Melius Research moved Microsoft Corporation (MSFT) off its Buy list and into a Hold position on Monday, citing doubts about the company’s ability to remain competitive in the rapidly evolving artificial intelligence market without materially increasing capital expenditures.
In its update, the research firm lowered its Microsoft price objective to $430. It also left an Oracle target unchanged at $160 and reiterated a Sell rating on Adobe.
The Melius note raises specific concerns that Microsoft’s core 365 productivity business is vulnerable to AI-driven disruption and that defending or advancing its position will likely require significantly higher spending on data centers and infrastructure. That potential increase in capital expenditures could weigh on Microsoft’s free cash flow, according to the firm.
Melius pointed to competitive pressure from Google, noting the peer’s robust market performance and growth metrics. The research commentary cited a 74.88% price return for Google over the past year alongside revenue growth of 15.09%. The firm also referenced balance sheet and valuation metrics indicating Google has more cash than debt and a PEG ratio of 0.86 - data Melius used to underscore Google’s financial flexibility and relative valuation.
The analyst added that if Microsoft opts not to accelerate spending now, that choice could be interpreted two ways - either as an execution problem or as an effort to manage reported earnings - neither of which the firm views as constructive for Microsoft’s medium-term outlook.
On valuation, Melius said Microsoft appears expensive under its revised free cash flow projections. The note states the company trades at 49 times fiscal year 2027 enterprise value to free cash flow based on the firm’s updated estimates, a metric Melius uses to argue that current market pricing may already reflect high expectations for future cash generation.
Beyond Microsoft, Melius maintained coverage stances across other technology names. It held Oracle’s price target at $160 and kept a Sell recommendation on Adobe, though no further detail on those ratings was supplied in the note excerpt.
In adjacent industry developments, Alphabet Inc. reported an acceleration in total revenue of 18% in the fourth quarter of 2025, beating expectations. Piper Sandler observed that Alphabet’s EBITDA was roughly 2% above forecasts, while BMO Capital highlighted topline upside driven by a 3% beat on Search revenue and an 8% beat on Google Cloud.
Following the results, several firms adjusted their targets for Alphabet. BMO raised its price target to $400 from $343, and Piper Sandler lifted its target to $395 from $365, with both maintaining positive ratings. KeyBanc Capital Markets also increased its target to $370, citing Alphabet’s sizable capital expenditures in Google Services and Google Cloud.
Alphabet’s internal initiatives were also noted. Waymo is integrating DeepMind’s Genie 3 AI model to construct virtual environments used to train its autonomous driving systems, a step the company says should help accelerate the development and scaling of its self-driving capabilities across markets. Separately, TotalEnergies has entered agreements to supply 1 gigawatt of solar capacity to Google’s data centers in Texas, with construction slated to begin in the second quarter of this year.
The Melius downgrade frames a competitive and capital-intensive landscape for large cloud and platform operators. The firm’s view centers on two linked variables - the need to invest heavily to remain competitive on AI-enabled services, and the valuation premium already priced into Microsoft shares relative to its own long-term free cash flow forecasts.
Investors tracking enterprise software, cloud infrastructure, and broader technology capital expenditure cycles may find the note relevant for assessing how spending decisions could influence margin and cash flow trajectories across the sector.