Rothschild downgrades Microsoft (MSFT) and Amazon (AMZN) over Gen-AI economics

JPMorgan's (JPM) report about the "astronomical" amount of capital expenditure (capex) required for AI generated a lot of buzz on social media.

For a recap, JPMorgan's research team estimated that it will cost between $5 trillion and $7 trillion to build out the global data center and AI infrastructure.

And because of this sizable investment, the researchers predict that it will require in the ballpark of $650 billion of annual revenue "in perpetuity" in order to even generate a modest 10% return through 2030.

The report especially drew the attention of those who have grown critical over the amount of money many of the tech giants are pouring into data centers without any real path yet toward generating revenue off of them.

And though Microsoft (MSFT) and Amazon (AMZN) both obviously have the massive scale necessary to handle their soaring AI capex, it appears not everyone on Wall Street is comfortable with the spending spree they're on.

This became clear on Tuesday when Rothschild Redburn analyst Alex Haissl downgraded both of the tech titans over concerns about the economics around their Gen-AI platforms.

Value creation of cloud services called into question

Haissl downgraded Microsoft to Neutral from Buy, while cutting his price target to $500 from $560.

He noted that the company "is still seen as one of the key beneficiaries of Gen-AI" especially through its Azure cloud platform, "which remains the main growth engine, accounting for over half of Microsoft's revenue."

And some of this growth has of course been driven through its partnership with OpenAI. However, Haissl flagged a "twofold" challenge with Microsoft's stock.

"Firstly, value creation from Gen-AI-related revenues is far lower than under traditional cloud 1.0 economics," Haissl wrote.

"As detailed in this report, it now takes roughly six times more capex to generate the same level of value — making the business structurally more capital intensive and weighing on long-term cash flow potential, with no clear end in sight."

Haissl also pointed to "value leakage" with Microsoft's Office 365 suite, noting that "the integration of third-party models such as OpenAI and Anthropic shifts value away from Microsoft."

As for Amazon, Haissl downgraded the company's stock to Neutral from Buy, while maintaining a $250 price target. He cited "limited upside" to Amazon's own cloud platform.

"Taking a more cautious view on AWS is a difficult but necessary step," Haissl wrote.

He said that Rothschild had "maintained our conviction that AWS was doing the right things and was better positioned than Azure thanks to its vertical integration and its partnership with Anthropic, which we see as more attractive than OpenAI given its focus on the software development Gen-AI cycle."

But, he added, "the backdrop has shifted" and as AWS market share has accelerated, it leaves "limited scope for meaningful upside relative to buy-side expectations."

Haissl also sees AWS facing a similar problem to Azure, which is that while it "captures move value within the stack," Gen-AI is "dilutive to returns."

Amazon's stock fell 4.4% on Tuesday, while Microsoft's dropped 2.7%.