Microsoft (MSFT) shares slid 2% in premarket trading on Thursday after Stifel downgraded the tech giant, citing concerns about artificial intelligence spending and its Azure cloud computing unit.
“We downgrade MSFT to Hold as we believe Street FY/CY27 revenue/EPS expectations are too optimistic,” analyst Brad Reback wrote in a note to clients. “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 Azure acceleration is unlikely. Additionally, FY27 is likely to have less in-period rev-rec as FY26 befitted from several product cycles, both a revenue and margin headwind.”
Reback lowered his rating on Microsoft to Hold from Buy and slashed his price target to $392 from $540.
Delving deeper, Reback said he now expects fiscal 2027 spending to be around $200B, in-line with Google’s (GOOG) (GOOGL) range of $175B and $185B for 2026. As such, he is concerned that gross margins could drop, estimating fiscal 2027 margins will be around 63%, down from a previous view of 67%.
“After years of tremendous OPEX discipline, we believe the company is entering a new, albeit still efficient, spending phase in order to effectively invest in building its own AI tools and [go-to-market] motions which is likely to be a headwind to [operating margin] leverage,” Reback added.
For Azure, the concern is that there is only “limited” upside coming from OpenAI (OPENAI) usage, as Google’s Gemini is nearing usage parity (Google disclosed 750M monthly active users compared to 800M for ChatGPT) and Anthropic (ANTHRO) is making strides on the enterprise side.
“Given this, as well as the expectation that management’s capacity allocation to first party apps and internal R&D continues for the foreseeable future, we believe meaningful near term Azure acceleration is unlikely,” Reback added.
“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 explained. “From a pure numbers perspective, as we have recently written, until either CAPEX growth slows below Azure growth and/or Azure posts a significant acceleration in its growth we do not expect the stock to re-rate.”