Microsoft Downgrade Sends MSFT Stock Below $400, Eyeing $345 If Support Breaks
Despite once again beating earnings expectations, Microsoft is facing a sharp reassessment from investors as surging AI investment costs...
Quick overview
- Microsoft's stock faced a significant downgrade from Stifel analyst Brad Reback, with the price target cut from $540 to $392, reflecting concerns over rising AI investment costs.
- Despite reporting strong fiscal second-quarter earnings, Microsoft shares fell around 5% as investors reassess the balance between growth ambitions and profitability.
- The company's rising capital expenditures, particularly in AI infrastructure, have raised questions about future margins and the timing of monetization.
- Weakness in cyclical segments, including a decline in the More Personal Computing division and Xbox revenue, adds further pressure to Microsoft's overall performance.
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Despite once again beating earnings expectations, Microsoft is facing a sharp reassessment from investors as surging AI investment costs raise questions about margins, valuation, and near-term execution.
A Rare Downgrade Sparks a Repricing
Microsoft shares came under renewed pressure on Thursday after Stifel analyst Brad Reback issued a rare downgrade, cutting the stock to Hold from Buy. More striking was the scale of the revision: the price target was slashed to $392 from $540, a reduction of roughly 27%. Reback argued that consensus revenue and earnings expectations had become overly optimistic, particularly in light of rising capital intensity tied to artificial intelligence.
The downgrade proved catalytic. Microsoft shares slipped below the psychologically important $400 level and fell around 5% on the day, extending a broader pullback that has now left the stock nearly 30% below its all-time high of $555.
Market Reaction Signals Deeper Unease
The selloff reflects more than a single analyst’s view. Despite reporting another earnings beat, Microsoft has lost roughly 10% in just over a week, suggesting investors are reassessing the balance between growth ambition and profitability discipline.
While revenue momentum remains strong, markets appear increasingly uneasy about whether accelerating AI-driven growth can translate into durable margin expansion. For a company of Microsoft’s scale, even modest shifts in profitability assumptions can have a significant impact on valuation. The result has been a swift repricing rather than a gradual recalibration.
Solid Earnings, Limited Reassurance
On paper, Microsoft’s fiscal second-quarter results were robust. Revenue reached $81.27 billion, comfortably exceeding the $80.31 billion consensus estimate. Adjusted earnings per share came in at $4.14, well ahead of expectations of $3.92.
Yet the response was notably muted. Shares fell roughly 5% in after-hours trading following the release and continued lower into the next session. The reaction underscored a shifting market mindset: earnings beats alone are no longer sufficient, especially when expectations are already elevated. Investors are now far more focused on forward margins, cost trajectories, and return on capital.
A Market Reset Reframes Expectations
Microsoft’s stock has undergone a notable repricing in recent months, signaling a broader reset in how investors are assessing mega-cap technology leaders. After peaking above $555 in October, shares retreated sharply, shedding more than $100 at their lowest point and briefly slipping below $440.
MSFT Chart Monthly – Heading Toward the 50 SMA
The stock attempted a recovery, rebounding to around $483 ahead of the latest quarterly report. However, renewed concerns around surging AI costs reversed that move, sending MSFT lower again and placing the psychologically important $400 level firmly back in focus, which was broken today as MSFT fell to $392 now facing the 50 monthly SMA (yellow). If the 50 SMA is broken, then the next target is the April 2025 low of $345.
This pullback reflects more than just earnings-related volatility. It underscores a shift in investor priorities—from rewarding growth at almost any cost to demanding clearer visibility on margins, capital efficiency, and returns on investment. In that context, Microsoft’s scale no longer guarantees insulation from scrutiny.
AI Spending Takes Center Stage
At the heart of the reassessment lies Microsoft’s rapidly rising capital expenditure. The company disclosed quarterly capex of $37.5 billion, a near 66% increase year over year, driven primarily by investments in AI infrastructure, data centers, and custom silicon.
Azure revenue growth of 39% confirmed strong demand, but costs are rising faster than many investors are comfortable with. Revenue increased 17%, while the cost of revenue climbed 19%, reinforcing concerns that margins may remain under pressure for longer than previously anticipated.
Management also cautioned that higher memory-chip prices could further weigh on cloud margins. While these investments strengthen Microsoft’s strategic positioning, they also heighten scrutiny around return on invested capital and the timing of monetization.
Monetization Timing Remains a Key Risk
Even if AI demand continues to grow, a critical uncertainty remains: how quickly that demand converts into high-margin revenue. Many enterprise customers are still in early experimentation phases, and while usage is expanding, pricing power and incremental profitability are less clear.
Until investors see firmer evidence that AI workloads are driving sustained margin expansion—not just top-line growth—skepticism is likely to persist. In the near term, the gap between investment intensity and monetization remains a central risk to the thesis.
Weakness Beyond AI Adds Pressure
Outside of AI, Microsoft also flagged softness in several cyclical segments. The More Personal Computing division is expected to decline, with Surface and Windows revenue under pressure from a sluggish PC market and memory constraints. Revenue in the segment is forecast to fall to between $12.3 billion and $12.8 billion, down from $14.3 billion in the prior quarter.
Gaming offered little relief. Xbox revenue declined 9%, while hardware sales fell 32%, highlighting ongoing challenges in consumer-facing businesses.
Strategic Strength, Narrow Margin for Error
Microsoft remains one of the most strategically important players in the global AI ecosystem, with unmatched scale, enterprise reach, and product integration. However, the recent pullback underscores a critical point: leadership does not eliminate execution risk.
With capital intensity rising and margins under close scrutiny, investors appear increasingly unwilling to price in perfection. For now, Microsoft’s story is less about whether AI will succeed—and more about how quickly ambition can be translated into sustainable, profitable returns.
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