BofA Merrill Lynch, which had maintained a "buy" rating on the stock since September 2008, said the Windows product cycle and stock buyback programs haven't given Microsoft the expected boost.
Shares of the Redmond, Washington-based company, dropped 0.5 percent to $28.42 at 8:41 a.m.
Analysts at BofA Merrill Lynch said their "buy" thesis had been predicated on an aggressive $40 billion share buyback program and the Windows 7 product cycle.
"We were hoping that [Microsoft] would make a bold foray with Windows 8 into smartphones and tablets," the analysts wrote in a note.
"Conventional product cycle wisdom dictates that the stock should peak before a Windows launch, but we remained optimistic because the limited availability of touch-based devices impaired an objective assessment of Windows 8.
"Now, six months post launch, despite more available touch-based devices, Windows 8 lacks momentum, challenging our optimism."
BofA Merrill Lynch also lowered its 2013 PC forecast to down 5 percent year-over-year from down 3 percent year-over-year following PC supply chain data that indicates weak trends.
Microsoft's price target was trimmed to $33.
The stock, with a market value of approximately $240 billion, has lost more than 11 percent in the past twelve months. It has 12 "strong buy", 11 "buy" and 15 "hold" recommendations by analysts, according to data provided by Thomson/First Call.