Why Microsoft Stock Dropped Today
Key Points
Investment banker Morgan Stanley says hyperscaler free cash flow isn't measuring up.
Massive capex have many AI companies operating in the red.
But Microsoft isn't one of those companies.
- 10 stocks we like better than Microsoft ›
Investment banker Morgan Stanley sounded an alarm on the artificial intelligence industry this morning -- and took a chunk out of Microsoft's (NASDAQ: MSFT) market cap when it did it. AI revenue isn't rising as fast as AI cost, and Microsoft could end up poorer as a result.
Shares of the mega-tech hyperscaler stock are down 3.2% through 1:45 p.m. ET.
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Image source: Microsoft.
Why Microsoft investors might worry
Hyperscalers as a whole are expected to grow their capital spending 57% this year, relative to 2025, says Morgan Stanley. Microsoft, in particular, plans to spend $190 billion as it builds out its AI infrastructure.
This much was already known.
What's new today is that Morgan Stanley is warning that "the gap between capital deployment and revenue generation continues to pressure near-term cash generation." At least some hyperscalers simply aren't generating enough free cash flow to cover their enormous cash outlays. And as a result, MS forecasts that some companies will need to take out more loans to cover the gap -- and pay higher interest rates to do so.
What this means for Microsoft stock
The good news is that Morgan Stanley says higher-quality borrowers will probably pay less extreme interest rates than lower-quality borrowers (such as Oracle (NYSE: ORCL), which has a rated mid-to-low BBB credit rating, reports StreetInsider.com).
The better news is that Microsoft is arguably one of the best credit risks out there in hyperscaler land. Although Microsoft is carrying a pretty substantial debt load of $129 billion, it has $77 billion in the bank to cover its payments and is generating gobs of free cash flow -- even after paying for capital investment: $67 billion is expected this year, according to data from S&P Global Market Intelligence.
Long story short, despite MS's misgivings, Microsoft stock will be just fine.
Should you buy stock in Microsoft right now?
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Oracle. The Motley Fool has a disclosure policy.
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