With Microsoft’s (NASDAQ:MSFT) Xbox Series X video game showcase on July 23, investors were hoping to get an eye for what the next generation of console gaming might entail. They were hoping for jaw-dropping graphics and mind-bending exclusive games that would help set Microsoft’s console apart from its key gaming competitors Sony (NYSE:SNE) and Nintendo (OTCMKTS:NTDOY). Investors were also hoping for a reason to further justify the case for MSFT stock as a video game play.
Unfortunately, the video game showcase manged to dispel much of the initial hype behind the console heading into its holiday-season debut. Within the two-day span after the showcase, MSFT stock fell nearly 5%.
The reasons for this disappointment are nuanced, but to summarize the complaints, the graphics were underwhelming and the number of true, AAA “next generation” titles was minuscule.
Specifically, gamers lambasted the bland visuals for its premier title, Halo: Infinite. Although this is only one game, the Halo series has long been the ace up Microsoft’s sleeve. Those exclusive games often could justify purchasing its consoles over Sony’s PlayStation systems.
The fact that it failed to impress also diminishes some people’s faith that next-generation consoles offer a huge leap in power from previous generations. While this critique might be shortsighted — the truly stunning games often come as a console matures — it certainly reflects the possible sentiment of many heading into the holiday season.
A Problem for MSFT Stock?
After viewing the video game showcase, many gamers are likely wondering, what’s the rush?
In this novel coronavirus world, where saving money is even more important than before, why should gamers buy a new console if most of the games it offers are still playable on the previous generations’ Xbox consoles? Seemingly contradicting the point about money-saving is the fact that Xbox hardware sales have unexpectedly increased 49% year over year, likely due to widespread stay-at-home initiatives. But, again, if they just bought a system, why would they buy the new console at launch a few months later?
Also consider that its current exclusive titles don’t offer an impressive leap in visuals or gameplay innovation.
The simple and honest answer is that right now, there isn’t much reason to rush out and buy a new Xbox Series X upon release. That wasn’t as clear up until the showcase, which mainly featured indie games over the AAA titles that truly draw people in.
But when looking at how this ties into MSFT stock as a video game play, it’s important to look at the big picture. We need to understand both its short-term and long-term gaming prospects before giving up on its potential completely.
Setting More Realistic Expectations
There’s a reason why we shouldn’t expect too much from the Xbox Series X when it first comes out. This is clearer when you examine how technological advancements through each console generation have created an environment that’s more conducive to a lackluster console launch than prior generations (at least in terms of visual fidelity and justifiable consumer excitement).
As an example, consider the leap in graphics in the Halo series between the Xbox and Xbox 360; then Xbox One and Xbox Series X. While the newer games undoubtedly look the best out of the bunch, the greatest overall leap in visuals is arguably from Halo: Combat Evolved on the Xbox to Halo 3 on the Xbox 360. The textures, lighting and resolutions all improved with each update, but not as starkly as it did between those two titles … those two console generations.
Looking at the difference between the games in the current generation and the upcoming Halo title for the next generation, the leap isn’t as immediately clear.
The reason for the Xbox Series X’s less apparent leap in visuals and seemingly lackluster content offerings is multifaceted:
- The games in the upcoming generation, while emphasizing a boost in visual fidelity, also emphasize a massive increase in video game world scaling. We should expect that a new console’s power might not be fully advantaged until later in its lifecycle. As such, I’d argue that we will see some new games push massive world sizes, while retaining more familiar levels of visual fidelity (this seems to be the case with Halo: Infinite).
- In the most recent console generation, consoles have essentially become glorified PC’s (though they’re actually less powerful), where there are varying levels of power and scalability.
- As a consequence, and with the increasing popularity of gaming in general, there are seemingly less system-exclusive titles now and more cross-platform games heading into the new generation of consoles; if it can run on more than one system, why make it a true “exclusive”? Halo: Infinite is slated for release on the PC and Xbox One too, despite being promoted as a the premier Xbox Series X game. Don’t expect true “next-gen” games until developers stop making games for the older consoles.
- This also intertwines with the movement towards streaming games on cloud systems and subscription-based models. If a new game is touted as part of a package deal that the company wants to promote, the package itself steals the spotlight. While this isn’t necessarily a detriment, it might further promote the perception that there are fewer exclusive games.
Putting It All Into Perspective
This isn’t to say that investors never should have had hope for the Xbox Series X as a catalyst for MSFT stock. Rather, the time horizon for its success might be more expansive than they think. There’s room for initial disappointment, as reflected in the reaction to the game showcase. This is particularly true when you consider that the global pandemic has put many in a financial bind.
The changes in consoles between generations used to be far more significant. As a gamer growing up in the age of the PlayStation and N64, I got to witness first-hand the development of increasingly more believable worlds and mind-melting variations of reality with each progressive console. But with each advancement came greater expectations, and now it’s much more difficult to be truly impressed as a gamer.
Thankfully, if you’re reading this, you’re likely an investor who is considering buying MSFT stock — and not necessarily a gamer.
There are plenty of other reasons to consider buying Microsoft than its gaming unit alone. While my enthusiasm for the Xbox Series X is less profound than before, many consumers will likely pick it up this holiday season. And Microsoft’s gaming segment has proved much more profitable than expected in the post-coronavirus world, which gives reason for excitement.
Furthermore, poor initial impressions don’t necessarily mean it won’t prove highly successful in the long term. Take Sony’s PlayStation 3 as an example. It took quite some time for it to get its footing.
However, the unexpected 49% increase in hardware sales for old Xbox systems leaves room for concern for the Xbox Series X’s short-term prospects. Ultimately, after viewing the video game showcase, I’d at the very least consider dampening sales expectations for the Xbox Series X’s debut.
Robert Waldo has been a web editor for InvestorPlace.com since 2016. As of this writing, he did not hold a position in any of the aforementioned securities.
