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Microsoft: Leveling Up to Become Netflix of Gaming

Enterprise behemoth Microsoft (MSFT) has been moving deeper into the consumer entertainment realm of late.

With the acquisition of Activision Blizzard (ATVI) in a deal of around $69 billion, it’s hard to ignore the firm’s Xbox gaming division, which now has one of the deepest content libraries in the video-gaming scene. Undoubtedly, gaming and consumer entertainment is not a new business for Microsoft, which has been in the industry for over two decades. The success of its Xbox console has been remarkable.

Amid supply chain constraints, though, not every hardcore gamer has been able to get the latest Series X console. Despite this, Microsoft is not just waiting around as it looks to take the gaming world by storm. I am bullish on MSFT stock, as video-gaming growth could be key to taking the sticky service revenues to the next level.

Microsoft Investing in the Future of Gaming

The company is running the risk of cannibalizing its Xbox hardware sales by investing considerable sums in its cloud-gaming platform Xbox Cloud Gaming. The platform follows in the footsteps of other players in the cloud-gaming arena, including Google Stadia by Alphabet (GOOG) and GeForce Now of Nvidia (NVDA).

There have been a growing number of firms looking to build gaming consoles in the cloud. Making PC-level gaming more accessible to wider audiences across a wider range of devices is the ultimate goal.

However, the biggest differentiating factor has arguably been the availability of high-quality content. Google pulled the plug on its exclusive releases for Stadia last year in a potential waving of the white flag in the face of Microsoft’s gaming empire.

There are major rivals in gaming, but there’s always one that stands out as better than the rest. Right now, Microsoft is a pioneer in the gaming scene, with a focus on bringing down the boundaries that separate niche hardcore gamers from the massive casual gamer market.

The casual gaming space is mobile-oriented. As Microsoft invests in its next console, which I believe could replace the current generation of Xbox, gamers will be able to play on any medium they desire. Undoubtedly, the next console is unlikely to take on any physical form through the eyes of consumers.

Microsoft: The King of Gaming Content?

It doesn’t matter if a firm has the best game-streaming infrastructure on the planet; if there’s a lack of content, users will look elsewhere. When it comes to consumer entertainment, content is king. In that regard, Microsoft seems to be the “Netflix (NFLX) of video games” with its Xbox Game Pass service.

Xbox Game Pass offers a library of titles and regularly-scheduled new releases. In many ways, the service seems to be as dominant in the gaming space as Netflix was before rivals flooded into the SVOD space.

The Game Pass service has been a great success with primarily Xbox console owners and PC gamers on the Windows platform. Still, the next frontier of growth could be the most exciting for Game Pass, as Microsoft looks to make its service available to everyone, not just users within the Microsoft ecosystem.

Microsoft isn’t trying to make its gaming offering exclusive. It’s opening the doors wide, and that could result in a flood of consumers rushing to subscribe to Game Pass.

The Xbox Cloud Gaming platform, formerly xCloud, essentially opens up Game Pass to the entire gaming market. The platform is currently in Beta and is available to those who lack a high-spec gaming PC or Xbox console.

Once its Cloud Gaming service is ready for prime time (keyboard and mouse support is on the horizon), I would look for Microsoft’s Xbox business to grow to contribute a larger slice of overall revenues.

The company is doing a lot of things right in the gaming scene. With Game Pass and Cloud Gaming, it’s disrupting two services, which combined as one could deliver a one-two gut punch to its long-time rivals Sony (SONY) and Nintendo (NTDOY).

Wall Street’s Take

Turning to Wall Street, MSFT stock comes in as a Strong Buy. Out of 27 analyst ratings, there are 27 unanimous Buy recommendations.

The average Microsoft price target is $374.88, implying an upside of 22.9%. Analyst price targets range from a low of $320.00 per share to a high of $425.00 per share.

The Bottom Line

With such deep pockets to invest in its gaming ambitions, I think it will be hard for any firm to catch up with the likes of Microsoft. It has too large a lead.

As Microsoft continues to take share in the gaming space, the company may very well become the king of the “metaverse,” or whatever Microsoft desires to call it once cloud-powered virtual-reality gaming experiences become mainstream.

There’s a reason why Microsoft has been able to command market-crushing returns for such a long time. It’s a disruptive innovator at heart, and it’s not slowing down, especially when it comes to the gaming market. For now, I think Microsoft’s gaming growth prospects are being heavily discounted.

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