DA Davidson analyst Gil Luria has downgraded Microsoft Corp (NASDAQ:MSFT) from Buy to Neutral, while keeping the price target at $475. Luria observed that competition has effectively matched Microsoft in the AI sector, which diminishes the rationale for its current premium valuation. He now ranks Microsoft fourth among the Magnificent Six. The stock has surged 92% since his initiation in January 2023, whereas the S&P 500 has gained 49%. The analyst highlighted that Microsoft has experienced accelerated growth and improved margins over recent quarters, becoming a leader in the commercialization of generative AI. Its early investment in OpenAI, coupled with the rapid deployment of capabilities within Azure and GitHub, allowed it to establish a notable advantage over Amazon. com Inc (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) Google Cloud, yielding superior results over the past four to six quarters. However, Luria pointed out that Microsoft's advantage has diminished in both the cloud and code generation markets, complicating its ability to maintain outperformance. According to Luria, AWS is now adding nearly as much cloud business as Azure after several quarters of Microsoft's additional growth. Google Cloud Platform has also seen accelerated expansion, matching Azure’s growth rates from the previous quarter. His new proprietary hyperscaler semiconductor analysis indicates that AWS and GCP are significantly ahead in deploying silicon within their data centers, providing them with an important edge over Azure looking ahead. While Microsoft has discussed its Maia chips, Luria emphasized that it is years behind Amazon and Google, seemingly using them solely to support Azure OpenAI Services workloads.

This suggests that Microsoft may be entering an arms race it cannot win, making it reliant on Nvidia Corp (NASDAQ:NVDA) and potentially shifting wealth from its shareholders to Nvidia’s. Following considerable margin expansion last year, Microsoft is projecting a decline in operating margins to fund increasing data center capital expenditures, expected to rise from 12% to 21% of revenue, according to Luria. He noted that this escalation is more significant than Amazon and Google's, reflecting Microsoft's greater dependence on Nvidia. Luria stated that Microsoft tends to overinvest at these rates annually, eroding margins by at least 100 basis points cumulatively. To counterbalance this margin pressure, Microsoft would need to lay off approximately 10, 000 employees for each consecutive year of over-investment. While Nvidia and others have highlighted strong ROI for hyperscalers like Azure, Luria cautioned that these returns may only be sustainable for a limited time. He mentioned that Azure’s growth could be enhanced by self-generated revenue, such as that from OpenAI. Furthermore, Luria pointed out that Microsoft has lost much of its edge with GitHub Copilot, as Amazon and GitLab have nearly matched its capabilities, and Cursor has emerged as the new standard. He projected fiscal first-quarter 2025 revenue at $64. 2 billion and EPS at $2. 96. Price Action: MSFT shares were down 0. 50% at $433. 10 in the latest trading session on Monday. Photo via Shutterstock Latest Ratings for MSFT View More Analyst Ratings for MSFT View the Latest Analyst Ratings UNLOCKED: 5 NEW TRADES EVERY WEEK. Click now for top trade ideas daily, along with continuous access to advanced tools and strategies for a market edge. Get the latest stock analysis from Benzinga? MICROSOFT (MSFT): Free Stock Analysis Report This article titled "Microsoft's AI Lead Shrinks: Analyst Downgrades Stock As Amazon And Google Close The Gap" originally appeared on Benzinga. com.