP or increasing GPU rental prices – both difficult propositions.
As Gen-AI drives growth, capital expenditure is increasingly focused on GPU capacity, with traditional cloud spending stable in absolute terms but declining as a share of the total. By FY30, Haissl estimates over 60% of Microsoft’s installed capacity could be GPU-based.
Secondly, Haissl sees an issue with Office 365, as integrating third-party models diverts value away from Microsoft. The analyst says the “disruption risk” for Office 365 doesn’t just mean enterprises might cancel or downgrade subscriptions; it also stems from employees using third-party AI models like OpenAI and Anthropic. This introduces “value leakage,” especially if Microsoft’s Copilot isn’t fully monetized. The line between consumer and enterprise Gen-AI is blurring, says Haissl, with many workers using personal tools for work tasks, creating “shadow IT” outside corporate channels.
All the above results in a downgrade from Haissl, whose MSFT rating goes from Buy to Neutral while his price target drops from $560 to $500, suggesting the stock will stay rangebound for the time being. (To watch Haissl’s track record, click here)
That’s a minority opinion on Wall Street. With 32 Buys and 3 Holds, Microsoft enjoys a Strong Buy consensus rating. Going by the $631.70 average target, a year from now, shares will be changing hands for a ~30% premium. (See MSFT stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.