Microsoft Shares Face Renewed Scrutiny Amid Analyst Downgrades

Microsoft's stock is navigating a challenging period as it contends with a second analyst downgrade in quick succession. Concerns are mounting over the company's artificial intelligence expenditures and its free cash flow generation, with pressure extending across the broader software sector.

The latest reassessment came from Melius Research, which shifted its rating on Microsoft from Buy to Hold on Monday. Analyst Ben Reitzes set a revised price target of $430 per share. This move followed a similar downgrade by Stifel just the previous week, marking a notable shift in sentiment among some market observers.

Reitzes expressed concern that Microsoft's free cash flow could fall short of Wall Street's expectations. He suggested the current share valuation appears to be driven more by the prevailing "sentiment" surrounding AI potential rather than near-term cash flow fundamentals.

Questions Over Copilot's Traction

A specific point of criticism centers on Microsoft's AI assistant, Copilot. Despite three years of intensive marketing efforts, the analyst noted the tool has attracted only 15 million paying users. Concurrently, competition is intensifying. Anthropic's Cowork, a rival product reportedly built in just ten days, is gaining traction and is viewed by many users as superior for Excel and other productivity applications.

The analyst warned that Microsoft may face pressure to offer Copilot for free to maintain competitiveness—a move that could significantly impact growth and margins within one of its most profitable business segments.

Share Price Demonstrates Resilience

Despite the negative analyst commentary, Microsoft's equity showed stability in Tuesday's trading session. Shares closed at $413.27, virtually unchanged on the day. Trading volume reached 44.6 million shares, approximately 48% above the three-month average.

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This stabilization coincided with market commentary suggesting the recent sell-off in software stocks—sometimes dubbed the "SaaSpocalypse"—had pushed valuations into oversold territory. An analysis from Barclays contended that enterprise transitions from legacy systems are multi-year processes, which should provide a degree of protection for established providers like Microsoft.

Quarterly Results Underpin Investor Concerns

The current pressure on the stock stems largely from the second fiscal quarter results, released on January 28. While Microsoft surpassed expectations with revenue of $81.27 billion (a 17% increase) and adjusted earnings per share of $4.14 (up 24%), the market's reaction was ultimately negative.

Key investor worries highlighted from the report include:

• Capital expenditures of $37.5 billion for the quarter
• A decline in free cash flow to $5.9 billion
• Azure growth of 39%, which failed to meet heightened hopes
• Dependence on OpenAI, with nearly 45% of $625 billion in contracted revenue commitments linked to the partnership

The Broader Street View Remains Positive

The recent downgrades represent a minority view. Consensus on Wall Street is still overwhelmingly bullish. Of the 43 analysts covering the stock, 39 maintain a Buy recommendation, while four advise holding. There are currently no Sell ratings. The average price target among analysts stands at $597, significantly above the current trading level.

The coming weeks will be critical for Microsoft as it seeks to address mounting questions regarding its AI investment strategy and cash flow trajectory.