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Microsoft Stock (NASDAQ:MSFT): Don’t Underestimate Its Gaming Dominance

Enterprise behemoth Microsoft (NASDAQ:MSFT) is finding ways to resonate with consumers, whether it be through the infusion of new generative artificial intelligence (AI) products across its Windows 11 operating system or its newest entry into the AI PC market with Copilot+ PCs. However, after a strong showing at its latest Xbox Games Showcase event, it’s the Xbox segment that looks to hold the most promise as Microsoft delves deeper into the arena of consumer products.

Over time, Xbox could evolve to be a huge growth driver as AI and the cloud gradually enter the lobby, making me bullish on MSFT stock.

Undoubtedly, Windows has had mixed success in most forms of consumer hardware that aren’t gaming-related, with the Windows Phone and Hololens (Microsoft’s augmented-reality headset) products that fell flat on their face. Though Microsoft’s PC offerings (the Windows Surface) have experienced some success, I can’t say I have anything more than muted expectations for Microsoft’s new AI-ready Copilot+ PCs, especially since competition in AI laptops seems just too fierce.

With Apple (NASDAQ:AAPL) and Dell (NASDAQ:DELL) readying their AI laptop lineups for 2024 (Apple has already done so; it’s just waiting for the software), I just don’t see Microsoft gaining significant traction in the PC space, even though it’s one of the market’s top AI innovators. Perhaps a further push into gaming holds the most promise as Microsoft seeks to hit the spot with consumers, further expanding its reach beyond enterprise customers.

Xbox Is a Very Powerful Growth Driver

Xbox has the power to act as an on-ramp to new devices, services, and software. If anything, Xbox and related hardware, as well as Microsoft’s AI prowess, may hold the keys to unlocking next-generation gaming growth.

As Xbox looks to further dominate the gaming industry while making a potential long-term gravitation to the cloud, I’d not underestimate Microsoft’s gaming business as it grows to become a larger slice of the pie. Currently, Xbox, though a king in the video game market, is only the third-largest segment over at Microsoft. Indeed, Microsoft is a behemoth, but Office and the cloud take the top two spots in terms of sales, at least for the time being.

Over time, I see the tides turning, especially as Microsoft takes a more consumer-centric approach by offering consumers unprecedented value through its game subscription service, Xbox Game Pass, and its capable line of gaming consoles. The firm recently refreshed the Xbox lineup with a trio of new offerings that boast a new look but, more importantly, more storage space.

With a full pipeline of truly next-generation content on the horizon (2025 will be a big year after seeing what was in store during the Xbox Games Showcase), there hasn’t been a better time to do a mid-cycle refresh, especially considering the latest slate of games take up a ton of storage (the latest Call of Duty titles can easily eat up more than 120GB of space).

With no remarkable GPU enhancements, however, I wouldn’t get my hopes up for an Xbox super-cycle. The mid-cycle refresh probably won’t move the needle with storage as a top feature alone. In any case, Xbox seems to have the content pipeline to get consumers “hooked” on Game Pass for the long haul. It’s one of the best values in the subscription world, depending on who you ask.

As Xbox advances its cloud-gaming capabilities further, perhaps reducing latency with some AI smarts, Xbox Cloud Gaming may be the future of how we choose to play. Sure, playing on any device could eat into Xbox hardware sales. However, it opens the door to a world of gamers, those who are just casual players and those with limited means to purchase the latest tech. Further, Xbox has also made good use of the Azure cloud and AI to enhance realism in Microsoft Flight Simulator.

The video gaming market could hit more than almost $500 billion by 2031. And given that Xbox can squeeze its rivals in more ways than one, I’d argue that it’ll be able to grab a huge chunk of this market to itself. Considering that some of the most ambitious gaming projects require a colossal budget and risk management, Microsoft seems well-suited to continue increasing its industry dominance over time.

Xbox Games Showcase 2024 Flexes a Strong Release Pipeline

The major value proposition lies in the form of coming titles to be included on Xbox Game Pass on day one. The most notable among them has to be Call of Duty: Black Ops 6, a title coming from Microsoft’s Activision Blizzard acquisition, which closed last year. With a powerful 2024-25 release pipeline, perhaps the value of the Activision Blizzard deal will become better recognized by this time next year.

In any case, Microsoft seems to have more than its fair share of gaming IP with Activision Blizzard’s assets and talented employees brought aboard. The only question is if Microsoft is willing to take big risks by spending on innovation to “level up” next-generation titles.

Indeed, there’s a slew of new gameplay innovations coming to Black Ops 6, such as Omnimovement (360-degree movement capability) and Intelligent Movement (automating certain actions, which sounds like some form of predictive AI is involved in the background), among other long-overdue new features for the franchise.

Given this, it looks like Microsoft is committed to improving Activision Blizzard games. If anything, the acquisition breathes a new wave of innovation across franchises, some of which may have grown “stale” over the years.

Is MSFT Stock a Buy, According to Analysts?

On TipRanks, MSFT stock comes in as a Strong Buy. Out of 34 analyst ratings, there are 33 Buys and one Hold recommendation. The average MSFT stock price target is $498.29, implying upside potential of 12.6%. Analyst price targets range from a low of $450.00 per share to a high of $600.00 per share.

The Bottom Line

Don’t discount Xbox and the fast-moving gaming business, as it looks to take the lion’s share of a market that could grow considerably in the coming years. As Xbox enhances the value proposition and makes its Game Pass service stickier, look for new innovations, like AI and the cloud, to take gaming growth to the next level.

Disclosure 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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