Microsoft just got downgraded by Stifel, sending the stock straight into the red. The rating dropped from “buy” to “hold” after analyst Brad Reback told clients he thinks Wall Street is way too confident about where things are going.
He said the expectations for 2027 are “too optimistic,” and warned there’s no solid reason to think things will improve in the short term.
The downgrade came right after Microsoft’s shares dropped 14% following its earnings report last week. After that brutal fall, the stock opened another 4% lower on Wednesday.
Stifel slashed its price target from $540 to $392, now the lowest target among all major analysts. Reback explained the two big reasons: slowing Azure growth and huge spending on artificial intelligence projects with no clear payback yet.
Azure drags while AI spending eats into margins
Brad said clearly that Microsoft has no short-term push to lift the stock. “We see no near-term catalysts and expect the stock to be range-bound until either capex growth slows below Azure growth and/or Azure posts a significant acceleration,” he wrote.
Brad also said the company’s current capital expenditure is out of control compared to the actual performance of Azure, which is facing major issues.
He mentioned Azure supply problems, while Google Cloud just reported strong results. And now Anthropic is picking up speed too.
Brad added that with this growing competition, it’s unlikely that Azure will suddenly speed up. That’s a problem because Azure is supposed to be the engine driving cloud growth.
The analyst also flagged that Microsoft’s heavy AI spending is making it hard for the company to boost its profit margins. He warned that this spending is “likely to be a headwind” for operating leverage, and that investors shouldn’t expect a quick turnaround.
Brad’s new price target is way below the $600+ average Wall Street target, but clearly, he sees risks that others don’t want to talk about.
Traders dump software stocks as AI disruption spreads
What’s hitting Microsoft isn’t just a company-specific problem. The whole software sector is getting wrecked by panic over AI disruption.
A big exchange-traded fund that tracks software stocks has dropped 15% in the past seven trading sessions and was down another 0.7% in premarket trading Thursday. Traders are in full-blown sell mode.
Jeffrey Favuzza from Jefferies called it the “SaaSpocalypse.” “Trading is very much ‘get me out’ style selling,” he said. The wave of fear exploded this week when Anthropic launched a tool for in-house lawyers, and software stocks collapsed.
Legalzoom.com crashed 20%, CS Disco dropped 12%, Thomson Reuters lost 16%, and London Stock Exchange Group fell 13%.
And it didn’t stop there.
The Claude Cowork tool, launched in January, started this whole thing. Then Alphabet began rolling out Project Genie, which creates game worlds from text or images, and that dragged down even video-game stocks.
The S&P North American software index has now fallen for three straight weeks, ending January with a 15% loss, the worst since October 2008.
“I ask clients, ‘What’s your hold-your-nose level?’ and even with all the capitulation, I haven’t heard any conviction on where that is,” Jeffrey said. “People are just selling everything and don’t care about the price.”
Right now, Microsoft is still considered a favorite by most analysts, with 96% rating it a buy. But that didn’t stop the stock from taking a hit after Stifel broke ranks.
The downgrade, the weak Azure growth, the ballooning AI costs, and the wider software crash have all collided. It’s no longer just about Microsoft. It’s about whether software itself is still a safe bet in a world where AI is getting faster, cheaper, and scarier.