The market was on fire yesterday, as receding omicron fears and renewed hope for the Build Back Better bill took stocks largely higher. With all the exciting moves in beaten-down cyclical stocks and small caps, another big story — actually — two stories — around megacap tech star Microsoft (NASDAQ:MSFT) may have slipped under your radar. The headlines were consequential not only in an of themselves, but also for what they mean for Microsoft’s growth prospects.
One big acquisition approval, and another announcement
On Tuesday, the European Commission gave its approval for Microsoft’s pending deal with Nuance Communications (NASDAQ:NUAN). Microsoft had announced the $16 billion Nuance deal back in April, but its prospects were never totally assured. Microsoft is a large and powerful tech stock, which means antitrust concerns are always a danger for any deal — especially large ones. The Nuance deal is Microsoft’s second largest, after the LinkedIn acquisition in 2016.
Image source: Getty Images.
But it appears Microsoft knows what it’s doing when it targets a company. It was notably absent last year, when the CEOs of most FAANG stocks had to testify before Congress about their market power. And Europe has been especially tough on large tech companies in recent years, even more so than the United States.
Still, the commission came to the conclusion that the Nuance acquisition would not materially decrease competition in the artificial-intelligence (AI) space in healthcare. Now, with the merger set to go through, look for Nuance’s AI capabilities to bolster Microsoft’s already-strong health cloud services.
At the time of merger, CEO Satya Nadella said:
Nuance provides the AI layer at the healthcare point of delivery and is a pioneer in the real-world application of enterprise AI. AI is technology’s most important priority, and healthcare is its most urgent application. Together, with our partner ecosystem, we will put advanced AI solutions into the hands of professionals everywhere to drive better decision-making and create more meaningful connections, as we accelerate the growth of Microsoft Cloud for Healthcare and Nuance.
Microsoft has been able to maintain impressive cloud growth with the introduction of industry-specific clouds over the past two years. It appears Nuance will fill some gaps in Microsoft’s healthcare capabilities.
With the ability to still make large and consequential acquisitions, Microsoft appears to have an advantage over some competitors who seem to be drawing more antitrust scrutiny, for whatever reason. That ability could allow it to keep up growth for longer than skeptics may believe.
And another acquisition announcement for good measure
On the heels of that good news, Microsoft wasted no time in announcing yet another acquisition. This time, Microsoft will be acquiring digital ad technology firm Xandr from AT&T (NYSE:T). Xandr is a result of AT&T’s merging its own digital ad capabilities with AppNexus, a programmatic ad firm it acquired for $1.6 billion back in 2018.
AT&T had hoped to build Xandr into a programmatic ad powerhouse, but apparently the scale was not sufficient to justify keeping it around. AT&T has been looking to sell noncore assets of late, to pay down debt ahead of its spinoff-and-merger of WarnerMedia with Discovery (NASDAQ:DISCA) (NASDAQ:DISCK). The terms of the deal weren’t disclosed, so we don’t know how much Microsoft will be paying.
In a statement, Microsoft’s president of web experiences Mikhail Parakhin said:
With Xandr’s talent and technology, Microsoft can accelerate the delivery of its digital advertising and retail media solutions, shaping tomorrow’s digital ad marketplace into one that respects consumer privacy preferences, understands publishers’ relationships with consumers and helps advertisers meet their goals.
It’s likely that Microsoft will look to fold Xandr in with Bing, its second-place search engine, in an attempt to create better programmatic and AI-driven advertising capabilities. Bing is often an afterthought for Microsoft investors, but don’t tell that to management. Microsoft appears set on growing its digital ad capabilities to compete with the dominant digital-ad “walled gardens,” especially as privacy restrictions may open up a competitive opportunity.
While many would settle for Microsoft’s enterprise software franchises alone, the tenacity to press forward in other growth areas is truly admirable, and music to the ears of this happy shareholder. If there are dangers to overdiversifying its business away from its core capabilities, as AT&T appears to have done, it hasn’t shown up in Microsoft’s financials.
Could there still be more gains ahead for Microsoft?
After rising 43% over the past 12 months, marking yet another market-beating year, and sitting just below all-time highs at $327 per share, Microsoft may have investors wondering if the company can keep up its streak. After all, it’s harder to grow fast the bigger you get.
However, people were saying that several years ago about Microsoft, when the share price was still in the double digits. Revenue in several of its core franchises remains high, and these two new acquisitions show management’s tenacity in pursuing growth across its entire impressive portfolio.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.