Microsoft stock received its second downgrade in a week. What went wrong?

Analytical company Melius Research downgraded Microsoft shares and no longer advises to buy them because of expectations of a short-term decline in Microsoft's free cash flow. This is the second downgrade for the company's shares in a week: earlier, investment bank Stifel refused to advise to buy the securities.

Melius Research analyst Ben Reitzes downgraded Microsoft shares from Buy to Hold, Bloomberg reported. Also, Reitzes reduced the target price of securities from $475 to $430: this is 7% higher than the closing price of trades on Friday, February 6.

Microsoft shares have lost 18% of their value over the past three months, and have fallen 15% since the beginning of 2026. In trading on Monday, the securities were up about 2.9% to $412.9.

Reitzes believes Microsoft's free cash flow in the coming quarters is likely to fall below Wall Street consensus forecasts, and the subscription business could also start to lag. Lower free cash flow makes the company less attractive compared to its competitors, the analyst said.

"Given the lack of free cash flow, one could argue that the current valuation of these stocks is only based on the 'wibe' around AI's prospects depending on what strong cash flow might become sometime in the 2030s," the analyst wrote in a note cited by CNBC. - "We may just be at the beginning of the stage where investors are getting tired of the 'wibe'."

Reitzes also criticized Microsoft's slow progress with its Copilot AI assistant. He said he was "stunned" that after three years of advancement, Copilot only has 15 million paying users. "Anthropic developed [AI assistant] Cowork in 10 days, and many believe it works with Excel and other plugins better than Copilot," the analyst noted. - Because of solutions like Anthropic's Cowork, Microsoft's powerful Microsoft 365 suite could face competition and the company may have to make Copilot free to stay in the game - which would hit growth and margins in its most profitable Productivity division."

The analyst added that he was "puzzled" that Microsoft did not increase capital expenditure for the year, which he believes will stifle development of its Azure cloud platform. Microsoft's competitors have increased spending on AI development to record levels.

The downgrade from Melius Research is the second for Microsoft shares in a month. On February 4, Stifel analyst Brad Riback similarly changed his Buy rating for Microsoft shares to Hold. Stifel also lowered its target price on the stock from $540 to $392. This is the lowest target for Microsoft's stock from the analysts' consensus. Microsoft's consensus forecasts for 2027 are "overly optimistic," Riback said in a note cited by Bloomberg. The analyst also cited two reasons for the sharp drop in Microsoft's stock price after the report was published: the growth rate of its Azure cloud business and high spending on artificial intelligence development.

"We see no near-term growth drivers and expect the stock to trade without a pronounced trend until either capital expenditures begin to grow slower than Azure revenue or Azure revenue begins to accelerate sharply," he wrote.

A month ago, only three analysts took a neutral stance on Microsoft shares. Now, according to MarketWatch, the company's shares have five recommendations to hold (Hold) out of 61 in total. The rest of the analysts who track the securities of the owner of the Azure cloud service recommend buying them. Their consensus price target of $594.9 implies a 48% upside from the closing price on February 6.

This article was AI-translated and verified by a human editor