Microsoft (MSFT) is riding high on the AI wave, but let's dissect the numbers and see if the current valuation truly reflects reality. We've got analysts tripping over themselves to slap price targets as high as $730 on the stock, fueled by the promise of AI-driven growth. Jefferies, for example, is maintaining a "Buy" rating with a $675 target, citing accelerated Copilot adoption. But is this optimism grounded in tangible returns, or is it just a case of AI-induced euphoria? Microsoft stock price target maintained at $675 by Jefferies on AI growth By Investing.com
The narrative being pushed is that Copilot is seeing "enterprise-wide rollouts," contributing to Microsoft's 15.59% revenue growth over the last twelve months. Now, 15.59% growth is nothing to sneeze at, but let's put that into perspective. We're talking about a company with a $3.51 trillion market cap. Sustaining that kind of growth rate becomes exponentially harder as the base gets larger. It's like trying to accelerate a fully loaded freight train – the energy required increases dramatically.
Rothschild & Co Redburn is throwing some cold water on the party. Analyst Alex Haissl downgraded both Amazon and Microsoft, arguing that the market is overestimating the returns related to AI investment. His core argument? AI is far more capital-intensive than "cloud 1.0." A GPU, according to their analysis, costs firms around $40 billion in capex per gigawatt of power, while generating only $10 billion of revenue per gigawatt. That's a 4:1 investment-to-revenue ratio. And that's before we even talk about the limited pricing power hyperscalers actually have. Amazon, Microsoft Stocks Downgraded, Can't Hit Expected Returns: Analyst
He also argues that AI chips have a short lifespan, with projects turning "value destructive" if a GPU is replaced every three years. This is where things get interesting. How many investors are really factoring in the depreciation rate of specialized AI hardware when valuing these companies? My guess is, not enough. And this is the part of the report that I find genuinely puzzling: the market seems to be ignoring the sheer cost of this AI arms race.
Then there's the Xbox situation. Reports are circulating that Microsoft might increase the price of its Xbox game consoles, allegedly due to component shortages exacerbated by the AI boom. Moore’s Law is Dead claims that Microsoft didn’t plan ahead, unlike Sony. And AMD is also reportedly planning to increase the price of its GPUs, which could hit Microsoft twice, given that AMD supplies the processors for Xbox consoles.
Now, a price increase on a gaming console might seem insignificant in the grand scheme of a multi-trillion-dollar company, but it could be a symptom of a bigger problem: the AI arms race is sucking up resources and driving up costs across the board. If Microsoft is having trouble securing components for its gaming consoles, what does that say about the long-term scalability of its AI ambitions? It's like a drought – the water shortage starts with the lawns before it hits the reservoirs.
