On Wednesday, March 24, Microsoft (NASDAQ:MSFT) sent market commentators into a frenzy with a potential $10 billion acquisition of video game chat platform Discord. On the surface, many called it a social play. But, it’s much more than that, and there’s plenty of reason to be hyped about MSFT stock moving forward.
In fact, if this deal goes through, it could be one of Microsoft’s smartest business moves ever. It would shift the company into overdrive in two of tech’s fastest growing markets: digital transformation and cloud computing. That makes now the perfect time to buy Microsoft stock.
The company is flush with cash and ready to make bold moves. Here’s a deeper look at what makes MSFT stock more appealing with the Discord acquisition.
Discord: It’s Not Just Fun and Games
Founder Jason Citron started Discord 6 years ago as a tool to help gamers connect. The free-wheeling company was among the first to tap into voice, video and text chatting for gamers. Microsoft was an early believer, announcing support for Discord on its Xbox Live servers in 2018. But Discord does much more than simply gather gamers. It’s a hotspot for all sorts of community interests. Even businesses are using the technology for seamless collaboration.
Discord’s multi-pronged strategy only became apparent on Tuesday, when Microsoft put in a $10 billion bid for the six-year-old company. That’s because Microsoft isn’t buying Discord for social reasons alone. Instead, the company is likely going to use Discord to rejuvenate its product lineup in a way that Skype and LinkedIn never could have. This acquisition is a potential keystone in Microsoft’s expansion into a $141 billion market that covers social, business tools and cloud computing.
A Digital Transformation Story Takes Shape
An acquisition of Discord would be a pivotal feather in Microsoft’s digital transformation cap, one of the company’s biggest growth areas. Almost every business is implementing collaboration and workplace tools to improve engagement and boost workers’ speed and productivity beyond the desk. While Microsoft has done well with its Teams collaboration app, which claims over 115 million daily active users, it has been no match for competitors Slack (NYSE:WORK) and Zoom (NASDAQ:ZM). These companies, which clearly capitalized on work from home trends, saw revenues grow 57% and almost 400%, respectively.
Microsoft, on the other hand, can’t afford another miss.
While the company essentially dominates the desktop operating system (OS) market, with 80% share, its PC business is dying a slow death to the smartphone. The Discord acquisition gives Microsoft a massive jolt of over 140 million users. With some tweaks, Discord can become the glue that makes Microsoft’s existing business solutions more interactive. And with Slack’s valuation now topping $23 billion, it’s clear that the business market is important — and growing.
Discord is especially well-suited for small and mid-sized team-oriented businesses who are looking to enhance productivity through real-time communication and file sharing. It’s faster and more intuitive than Microsoft Teams. And, it’s much better than Skype and Xbox Live at texting, audio quality and general user-friendliness.
Battling Amazon in the Cloud
The Discord acquisition would also add luster to the crown jewel in Microsoft’s portfolio: cloud computing. Cloud is Microsoft’s largest and fastest-growing business, taking in $59 billion last year and growing an incredible 34%. The company’s Azure platform allows businesses to manage their applications through Microsoft-managed data centers to reduce cost and complexity.
While Amazon dominates this market, with roughly 30% share, MSFT wants to change that. In fact, Microsoft’s Cloud business actually outgrew Amazon’s (NASDAQ:AMZN) Web Services (AWS) business last year. The combination of Azure, Office and other applications could close the gap.
Microsoft has done exceptionally well at migrating its existing customers, many of which are still managing their networks the old fashioned way, to Azure. If Microsoft were to buy Discord, it could move the company’s servers onto its Azure Cloud platform and turn it into a paid subscription offering. That move would bring the company a tidal wave of new customers generating video, voice and file-sharing traffic. This move would also cut out Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), which is currently supporting Discord’s cloud infrastructure.
Lots of Growth Levers Make MSFT Stock a Buy and Hold
With a massive cash hoard of over $132 billion and over $50 billion of free cash flow, Microsoft has ample firepower to make a big growth acquisition. Even if MSFT’s acquisition of Discord falls through, the company has the wind at its back. Having grown around 8% on average over the last decade, the company should see growth ramp up to around 12% or more as it rides two massive, multi-year investment cycles in cloud and digital transformation.
With MSFT stock trading at 32x forward earnings, essentially in line with earnings growth, its valuation looks very reasonable. And despite a volatile market for tech stocks,the stock has held up well, up 6% year-to-date versus a 2% gain for the S&P 500 over the same period.
This is a stock to buy and hold and not worry about.
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.