Evercore ISI analyst Kirk Materne was arguably overselling him when he suggested entering a Microsoft (NASDAQ:MSFT) because of its opportunity to grow within the video game industry. There are many other great reasons to own MSFT stocks. Indeed, video games remain a relatively small part of the software giant’s total activity.
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Nonetheless, his point is well taken. Despite everything Microsoft has already done to carve out a share of the video game market, what happens in 2020 could actually be a game-changer.
Rival Sony (NYSE:END) has also already hinted at its next entry into the race, with its next-gen PlayStation console packed with impressive specs. Alphabet (NASDAQ:GOOGL) is also entering the fray, skipping console development altogether and handling all intensive game processing remotely from the cloud. Next year might just be the year, however, one company puts its finger right on the pulse of what the video game market wants.
Scarlett Project
In terms the average teenage gamer would understand, the next generation of Microsoft’s Xbox series looks like it’s gonna be a “beast”. Powered by graphics hardware based on Zen 2 and Radeon from Advanced micro-systems (NASDAQ:AMD), the console that will be released at the end of next year will offer 8K graphics and frame rates of up to 120 per second. It’s a level of visual detail that borders on perfection. The still unnamed console, simply referred to as Project Scarlett for now, will also use SSDs.
All in all, Microsoft described the console in development as being four times more powerful than the Xbox One X, which is the last choice commercially available in its franchise.
The specs largely mirror those Sony touted for its next-gen PlayStation, which is also expected to be available at the end of next year. Microsoft is arguably doing more to attract more players to its ecosystem. Namely, the company is strengthening its game streaming offering.
Although subject to a name change, what is currently called xCloud will allow players to stream games from their consoles to other devices including phones and tablets.
At the same time, Microsoft is adding another level to its existing Game Pass service. Called Xbox Game Pass Ultimate, which is mostly a combination of Xbox Live Gold and the familiar Game Pass. The new product works for PC games as well as console games.
And yet, as forward-thinking Microsoft’s gaming efforts may be, the company is also backsliding … as when it comes to compatibility.
Although he did not clarify exactly what constitutes a “generation”, the the company’s presentation at this year’s E3 event said “Thousands of games across four generations of consoles will look and perform better on Project Scarlett.” In other words, old game discs that wouldn’t normally be playable on new hardware will now be playable on new consoles, relieving gamers who don’t want to rebuild a whole new game library.
Effect on MSFT shares
Even though Project Scarlett is a runaway success, it is unlikely to increase the value of MSFT stock. It certainly won’t hurt though.
In its early days, Microsoft’s Xbox was seen more as an experience than a profit center. Designed to use its DirectX encoding which could not be fully realized with personal computers, it is unlikely that when the first Xbox was sold in 2001, the organization ever thought it would become the success it has become. .
But gaming is still only a small part of Microsoft’s total business.
Although it is difficult to unearth the details, the previous fiscal year (ending in June), the “More Personal Computing†division of the company generated $ 42.7 billion, or 38% of its turnover of 110.4 billion dollars. This division, however, also includes sales of its Windows operating system, the Windows business product and the cloud product, search engine revenue and sales revenue from its Surface line of tablets. That’s a lot of different industries that make up a relatively small part of the revenue pie.
To its credit, sales of the More Personal Computing division increased by 8% last year, and last quarter gaming revenue increased 7%. Xbox software and services revenue was up 15% at constant currencies, in line with the 9% improvement in sales for the entire division. But, the game just doesn’t offer enough firepower to significantly move the dial for the business.
Nickels and dimes always add up.
Net income for MSFT shares
While this isn’t a strong enough reason to get into a stake, just because video games aren’t a game-changer for Microsoft doesn’t mean MSFT stock isn’t worth being. detained. He is. The company is crushing it with its cloud business, and Wedbush analyst Daniel Ives recently touted the idea that it was close the gap to Amazon (NASDAQ:AMZN) by winning a “bigger and more strategic†cloud business at the enterprise level. Its business productivity and networking platforms are also on the rise.
But the game? For better or worse, video games are a low-impact business for Microsoft’s software icon and stock investors.
As of this writing, James Brumley held a long position in Alphabet. You can learn more about James on his site, jamesbrumley.com, Where follow him on twitter, at @jbrumley.
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