Stifel issues rare Microsoft downgrade on cloud and AI concerns

Investing.com — Microsoft has been downgraded to Hold from Buy at Stifel, with analyst Brad Reback warning that Wall Street’s forecasts for fiscal and calendar 2027 are “too optimistic” given cloud supply constraints, rising spending and intensifying AI competition.

Reback said it is “time for a break,” cutting the firm’s target price to $392 from $540.

Stifel flagged ongoing Azure supply limitations as a central issue. The analysts said that “given the well-documented Azure supply issues, coupled with Google’s strong GCP/Gemini results…and growing Anthropic momentum, we believe near-term Azure acceleration is unlikely.”

The firm also expects revenue recognition to normalise after fiscal 2026 benefitted from multiple product cycles.

Stifel warned that spending pressures will rise sharply. The firm increased its fiscal 2027 capital expenditure estimate to “~$200B (~40% growth),” well above the Street’s roughly $160 billion expectation.

Reback added that higher investment needs mean gross margin estimates must fall, lowering Stifel’s fiscal 2027 forecast to “~63% vs ~67% consensus.”

Operationally, Stifel sees Microsoft entering “a new, albeit still efficient, spending phase” to build and commercialise its own AI tools, which is “likely to be a headwind to OM leverage.”

While the firm still views Microsoft as well-positioned over the long term, it argued that “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.”

Stifel does not expect the stock to re-rate until capital expenditure growth slows below Azure growth or the cloud platform delivers “a significant acceleration.”

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