The bull case for generative artificial intelligence is no longer clear and hyperscalers should be approached with caution, according to an analyst who downgraded two of Wall Street’s most-favoured tech giants. Microsoft Corp and Amazon.com, Inc saw their ratings cut to neutral from buy yesterday, as Rothschild & Co Redburn’s Alexander Haissl downgraded the stocks for the first time since initiating coverage in June 2022, according to data compiled by Bloomberg.
Shares of both firms traded more than 1.5% lower in premarket. The industry’s “trust us – Gen-AI is just like early cloud 1.0” narrative looks “increasingly misplaced,” Haissl wrote in a note, stating that the underlying economics are “far weaker than assumed.” Haissl’s downgrades follow a selloff in the tech-heavy Nasdaq 100, which has wiped out almost $1.8tn since a late-October peak to send the gauge down 5.1% in that time. Investors have retreated from AI-related stocks amid unease over stretched valuations.
With this call, Haissl broke rank with most of his peers. More than 90% of the analysts covering the stocks have buy-equivalent recommendations on them — with not a single sell rating, according to Bloomberg data.
A former head of automotive research at Berenberg and Credit Suisse Group AG, Haissl began his career as a police officer in Vienna. He joined the firm, then called Redburn Ltd, in 2022 and initiated coverage on Amazon and Microsoft with a buy rating citing their untapped cloud potential.
While the cloud-computing and e-commerce giant has more than doubled in the period, Microsoft has rallied 98%. Haissl’s coverage spans just three other stocks. He initiated with a sell rating on Oracle Corp in September — the software firm’s shares have fallen about 25% since then.
However, his call to downgrade Snowflake Inc to sell from neutral in March 2024 hasn’t had the same result — the stock has rallied about 60%. He also has a neutral rating on MongoDB Inc. Technology firms are spending tens of billions of dollars to build out their AI infrastructure.
In recent weeks, investors have become increasingly concerned about how quickly depreciating assets like graphics processing units and servers lose value. “Gen-AI margins already assume longer depreciation schedules of 5-6 years, versus just three years in the early cloud era,” Haissl said. “On a like-for-like basis, this means capital intensity for Gen-AI is significantly higher, while pricing power is notably weaker.”
Hedge fund manager Michael Burry, who’s best known for his bet against the US housing market before the 2008 global financial crisis, has chimed in with cryptic posts about depreciation of assets at large tech companies.
Haissl also noted that there is higher risk of an overbuild at the companies, “as Gen-AI scales on a bloated, inefficient stack, while cloud 1.0 scaled only after achieving efficiency.” Rothschild & Co Redburn cut Microsoft’s price target to $500 from $560, and maintained Amazon’s target of $250.
The Windows software maker has 71 buy-equivalent ratings, two holds and no sell ratings among analysts tracked by Bloomberg, while Amazon has 80 buys, five holds and no sell ratings. Redburn conducts deep-dive research into stocks and publishes notes running into tens of pages. Last month, their analyst Dominic Ball came out on top as he was found to be the lone analyst with a sell rating on Fiserv Inc ahead of the company’s crushing stock selloff.
Shares of both firms traded more than 1.5% lower in premarket. The industry’s “trust us – Gen-AI is just like early cloud 1.0” narrative looks “increasingly misplaced,” Haissl wrote in a note, stating that the underlying economics are “far weaker than assumed.” Haissl’s downgrades follow a selloff in the tech-heavy Nasdaq 100, which has wiped out almost $1.8tn since a late-October peak to send the gauge down 5.1% in that time. Investors have retreated from AI-related stocks amid unease over stretched valuations.
With this call, Haissl broke rank with most of his peers. More than 90% of the analysts covering the stocks have buy-equivalent recommendations on them — with not a single sell rating, according to Bloomberg data.
A former head of automotive research at Berenberg and Credit Suisse Group AG, Haissl began his career as a police officer in Vienna. He joined the firm, then called Redburn Ltd, in 2022 and initiated coverage on Amazon and Microsoft with a buy rating citing their untapped cloud potential.
While the cloud-computing and e-commerce giant has more than doubled in the period, Microsoft has rallied 98%. Haissl’s coverage spans just three other stocks. He initiated with a sell rating on Oracle Corp in September — the software firm’s shares have fallen about 25% since then.
However, his call to downgrade Snowflake Inc to sell from neutral in March 2024 hasn’t had the same result — the stock has rallied about 60%. He also has a neutral rating on MongoDB Inc. Technology firms are spending tens of billions of dollars to build out their AI infrastructure.
In recent weeks, investors have become increasingly concerned about how quickly depreciating assets like graphics processing units and servers lose value. “Gen-AI margins already assume longer depreciation schedules of 5-6 years, versus just three years in the early cloud era,” Haissl said. “On a like-for-like basis, this means capital intensity for Gen-AI is significantly higher, while pricing power is notably weaker.”
Hedge fund manager Michael Burry, who’s best known for his bet against the US housing market before the 2008 global financial crisis, has chimed in with cryptic posts about depreciation of assets at large tech companies.
Haissl also noted that there is higher risk of an overbuild at the companies, “as Gen-AI scales on a bloated, inefficient stack, while cloud 1.0 scaled only after achieving efficiency.” Rothschild & Co Redburn cut Microsoft’s price target to $500 from $560, and maintained Amazon’s target of $250.
The Windows software maker has 71 buy-equivalent ratings, two holds and no sell ratings among analysts tracked by Bloomberg, while Amazon has 80 buys, five holds and no sell ratings. Redburn conducts deep-dive research into stocks and publishes notes running into tens of pages. Last month, their analyst Dominic Ball came out on top as he was found to be the lone analyst with a sell rating on Fiserv Inc ahead of the company’s crushing stock selloff.