Wall Street’s sentiment toward Microsoft is shifting as analysts express growing concern over the disruptive potential of artificial intelligence. In less than a week, the tech giant has been downgraded twice, with Melius Research moving the stock from Hold from Buy on Monday.
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This follows last week’s downgrade by Stifel, signalling a broader scepticism regarding Microsoft’s capital expenditure (Capex) and the long-term viability of its AI monetization strategy.
Melius analyst Ben Reitzes highlighted that Microsoft’s core productivity suite—traditionally its most profitable segment—faces a “lose-lose” scenario.
- Competitive Pressure: Emerging tools like Anthropic’s Cowork are posing a legitimate threat to Microsoft 365. To remain competitive, Microsoft may be forced to bundle its Copilot features for free, which would compress margins and stall growth.
- Monetization Scepticism: Reitzes expressed doubt that customers are willing to “pay extra for AI” long-term, suggesting that AI features may eventually become a standard, high-cost expectation rather than a premium revenue driver.
- The Azure Bottleneck: High internal demand for AI processing power could consume Azure’s capacity, limiting the cloud division’s ability to exceed growth expectations.
Investors are increasingly nervous about the sheer scale of Microsoft’s spending. To keep pace with rivals like Alphabet and Amazon, Microsoft must aggressively increase its Capex.
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“Free cash flow may take another hit,” Reitzes warned. He noted that if Microsoft fails to spend now, it suggests execution issues; if it does, it risks hurting immediate returns.
The fallout from Microsoft’s recent earnings report, which triggered a historic selloff due to concerns over Azure’s growth pace, continues to weigh on the stock. While shares saw a modest 2.4% bump on Monday, they remain down more than 24% from their October peak.
The caution isn’t limited to Microsoft; the entire software sector is under pressure. A Goldman Sachs basket of software stocks has tumbled more than 14% since late January as investors fear AI startups are becoming permanent headwinds for established players. Despite these macro concerns and the recent downgrades, the vast majority of Wall Street remains optimistic. Currently, 96% of analysts tracked by Bloomberg still recommend buying the stock, with an average price target of just over $600—implying an upside of nearly 50%. In contrast, Melius has set one of the Street’s lowest targets at $430, though notably, no major analysts currently recommend an outright “Sell.”
