Microsoft Downgraded to Hold as AI Capex Pressures Mount
Melius cut Microsoft’s rating from Buy to Hold, citing intensifying AI-driven competition and the need for significantly higher capital spending on its 365 business. The firm noted Microsoft trades at roughly 49× FY27 EV/FCF and cut its price target to $430.
1. Analyst Downgrade to Hold
Melius downgraded Microsoft from Buy to Hold, highlighting growing competitive threats in the artificial intelligence space. The firm specifically pointed to pressure on Microsoft’s 365 business and the resulting execution risks if spending does not keep pace.
2. Rising AI Capex Requirements
The analyst noted that AI-driven competitors such as Alphabet and Amazon are driving Microsoft to commit significantly higher capital expenditures. This elevated spending could weigh on free cash flow, or conversely, signal execution challenges if underinvested.
3. Valuation and Price Target Revision
Melius noted Microsoft trades at approximately 49 times FY27 enterprise value to free cash flow, which they view as expensive. The firm lowered its price target on Microsoft shares to $430 and reiterated concerns over long-term AI partnership assumptions, particularly regarding OpenAI’s cash flow generation.