Melius Research downgraded Microsoft to Hold from Buy on February 9, 2026, citing mounting competitive threats from AI startups and disappointing adoption of the company's Copilot productivity suite. The downgrade, the second in less than a week following a similar move by Stifel, reflects growing Wall Street concern that Microsoft's massive AI investments may not generate anticipated returns while competitors advance more rapidly.
Analyst Ben Reitzes set a $430 price target, representing modest upside from current levels, but expressed alarm at Microsoft CEO Satya Nadella's positioning in the AI landscape. "Satya Lost the AI Narrative," Reitzes wrote in the research note, criticizing the company's slow progress on Copilot despite three years of promotion. The analyst noted Copilot has attracted only 15 million paid users, a figure he described as surprisingly low given Microsoft's distribution advantages through Office 365.
The competitive threat from Anthropic's Claude Cowork particularly concerns Melius. Reitzes stated he was "floored" that Anthropic developed Cowork in just 10 days, with most users believing it works better with Excel and other applications than Microsoft's own Copilot. "Due to things like Cowork from Anthropic, Microsoft's powerful 365 suite could see challenges and may need to give Copilot away just to stay relevant—hurting growth and margins in its most profitable Productivity segment," Reitzes explained.
The downgrade highlights capital expenditure pressures as Microsoft attempts to maintain pace with Google and Amazon in AI infrastructure buildouts. Microsoft's fiscal 2026 capital expenditure is projected to reach $115 billion, with data center construction spending increasing 66 percent year-over-year. Melius warns this spending trajectory threatens free cash flow, making the stock appear "very expensive" at 49 times fiscal year 2027 enterprise value to free cash flow based on revised estimates.
Reitzes expressed confusion that Microsoft did not increase its capital expenditure guidance despite competitive pressure. "If Microsoft doesn't increase its spending now, analysts at Melius believe that it may either be an execution issue or a need to manage earnings. Both cases, however, aren't good," the note stated. The dilemma places Microsoft in a position where either aggressive spending harms cash flow or conservative spending cedes competitive advantage to rivals.
The valuation concerns prove particularly striking given Microsoft's historical premium positioning. The company's forward price-to-earnings ratio has dropped to 23.0 times, lower than IBM's 23.7 times multiple. This valuation inversion represents a rare occurrence, last seen in July 2013, signaling market skepticism about Microsoft's ability to monetize AI investments effectively.
The Stifel downgrade preceding Melius raised similar concerns, warning about Azure supply constraints and mounting competition from Google Cloud Platform. Stifel increased its fiscal 2027 capital expenditure estimate for Microsoft to approximately $200 billion, representing one of the largest infrastructure buildouts in corporate history. The firm noted Azure growth is decelerating despite massive investment, questioning whether returns justify the spending.
Microsoft shares declined 0.08 percent to $413.27 on February 10 as investors digested the Melius downgrade. Despite successive downgrades, roughly 96 percent of analysts tracked by Bloomberg still recommend buying the stock, with average price targets around $600 implying nearly 50 percent upside. This disconnect between analyst ratings and recent downgrades suggests market participants are reassessing Microsoft's AI strategy in real time.
