Shares of Microsoft and Amazon faced significant pressure on Tuesday following a rare analyst downgrade and the launch of new European Union regulatory investigations. The dual setbacks have intensified concerns that the generative AI investment boom may be overheating, prompting investors to reassess stretched valuations and the sector's long-term profitability.
Rothschild & Co Redburn analyst Alexander Haissl downgraded both Microsoft and Amazon from 'buy' to 'neutral', marking his first downgrade since initiating coverage in 2022. Concurrently, the European Commission announced it had opened investigations to determine if Amazon Web Services (AWS) and Microsoft Azure should be designated as 'gatekeepers' under the Digital Markets Act (DMA).
In early trading, Microsoft's stock fell 3.2%, while Amazon's dropped nearly 4%. Haissl's report challenged the prevailing market consensus, stating the bull case for generative AI "looks increasingly misplaced" and arguing the sector's underlying economics are far weaker than widely assumed. He highlighted the heavy capital expenditure required for AI infrastructure, noting depreciation schedules for current-generation GPUs and servers assume a five-to-six-year economic life—far longer than in the early cloud era. This implies significantly higher capital intensity at a time when pricing power is limited.
The analyst's move contrasts sharply with the broader analyst community. According to Bloomberg data, over 90% of analysts covering both companies maintain buy-equivalent ratings, with none assigning sell recommendations. Rothschild & Co Redburn cut Microsoft's price target to $500 from $560 while keeping Amazon's unchanged at $250.
The EU's parallel announcement added a layer of regulatory uncertainty. Regulators are examining whether AWS and Azure operate as "important gateways" between businesses and consumers, a key test for gatekeeper designation, even though they do not meet formal user thresholds. Such a label would impose stricter obligations under the DMA. EU antitrust chief Teresa Ribera stated, "We will also look at whether the DMA’s existing rules need to be updated so Europe can keep pace with fast-evolving practices in the cloud sector."
A Microsoft spokesperson said the company was ready to contribute to the enquiry, while an AWS spokesperson argued that "designating cloud providers as gatekeepers isn’t worth the risks of stifling invention or raising costs for European companies."
In a related interview with Invezz, Kate Leaman, chief market analyst at AvaTrade, warned that Big Tech's capital expenditures on AI are growing much faster than revenue. She noted that aggregated capex by major hyperscaler tech firms is approaching record levels relative to their operating cash flow, with one estimate putting aggregate capex at roughly 60% of operating cash flow for Amazon, Google/Alphabet, Microsoft, and Meta. Analysts flag that unless revenue increases markedly, many of these companies could be reinvesting nearly all of their free cash flow into infrastructure within a few years.
Leaman also discussed Alphabet's record $155 billion cloud backlog driven by AI, calling it an encouraging signal but cautioning that a backlog is not the same as recognized revenue. She emphasized that the key differentiators for sustained growth will be capital-allocation discipline, enterprise adoption, and the ability to navigate increasing regulatory scrutiny around data privacy and AI governance.
