3 Key Risks That Could Drag Down Microsoft Stock
Microsoft (MSFT) is facing threats. Even the biggest names aren’t invincible. Stocks can drop sharply without warning – wiping out months or years of gains in a matter of weeks. History shows that sudden market swings can hit any company, no matter how dominant it seems.
Specifically, we see these risks:
- Critical Over-Reliance on OpenAI for Future Growth
- Soaring Capital Expenditures with Declining Margins
- Stagnation and Decline in Legacy Segments
Risk 1: Critical Over-Reliance on OpenAI for Future Growth
- Microsoft Stock To $387?
- Microsoft Stock Drop Looks Sharp, But How Deep Can It Go?
- Microsoft’s $250 Billion Problem Has a Name: OpenAI
- A Decade of Rewards: $368 Bil From Microsoft Stock
- Microsoft Stock: Is the AI Investment Skepticism Justified?
- Triggers That Could Ignite the Next Rally In Microsoft Stock
- Details: Massive $281 billion revenue concentration from a single partner, Potential for significant downward EPS revision if OpenAI relationship sours or underperforms
- Segment Affected: Intelligent Cloud
- Potential Timeline: Immediate to next 2-3 quarters
- Evidence: CFO disclosed 45% of the $625 billion Commercial RPO is from OpenAI (Q2 2026 Earnings Call), Shareholder lawsuits being investigated over alleged misleading statements about this dependency (February 2026)
Risk 2: Soaring Capital Expenditures with Declining Margins
- Details: Negative impact on free cash flow despite revenue growth, Multiple compression as the market questions the ROI of massive AI spending
- Segment Affected: Company-Wide, particularly impacting Intelligent Cloud profitability
- Potential Timeline: Next 1-2 quarters as spending continues
- Evidence: Capital expenditures surged to $37.5 billion in a single quarter (Q2 2026 Earnings Call), Company-wide gross margin percentage declined year-over-year (Q2 2026 Earnings Call)
Risk 3: Stagnation and Decline in Legacy Segments
- Details: Drag on overall revenue growth, Valuation anchor as high-growth segments have to compensate for legacy weakness
- Segment Affected: More Personal Computing
- Potential Timeline: Ongoing, with potential for further deterioration in coming quarters
- Evidence: More Personal Computing segment revenue declined by 3% (Q2 2026 Earnings Call), Gaming revenue decreased by 9%, with Xbox content and services revenue down 5% (Q2 2026 Earnings Call)
What Is The Worst That Could Happen?
Looking at Microsoft’s risk in tough markets shows some eye-opening dips. It lost about 65% in the Dot-Com crash, nearly 58% in the Global Financial Crisis, and 37% during the inflation shock. Even smaller hits like the 2018 correction and the Covid slump wiped out roughly 18-28%.
Is Risk Showing Up In Financials Yet?
- Revenue Growth: 16.7% LTM and 14.4% last 3-year average.
- Cash Generation: Nearly 25.3% free cash flow margin and 46.7% operating margin LTM.
- Valuation: Microsoft stock trades at a P/E multiple of 25.8
| MSFT | S&P Median | |
|---|---|---|
| Sector | Information Technology | – |
| Industry | Systems Software | – |
| PE Ratio | 25.8 | 24.9 |
|
|
||
| LTM* Revenue Growth | 16.7% | 6.4% |
| 3Y Average Annual Revenue Growth | 14.4% | 5.7% |
|
|
||
| LTM* Operating Margin | 46.7% | 18.8% |
| 3Y Average Operating Margin | 45.3% | 18.3% |
| LTM* Free Cash Flow Margin | 25.3% | 14.0% |
*LTM: Last Twelve Months
If you want more details, read Buy or Sell MSFT Stock.
Portfolios Over Individual Stock Picks
Stocks soar and sink – the key is staying invested. A balanced portfolio helps you ride market volatility, boosts gains and reduces single stock risk
The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.