Microsoft is in trouble
Microsoft shares were downgraded for the second time in less than a week as Wall Street grows increasingly wary about the potential disruption software stocks face from artificial intelligence.
Melius Research cut the stock to hold from buy on Monday, citing concerns about capex spending and Microsoft’s Copilot-branded products which are its main vehicle for selling AI software tools to office workers.
The move follows a similar downgrade from Stifel late last week, with analysts warning about the pace of growth in its Azure cloud-computing business.
“Due to things like Cowork from Anthropic, Microsoft’s powerful 365 suite could see challenges and may need to give Copilot away just to stay relevant — hurting growth and margins in its most profitable Productivity segment,” wrote Melius analyst Ben Reitzes.
“This reality will consume internal capacity of Azure, limiting beats there too.”
The downgrades come at a time when investors are increasing nervous about the long-term prospects of software writ large, with AI tools from companies like Anthropic seen as a major disruptive force and a potentially permanent headwind to growth.
A Goldman Sachs basket of software stocks has tumbled more than 14% since late January.
Shares of Microsoft rose as much as 2.4% on Monday, although they are down more than 24% from an October peak.
Much of the stock’s weakness follows Microsoft’s results from earlier this month, which resulted in a historic selloff in the stock given after analysts raised concerns about pace of growth in Microsoft’s Azure cloud-computing business, and the heavy amount it is spending on artificial intelligence.
For Reitzes, Microsoft is in a lose-lose situation, as it “needs to increase its capex markedly” in order to keep pace with Alphabet and Amazon.
This means free cash flow “may take another hit.” However, if it doesn’t increase spending now, he added, “it reflects either an execution issue or a need to manage earnings – neither is good.”
Reitzes also expressed concern about whether AI will pay off, writing that “we increasingly think that ‘pay extra for AI’ isn’t a thing – and Copilot will need to be included for free, increasing costs long-term.”
The firm lowered its price target on Microsoft to $430, one of the lowest on the Street.
Even with the downgrades, roughly 96% of the analysts tracked by Bloomberg recommend buying the stocks.
The rest have the equivalent of hold ratings, with none recommending selling. The average price target stands at a little over $600, implying upside of nearly 50% from its current price.
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