Stifel Cuts Microsoft Target to $400, Flags Margin Risk

Stifel analyst Brad Reback lowered his price target on Microsoft to $400, citing rising capital spending to expand Azure’s AI infrastructure and the risk of substantial margin compression. Microsoft shares fell to a 52-week low and the stock’s relative strength index dropped into the late 20s. The shares are down more than 25% year-to-date.

In a research note, Reback wrote that current Street estimates understate costs tied to scaling Azure. He projected Microsoft’s gross margin in fiscal 2027 could fall about 450 basis points year-over-year to roughly 63%, versus the consensus forecast of about 66.5%. Reback attributed the decline mainly to higher depreciation and operating costs from building, cooling and maintaining specialized data centers for AI workloads.

Stifel also flagged fiscal 2027 earnings and free cash flow as weaker than consensus. The firm estimated consensus EPS for FY27 may be overstated by about $1; Wall Street currently expects roughly $19.45 per share. Stifel cited growing finance lease obligations and expected upper single-digit operating expense growth as drivers of the gap.

Reback highlighted a steady decline in Microsoft’s organic free cash flow and wrote that if free cash flow does not rebound in FY27, the company’s ability to fund rising dividends and large share buybacks would be constrained.

The research note noted Microsoft shares are trading below their major moving averages, a technical setup that supports a short-term bearish view. The low RSI could prompt some traders to look for a near-term bounce, but the analyst urged caution for investors expecting an immediate recovery.

Stifel placed Microsoft’s outlook in the context of a broader shift across cloud and enterprise software companies toward greater emphasis on cash returns and margin sustainability. The note referenced Microsoft’s $37 billion annualized AI run rate and said supporting rapid AI growth could require much larger annual capital expenditures.

The analyst wrote that Microsoft needs to show products such as Copilot and Azure AI can convert into higher-margin, recurring software revenue rather than remain capital-intensive services. Microsoft did not provide a comment on the Stifel note.