Microsoft’s rating was downgraded twice in less than a week, with warnings about risks related to artificial intelligence.

As Wall Street grows increasingly wary of the potential disruption that artificial intelligence may bring to software stocks, Microsoft’s shares have been downgraded for the second time in less than a week.

On Monday, Melius Research downgraded Microsoft from "Buy" to "Hold," citing concerns about capital expenditures (capex) and products branded under Copilot. Copilot is Microsoft’s main vehicle for selling AI software tools to office professionals. Previously, late last week, Stifel made a similar downgrade, with analysts warning that Microsoft Azure’s cloud computing business faced concerns over its growth rate.

Melius analyst Ben Reitzes wrote in a report: "With the emergence of products like Anthropic's Cowork, Microsoft’s powerful 365 suite may be challenged, and may even have to offer Copilot for free to maintain relevance, which would harm the growth and profit margins of its most lucrative productivity segment. This reality could also consume internal resources from Azure, thereby limiting the business's upside potential."

The downgrade comes amid growing investor unease over the long-term prospects of the entire software sector. AI tools from companies such as Anthropic are seen as important disruptive forces and could pose long-term or even permanent headwinds to growth. Goldman Sachs’s basket of software stocks has fallen more than 14% since late January.

Nevertheless, Microsoft’s shares rose as much as 2.4% on Monday, but are still down more than 24% from their high in October last year.

The weakness in share price largely stems from Microsoft’s earnings released earlier this month. Due to analyst concerns over Azure cloud business growth slowing and the company’s massive investments in AI, Microsoft shares suffered a historic sell-off at the time.

In Reitzes’s view, Microsoft is in a “dilemma”: To catch up with Alphabet and Amazon, the company must significantly increase capital expenditures, which means free cash flow may take another hit. But if it does not ramp up investments now, it may either reflect execution issues or efforts to manage profit performance—neither of which are good.

Reitzes also voiced doubts over whether AI can ultimately deliver returns, saying, "We increasingly believe that there’s no such thing as paying extra for AI. Copilot may have to be bundled for free, thereby driving up costs in the long term."

Melius also lowered Microsoft’s target price to $430, one of the lowest targets on Wall Street.

Despite the downgrade, among analysts tracked by Bloomberg, about 96% still recommend buying Microsoft shares, with the rest giving a rating equivalent to “Hold,” and no analyst recommending a “Sell.” The average target price is slightly above $600, implying nearly 50% upside from the current share price.

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