By Mackenzie Tatananni

Microsoft stock got a rare downgrade Thursday as one analyst contended that revenue and earnings expectations for the tech behemoth were far too optimistic.

Stifel analyst Brad Reback cut his rating on the shares to Hold from Buy with a $392 price target, down from $540 previously -- a 27% decrease.

Microsoft stock fell 3.9% to $397.98 Thursday as a sweeping selloff in software stocks entered its third day. Reback's new price target suggests the stock could fall an additional 1.5%.

The downgrade makes Reback a rare dissenting voice on Wall Street. Of 64 analysts polled by FactSet, 60 rate the stock at Buy or the equivalent. The remaining four, Reback included, rate it at Hold.

To support his reasoning, Reback pointed to "well-documented Azure supply issues" -- a reference to the ongoing data center capacity shortages and server constraints that are projected to persist into 2026.

And then there's the matter of Microsoft's competitive positioning in the market for artificial-intelligence tools and services. Alphabet-owned Google reported strong Google Cloud Platform and Gemini results along with fourth-quarter earnings on Wednesday.

Google Cloud, in particular, was a standout. The business brought in $17.7 billion in revenue, up 48% from the prior year and ahead of Wall Street forecasts. Operating margins also increased, unlike some other cloud providers.

And then there's the AI firm Anthropic, which is steadily gaining momentum. Anthropic's new AI tool tailored to legal work sparked a massive selloff across software and tech services stocks earlier this week, mirroring the DeepSeek panic of February 2025.

With all these factors taken into consideration, Reback believes Azure revenue acceleration is "unlikely" in the near term and likely will be tamped down by supply constraints and competitive pressure.

While Azure revenue climbed 39% in Microsoft's fiscal second quarter, beating analysts' estimates, the figure marked a slight deceleration from 40% growth in the previous quarter.

Additionally, 2027 is expected to have less in-period revenue recognition than 2026, which benefitted from several product cycles, the analyst wrote.

While Microsoft remains well-positioned over the long term to navigate the AI landscape, "the near-term prospects seem a bit more cloudy as Google appears to be rapidly gaining AI share," Reback wrote.

He noted that Microsoft's relationship with OpenAI "is not nearly as additive as it once was" either.

After years of what he calls "tremendous (operating expenditure) discipline," Microsoft appears to be entering a "new, albeit still efficient" spending phase to work on its AI tools, which will likely weigh on operating margins.

However, this strategy has yet to bear fruit. From a "pure numbers perspective," Reback doesn't expect the stock to re-rate until capital expenditure growth slows below Azure's growth, or Azure revenue increases significantly. It's "time for a break," he wrote.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 05, 2026 15:31 ET (20:31 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.