Quick overview

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Alexander Haissl of Rothschild and Co. Redburn downgraded Microsoft and Amazon.com from a “buy” to a “neutral” rating for the first time since he began coverage in June 2022. Following this announcement, shares of both companies fell by more than 2% in New York

Haissl stated that the underlying economics are “far weaker than assumed,” and he believes that the industry’s narrative claiming “Gen-AI is just like early cloud 1.0” is becoming “increasingly misplaced.”

Haissl’s downgrades come in the wake of a selloff in the tech-heavy Nasdaq 100, which has seen a decline of nearly $1.8 trillion since its peak in late October, dropping 5.1% as of Monday’s close. Concerns over stretched valuations have led investors to pull out of AI-related stocks.

Additionally, Haissl mentioned that both companies are more likely to overbuild, citing that “cloud 1.0 scaled only after achieving efficiency, while Gen-AI scales on a bloated, inefficient stack.” Rothschild and Co. Redburn has maintained Amazon’s price target at $250 while lowering Microsoft’s target from $560 to $500. According to analysts monitored by Bloomberg, Microsoft has 71 buy-equivalent ratings, two holds, and no sell ratings, while Amazon has 80 buys, five holds, and no sells.

Haissl also covers three additional stocks. He recently assigned a sell rating to Oracle Corp., which has seen its stock drop by about 25% since then. Conversely, his recommendation to downgrade Snowflake Inc. has proven timely, as its stock has increased by approximately 60% since being moved from neutral in March 2024. He currently holds a neutral rating on MongoDB Inc.

Tens of billions of dollars are being invested by tech companies to develop their AI infrastructure. In recent weeks, concerns have heightened over the rate at which depreciating assets like servers and graphics processing units lose their value. Haissl pointed out that “Gen-AI margins already assume longer depreciation schedules of 5-6 years, compared to just three years during the early cloud era.” This suggests that while pricing power is significantly weaker, capital intensity for Gen-AI is much higher on a like-for-like basis. Michael Burry, a hedge fund manager best known for his bet against the US housing market before the 2008 global financial crisis, has commented cryptically on the depreciation of assets at major tech companies.