There has been a divergence in the fortunes of the “Magnificent 7” stocks this year. Tesla (TSLA), Alphabet (GOOG), and Apple (AAPL) are deep in the red for the year. Meta Platforms (META) continues to be the best performer, up 25%. Microsoft (MSFT) stock is the third-best performer in the group, up 19% and outperforming the market by a significant margin so far in 2025.

Microsoft is closing in a $4 trillion market cap and its shares are up nearly 30% in the past three months. 

In this article, we’ll discuss whether there’s still some steam left in Microsoft’s rally after the recent outperformance, beginning with examining some of the risks investors should watch out for.

Key Risks Microsoft Investors Should Watch

Microsoft is among the rare defensive plays in the tech space, with a less cyclical business and consistent and stable cash flows. Its revenue stream is diversified and spread across the core Windows and Office franchises, premium subscription products, advertising, cloud, gaming, and LinkedIn. However, there are some risks investors should watch out for: 

• Valuation: As Howard Marks’ famous quote says, “It's not what you buy, it's what you pay.” MSFT stock now trades at a forward price-earnings (P/E) multiple of 33.3x, which is higher than its historical averages. While I would argue that Microsoft has seen a re-rating, and long-term multiples are now somewhat obsolete, the stock even trades at a premium to the multiples we’ve seen over the last five years. While the valuations haven’t reached alarming levels yet, I find the margin of safety quite low at these levels.
• Evolving Relations with OpenAI: A partnership with OpenAI was expected to be an easy win for Microsoft, helping drive the performance of Bing and Edge, along with its cloud business. However, multiple reports discuss the souring relations between the two companies, and Microsoft is no longer the exclusive cloud computing supplier for OpenAI. There are also reports that OpenAI is seeking to cut Microsoft’s revenue share by half to 10% by 2030.
• AI Monetization: AI monetization remains another challenge for Microsoft, and markets are now more interested in return on investment. To be sure, Microsoft has taken a prudent approach and canceled some data center leases, which CEO Satya Nadella downplayed during the most recent earnings call, terming them as customary “adjustments” the company has been making over the years. However, in the coming quarters, the company will face increased scrutiny over its AI monetization plans.
• Antitrust Probes: The President Donald Trump administration has advanced the antitrust probe against Microsoft that was initiated under former President Joe Biden. Microsoft faces antitrust probes in other jurisdictions, particularly in Europe, and these remain a headwind for the tech giant.

MSFT Stock Forecast

While Microsoft has a consensus rating of “Strong Buy,” its mean target price of $528.88 is just about 6.5% higher than the July 8 closing price. The company will release its fiscal Q4 2025 earnings on July 29, and analysts will likely revise their targets following the reveal. 

Should You Buy Microsoft Stock Now?

I believe Microsoft is a strong contender to join the $4 trillion club. The company brings the best of both worlds to the table as on one hand, it is a defensive play and relatively immune to macro shocks ranging from geopolitical tensions, tariff tantrums, and economic slowdowns. On the other hand, AI could help drive earnings growth over the medium to long term.

However, the company’s earnings are expected to grow by just over 12% in the next fiscal year, which does not look encouraging considering the current valuation. While AI might help drive long-term earnings growth, in the short term, it is hitting tech companies’ bottom lines in the form of higher depreciation.

Overall, given where MSFT stock trades now, I don’t find the near-term risk-return equation too favorable. While I won't sell any of my MSFT shares yet, I won’t be adding to my existing positions and would rather wait it out for a better entry point.