Microsoft Faces Second Downgrade as Analysts Flag Rising AI Risks and Capex Pressure

Microsoft Corp. has again been hit with a downgrade from Wall Street, marking the second time in less than a week that analysts have lowered their rating on the company’s stock amid rising concerns over the risks associated with artificial intelligence and its heavy investment strategy. The latest came from Melius Research, which shifted its recommendation on Microsoft from “Buy” to “Hold,” citing a complex mix of competitive pressures, skyrocketing capital expenditures, and uncertainty around the company’s ability to profitably monetise its AI initiatives.

The Melius downgrade follows closely on the heels of a similar move by Stifel, another Wall Street firm that recently cut Microsoft’s stock to a Hold rating and sharply reduced its price target. Analysts are increasingly questioning the sustainability of Microsoft’s near-term growth as the company navigates intensifying competition in cloud computing and AI services — particularly against rivals such as Google and Amazon, which have both been aggressively scaling their own AI infrastructure and platforms.

At the core of analysts’ anxiety is Microsoft’s strategy around artificial intelligence, especially its Copilot family of products — generative AI tools embedded across Office 365 and other enterprise software. While Copilot has been a key focus for the company’s efforts to lock in corporate customers and drive future subscription revenues, investors and analysts alike are still waiting for clear evidence that AI usage will translate into sustainable profitability. According to Melius, the company may be forced to include some AI features for free just to remain competitive, potentially eroding margins rather than boosting revenue.

Melius also pointed to Microsoft’s capital expenditure — spending on data centres, servers, specialised chips, and cloud infrastructure — as a potential headwind for its free cash flow profile. In its most recent quarter, Microsoft reported capex nearing $37.5 billion, a surge driven by AI infrastructure build-outs that have yet to fully convert into predictable revenue streams. This level of investment, though arguably necessary in the “AI arms race,” raises questions about whether the long-term payoff will outweigh the short-term pressure on margins and cash flow.

By lowering its rating to Hold and trimming its price target to around $430, Melius signalled diminished conviction in Microsoft’s ability to outperform the broader market in the coming months. Importantly, while this downgrade reflects growing caution, it doesn’t represent a wholesale rejection of Microsoft’s long-term prospects. Wall Street’s broader consensus remains largely bullish; many analysts still recommend Buy, and the average target price across research firms sits significantly above current trading levels — suggesting investors still see upside if Microsoft can execute effectively.

The company’s own quarterly results underscore this mixed picture. In its latest earnings report, Microsoft posted revenue and earnings beats, with quarterly revenue exceeding expectations and adjusted earnings per share coming in ahead of forecasts. However, the market’s reaction to these results was muted, illustrating how traditional earnings success is no longer sufficient to reassure investors when future profitability hinges on uncertain, long-term investments like AI.

Another focal point of investor concern is Microsoft’s Azure cloud business — a critical driver of future growth. While Azure continues to grow at a robust pace, analysts at Stifel and others have warned that supply constraints in Azure’s data centre capacity, alongside intensifying competition from Google Cloud and Amazon’s AWS, could slow the acceleration investors were hoping to see. Some supply bottlenecks and rising costs are expected to persist into future fiscal periods, making near-term cloud momentum less certain than previously anticipated.

Competition from AI-centric rivals is a recurring theme in the stock’s recent volatility. Google’s strong performance with its cloud platform and AI toolkit, as well as Amazon’s massive investments in infrastructure, have heightened competitive pressure on Microsoft’s offerings. At the same time, emerging companies like Anthropic are carving out niche spaces with their own generative AI tools, adding further disruption risk to established players.

Underlying these shifts is a broader reevaluation on Wall Street about how AI will reshape the software landscape. Some analysts have remarked that AI could erode traditional business models rather than augment them: a reversal of the earlier sentiment that “software eats the world.” This has led to valuation compression across certain segments of the software sector, with Melius downgrading not only Microsoft but also other major SaaS companies in recent weeks.

For Microsoft investors, the recent downgrades may serve as a moment of reflection on the balance between ambition and execution. The company remains one of the most valuable and influential tech giants globally, with deep investments in cloud, productivity, and AI technologies. Yet the pace and scale of its spending, coupled with persistent questions around monetisation and competitive dynamics, have introduced fresh uncertainties about the timing and extent of returns on those investments.

Going forward, the stock’s performance will likely hinge on how effectively Microsoft can demonstrate that its AI strategy delivers not just innovation and engagement, but also clear, sustained profitability. Investors will be watching future earnings releases, cloud growth metrics, and product monetisation trends closely, seeking evidence that the company’s AI investments are beginning to pay off rather than merely consume capital.

In summary, Microsoft’s second downgrade in recent days reflects a broader shift in investor sentiment around the company’s AI trajectory. While Wall Street still largely backs Microsoft’s long-term prospects, there is palpable caution over how cost-intensive AI development and fierce competition will impact growth, cash flow, and valuation dynamics in the short to medium term.