It took nearly two years, but Microsoft (MSFT 0.68%) finally got its mega-acquisition of top video game publisher Activision Blizzard (ATVI) across the finish line in October 2023. That means the new video game prize, added to the "Xbox content and services" segment, was contributing financially to Microsoft's latest quarter -- Q2 fiscal 2024, which corresponds to the fourth quarter of calendar year 2023.

The $69 billion paid for ATVI may be a massive sum to comprehend, but it actually barely showed up as a blip on Microsoft's financial statements. Nevertheless, it does make the Xbox and services segment an even larger force in the massive global video game industry. Does this make Microsoft stock a buy?

How did Microsoft come up with that kind of cash?

First, let's put this $69 billion into perspective, because for Microsoft, it's just not that much money.

At the end of June 2023 (the end of its last fiscal year), Microsoft had $111 billion in cash and short-term investments, plus another $9.9 billion in long-term investments. This was offset by $42 billion in long-term debt. Microsoft was stockpiling cash a bit ahead of the payday for ATVI shareholders, but such large figures aren't too far off from the norm.

Now, as of the end of calendar year 2023, Microsoft reported $81 billion in cash and short-term investments, offset by total debt of $72 billion (a $27 billion short-term loan was taken out to help pay for ATVI, adding to the now $45 billion in long-term debt on the balance sheet).

ATVI certainly put a dent in the balance sheet, but the payout certainly won't set Microsoft back for very long.

MSFT Cash and Short Term Investments (Quarterly) Chart

Data by YCharts.

The reason? Microsoft generates massive amounts of free cash flow (FCF) from its software empire -- more than $67 billion (or an FCF profit margin of 29%) in the last 12 months alone. In other words, Microsoft could acquire an ATVI-sized business every single year if it wanted, and would have its coffers replenished by the year following, at the rate it's been cranking out cash.

Are video games a reason to buy Microsoft stock?

In its last quarterly update before takeover (Q2 2023), ATVI reported a big jump in its own financial activity. Revenue rose 35% year over year to $2.21 billion, and $567 million in free cash flow. Not bad.

But even when added to the Xbox segment, let alone Microsoft overall, ATVI just isn't that big. Microsoft's management said that Xbox segment revenue was up 61% year over year in the final months of 2023, compared to a year ago when there was no ATVI.

And on the earnings call, CFO Amy Hood said ATVI added four points to Microsoft's reported year-over-year revenue growth rate of 18% (so, Microsoft would have grown 14% year over year without ATVI).

Of course, as the video game industry undergoes change from the ongoing mobile and cloud revolution, ATVI will fit well into Microsoft's overall cloud computing infrastructure and software distribution capabilities.

But the point is ultimately this: As big as the ATVI purchase may sound, it's actually a very small piece of the sprawling Microsoft empire.

Instead of buying Microsoft stock for ATVI, focus instead on the "Intelligent Cloud" segment, which grew 20% year over year to $25.9 billion (or 42% of revenue). Now that's a reason to buy and hold Microsoft stock right now, and the key reason why the market is keeping the stock near all-time highs in spite of shares trading for a high premium of 30 times one-year-forward earnings.

Another decade of cloud industry (with a new AI twist) growth lays ahead, and Microsoft is delivering the goods.