Wall Street Downgrades Microsoft Stock for Second Time in a Week Amid AI and Capital Spending Concerns

New York | EcoPulse24

Microsoft stock received a fresh downgrade - its second in less than a week - as Wall Street's worries mount about the effect of artificial intelligence tools on software companies and the capital spending pressures linked to the company’s AI expansion.

Melius Research downgraded its recommendation on Microsoft shares to hold from buy, citing risks related to high capital investments and challenges in marketing Copilot, Microsoft's key product for selling AI solutions to business users. This follows a similar downgrade days earlier by Stifel, which warned about slowing growth in the Azure cloud business.

Melius analyst Ben Reitzes noted that rapid competition from tools like Cowork by Anthropic might force Microsoft to offer Copilot within Microsoft 365 at no extra cost to stay competitive, pressuring profit margins in its productivity segment and taxing Azure’s operational capacity.

The downgrades come amid broader concerns about the future of the software sector, with AI seen as a structural shift that could pose lasting growth headwinds. Goldman Sachs' software stock basket is down over 14% since late January.

Despite this, Microsoft shares rose as much as 2.4% on Monday but remain down more than 24% from their October peak. Analysts attribute much of this decline to recent company results that raised investor concerns about Azure’s growth pace and surging AI spending.

Melius believes Microsoft faces a tough balance: ramping up capital spending to keep pace with rivals like Alphabet and Amazon could strain free cash flow, but slowing investment might be seen as poor execution or earnings management - both negative for the stock. Melius also cut its target price to $430, among the lowest on the street.

Despite the downgrades, about 96% of Bloomberg-tracked analysts recommend buying the stock, with the remainder rating it a hold and none advising a sell. The average price target exceeds $600, suggesting nearly 50% upside from current levels.