Melius Downgrades Microsoft to Hold, $430 Target
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- Melius Research downgraded Microsoft (NASDAQ:MSFT) from Buy to Hold on February 9, setting a $430 price objective and flagging that rising capex to compete with Google and Amazon could pressure free cash flow.
- Microsoft's 365 business is exposed to AI-driven threats, per the Melius analyst, who warned that failing to lift capex would imply either earnings management or execution problems.
- Melius characterized Microsoft shares as "very expensive" under the firm's new FCF estimates, framing valuation as a core part of the downgrade thesis.
- Microsoft's Q2 2026 results showed Microsoft Cloud revenue crossing $50 billion, underscoring the scale of the business Melius is now more cautious on.
- Microsoft reported capital expenditures of $37.5 billion in the quarter, with roughly two-thirds allocated to short-lived assets like GPUs and CPUs across Azure, M365 Copilot, GitHub Copilot, and R&D.
Why it matters: For Microsoft shareholders, Melius is essentially saying the AI capex arms race is a margin story, not just a growth story: the $37.5 billion quarterly capex bill, two-thirds of it going to depreciating hardware, may compress free cash flow enough to make current valuations hard to justify against $430.
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