Melius Downgrades Microsoft to Hold Citing AI Capex Pressures and Valuation Concerns

Group 1 - Melius downgraded Microsoft from Buy to Hold due to increasing competitive threats from AI and rising capital expenditure requirements [1] - Microsoft's 365 business is under pressure from AI-driven competitors, requiring higher capital spending to compete with firms like Alphabet and Amazon [2] - Higher investment levels could negatively impact free cash flow, while insufficient spending may indicate execution challenges or earnings management [2] Group 2 - Concerns were raised about long-term assumptions regarding OpenAI, with doubts about its ability to generate free cash flow compared to competitors like Anthropic and Google [3] - Melius suggested that public investors might push OpenAI towards a less capital-intensive model in the future [3] - Microsoft is currently trading at approximately 49 times FY27 enterprise value to free cash flow, indicating it may be overvalued based on revised estimates [4] Group 3 - Melius lowered its price target for Microsoft to $430 and set Oracle's target at $160, while reiterating a Sell rating on Adobe [4]