Microsoft Corporation shares rose 3.1% to $413.60 during Tuesday's early trading session in New York, staging a rebound even after a Wall Street firm downgraded the stock, citing mounting concerns over the financial impact of the company's aggressive artificial intelligence investments.
Analyst Downgrade Highlights Cash Flow Worries
Melius Research lowered its rating on Microsoft to "hold" from "buy" on Monday, assigning a $430 price target. The firm warned that escalating AI-related capital spending could structurally pressure Microsoft's free cash flow, potentially limiting near-term upside for the stock. Analyst Ben Reitzes cautioned that equity valuations risk becoming overly reliant on intangible "vibes" about AI prospects if cash generation continues to tighten.
Reitzes also expressed skepticism about Microsoft's Copilot AI assistant, suggesting increased competition could force the company to offer the product at little or no cost to maintain market relevance, which might pressure growth and margins within its Productivity segment.
Financial Context and Investor Focus
The software giant recently reported December quarter revenue of $81.27 billion and GAAP net income of $38.46 billion, with results reflecting its strategic investments in OpenAI. On the earnings call, CEO Satya Nadella highlighted that Microsoft Cloud revenue exceeded $50 billion for the first time, growing 26% year-over-year, driven by demand for infrastructure and AI services.
However, reports indicated Microsoft allocated a record amount toward AI investments last quarter while cloud-computing growth showed signs of moderation, unsettling some investors who anticipated a quicker payoff from the substantial outlays and the OpenAI partnership.
The broader investment community is closely monitoring upcoming U.S. economic data, including Wednesday's Employment Situation report and Friday's Consumer Price Index reading, for signals on interest rate trajectories that could influence technology stock valuations.
