MSFT's Edge Is Softening

Last week’s software selloff may have created ample buying opportunities. But Melius Research says that, when it comes to one of the sector’s biggest names, now is not the time to buy the dip.

Microsoft $MSFT ( ▲ 3.11% ) is losing favor at Melius as concerns mount around near-term free cash flow. The firm downgraded the stock to Hold and lowered its price target to $430, citing pressure on cash generation and rising skepticism around AI-driven valuations.

Melius said Microsoft’s shares now look less compelling versus peers as investors refocus on tangible cash flow rather than long-dated AI promise.

Analyst Ben Reitzes warned that Microsoft’s free cash flow could fall short of Wall Street expectations, while parts of its subscription business may also start to miss.

In his view, that combination weakens Microsoft’s relative appeal at a time when investors are becoming less tolerant of what he calls “vibes” driven valuations.

Reitzes contrasted Microsoft with AI semis and select hardware names that benefit from broader industry spending while generating strong cash flow today.

Melius also criticized Microsoft’s progress with Copilot, noting just 15 million paid users after several years of promotion.

Reitzes questioned whether Copilot may ultimately need to be bundled or given away to stay competitive, potentially pressuring margins in the Productivity segment.

The firm added that Microsoft’s decision not to raise capital spending could limit upside at Azure.

Combined, Melius says these factors put free cash flow, not AI ambition, back at the center of the debate.