Melius downgraded Microsoft (NASDAQ: MSFT) from Buy to Hold, citing growing competitive threats from artificial intelligence and concerns over rising capital expenditure requirements.
The firm said Microsoft’s 365 business faces increasing pressure from AI-driven competitors, necessitating significantly higher capital spending to keep pace with rivals such as Alphabet and Amazon. Melius argued that higher investment levels could further weigh on free cash flow, while failure to step up spending could signal execution challenges or earnings management.
The analyst also questioned long-term assumptions around OpenAI, noting that Oracle does not generate free cash flow and that there is no certainty OpenAI will outperform competitors such as Anthropic or Google. Melius suggested that public investors may eventually push OpenAI to adopt a less capital-intensive model.
While AI-related concerns are reflected in current valuations, the firm said this does not necessarily imply near-term upside, noting that Microsoft appears expensive on revised estimates, trading at roughly 49 times FY27 enterprise value to free cash flow. Melius lowered its price target on Microsoft to $430, set Oracle’s target at $160, and reiterated a Sell rating on Adobe.
