Stifel believes that heavy AI spending and rising competition could weigh on Microsoft ‘s growth. The investment firm downgraded the “Magnificent Seven” technology titan to a hold rating from buy. Analyst Brad Reback also lowered his price target to $392 from $540. Shares of Microsoft are flat over the past 12 months but have slipped 14% this year. Reback’s revised forecast implies that the stock has a further 5% to fall. MSFT 1Y mountain MSFT 1Y chart Reback said that his downgrade comes as Wall Street’s earnings and revenue expectations appear too optimistic. “Given the well-documented Azure supply issues, coupled with Google’s strong GCP Gemini results this evening and growing Anthropic momentum, we believe near-term Azur acceleration is unlikely,” he wrote. “Net/net, while MSFT remains well positioned over the long-term to navigate the rapidly [evolving] AI landscape over the coming years, the near-term prospects seem a bit more cloudy as [Google] appears to be rapidly gaining AI share and MSFT’s OAI relationship is not nearly as additive [as] it once was.” Reback also expects Azure’s gross margin compression to accelerate in the coming quarter, thanks to meaningful capital expenditures growth and an increasing percentage of spend centered on short-lived compute assets. “[Beyond] the COGS headwinds, management has made it very clear over the last 2 quarters they [are] stepping up their AI R & D investments which comes with a high price tag as it relates to hiring retaining personal as well as supporting these efforts (lots of GPU cycles consumed),” the analyst added. “The [net] impact of this is that OPEX growth is likely to be much closer to revenue growth than we [have] seen over the last several years.” Reback sees no near-term catalysts for the stock, and expects it to trade range-bound either until Azure posts a significant acceleration or until capital expenditures growth slows below Azure growth, he wrote. Reback’s downgrade comes a week after Microsoft stock dipped 10% after it shared fiscal third-quarter operating margin guidance of 45.1%, below StreetAccount’s 45.5% consensus. Cloud growth also moderated, with revenue from Azure and other cloud services coming in at 39% and below the 40% growth from Microsoft’s fiscal first quarter.
