Wolfe trims Microsoft price target to $525 on higher AI-related capex outlook

Microsoft shares faced a fresh round of scrutiny after Wolfe Research cut its price target to $525 from $570, while keeping an Outperform rating. The change was tied less to near-term demand expectations and more to cost estimates for building out artificial intelligence infrastructure, according to the note discussed in market coverage on Monday.

Wolfe said it has raised its fiscal 2027 capital expenditure forecast to $270 billion from $230 billion. The firm pointed to surging memory prices as the key driver behind the higher spending assumptions, reflecting how expensive components can quickly flow through to total system build costs for data-center capacity.

That capex revision cascaded into Wolfe’s cash flow model. The firm now expects fiscal 2027 free cash flow of negative $17.4 billion, a sharp move from its prior view of roughly $14.7 billion positive, and a significant gap versus consensus referenced in the coverage.

Wolfe also trimmed parts of its profitability and earnings outlook for fiscal 2027. The note lowered its gross margin projection to 63.1% from 64.0%, and reduced its fiscal 2027 EPS estimate by about 1% to $19.02, according to the figures summarized in the market report.

Even with the valuation and forecast cuts, Wolfe’s message was not purely bearish. The note continued to expect Azure growth to run ahead of consensus in fiscal 2027 and fiscal 2028, framing Azure as an area where demand could help offset the near-term pressure from higher investment intensity.

The memory-cost angle matters because AI systems require large volumes of compute and memory to process training and inference workloads. When memory becomes more expensive, it can raise the economics of future infrastructure plans, and analysts often translate those changes into higher capex, lower margins, and revised cash flow paths.

What Wolfe did not appear to disclose in the coverage was any specific timing for when the higher capex would translate into measurable profit improvements, or the extent to which Microsoft could pass through component cost pressures into pricing. The reported details also do not include a revised set of revenue forecasts, leaving investors to infer how the firm reconciles higher spending with continued Azure growth.

As investors digest the implications, the next datapoints to watch are Microsoft’s own commentary on data-center buildout economics and component cost trends, as well as further analyst updates that test whether the market’s expectations for AI-related infrastructure spending align with Wolfe’s steeper fiscal 2027 capex assumptions.