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
- 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.