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    Microsoft is as blue chip as it gets — looks for next acquisition to accelerate growth

    Victor Lei — Head of Research

    Victor Lei — Head of Research

    April 5, 2021

    Source: Giphy

    April 5, 2021

    How fast can a gorilla that weighs $1.8t grow? Let’s find out…

    On Apr. 1, Microsoft was awarded a $21.9b contract to supply the US army with AR headsets over 10 years. Despite being a massive contract, Microsoft’s stock only moved up 4%.

    For a company that did over $150b sales in 2020, a contract potentially worth $2.2b/year barely moves the needle.

    Big spender Microsoft, is looking for its next purchase

    In the past 6 months, Microsoft…

    • Tried acquiring TikTok’s US division and Pinterest ($PINS) — which failed to reach a deal.
    • Is in early talks to acquire Discord (potentially valued at over $10b) but is likely to go public instead — as reported by Bloomberg.

    With over 140m users, Discord would be a big boost for Microsoft’s COVID-accelerated gaming division. In Microsoft’s recent quarter, gaming sales became its 2nd fastest-growing unit (right behind its cloud division).

    Just how important is gaming for Microsoft?

    CEO, Satya Nadella, might be tired of being in second place in the console wars. For the past two decades, Microsoft’s Xbox console sales were behind each of Sony’s Playstation consoles… Change was needed.

    Instead of focusing only on the Xbox console, Microsoft began building an ecosystem around its gaming products — a strategy famously used by Apple with its iPhone:

    • Offering subscription services like Game Pass — a Netflix-like product for gaming.
    • Building cross-platform compatibility (i.e. games can be played on Xbox, PC or iPhone) — differentiating it from other gaming platforms.

    Discord would be the additional piece that adds a community component to its gaming ecosystem.

    For investors… Slow and steady

    As the second-largest company in the US by market cap ($1.8t — right behind Apple), Microsoft is as blue-chip as it gets. The larger you get, the harder it is to grow. While its stock has risen 35%/year in the past 5 years, achieving that same level of growth at its current size ($1.8t) will be much more difficult.

    But what you get with a larger, stable company is less volatility. As tech stocks crashed in Feb — bringing many down 30%+, Microsoft barely fell more than 7%.

    And that is the power of blue-chip stocks — greater stability during market chaos.

    Learn more: Microsoft went through a decade of poor returns, before taking off like a rocket in 2014

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