Microsoft’s [MSFT] share price has delivered investors over 50% worth of gains in the past 12 months, but while revenue is being driven by its cloud and Office products, the real growth in its business could come from its gaming division.
Those interested in Microsoft’s share price might already have a sense that the tech giant wants to branch out beyond its core products, with recent coverage focused on its failed TikTok bid.
Instead of acquiring the social media platform, Microsoft ended up spending a cool $7.5bn on ZeniMax Media, owner of video games publisher Bethesda. The deal is the biggest ever for Microsoft's gaming division and gives it the rights to huge franchises including Fallout, The Elder Scrolls and Doom.
“We note that this acquisition comes in the wake of the failed TikTok deal as [Microsoft CEO Satya Nadella] continues to remain laser-focused on growing the consumer side of the house, while the flagship enterprise/cloud Azure and Office 365 business is humming along at an accelerated growth pace,” wrote Wedbush analyst Daniel Ives, maintaining his $260 target on Microsoft’s share price.
Strategically, buying ZeniMax Media represents a further expansion into an area that is becoming more important for Microsoft’s share price and wider business. In its most recent quarterly results, Microsoft reported that gaming revenue had increased 64%, or $1.3bn, driven by the growth in Xbox content and services.
“We note that this acquisition comes in the wake of the failed TikTok deal as [Microsoft CEO Satya Nadella] continues to remain laser-focused on growing the consumer side of the house, while the flagship enterprise/cloud Azure and Office 365 business is humming along at an accelerated growth pace” - Wedbush analyst Daniel Ives
Microsoft taps into subscription gaming
If Microsoft’s share price is to keep up with the wider tech industry, its increasing investment in the gaming sector will need to pay off.
Gamers are increasingly using Netflix-like subscription services alongside standalone game purchases. Microsoft’s Xbox Game Pass gives subscribers access to over 100 games, including big hitters like Red Dead Redemption 2 and Resident Evil. Since April, the service has seen a 50% increase in subscribers, with over 15m current subscribers.
Rise of Microsoft's Xboc Game Pass' subscribers since April
A large part of that growth has been triggered by the coronavirus, as people look for more ways to entertain themselves around the house and Microsoft appears to be betting that the popularity of these services will continue. PR around the Bethesda deal has even said that future games will be released on Xbox Game Pass and in-store on the same day — something that would have been unthinkable at the start of this year:
“With the addition of Bethesda, Microsoft will grow from 15 to 23 creative studio teams and will be adding Bethesda’s iconic franchises to Xbox Game Pass,” Microsoft said. “This includes Microsoft’s intent to bring Bethesda’s future games into Xbox Game Pass the same day they launch on Xbox or PC.”
Can Microsoft adapt for mobile gamers?
When Microsoft launches the next iteration of the Xbox in October, it will not only be going head-to-head with Sony's  PlayStation 5, but also smartphone manufacturers.
Since the Xbox One was released in 2015, Microsoft has managed to shift 50m units. However, as the Financial Times points out, that's nothing compared to the 140m smartphones which the three biggest handset manufacturers have sold over the past three quarters.
Mobile also dominates gaming sales, accounting for $85bn of a total of $165bn. Microsoft isn’t blind to this. The Microsoft Xbox Pass allows users to not only play games on their PC or console, but also facilitates streaming them over an Android app to their smartphones. This could meaningfully drive revenue for its gaming division over the coming years and contribute to Microsoft’s share price in the process.
Microsoft's mobile gaming sales out of a total $165bn
Where next for Microsoft’s share price?
Microsoft has had a very good 2020. So good that, on 15 September, it announced its quarterly dividend was increasing to $0.56 per share, up 10% on the previous quarter. In its last quarterly results, revenue came in at $38bn, an increase of 13% year-on-year, while operating income was $13.4bn, up 8%.
Gaming could well be the next growth area, but lasting success will largely depend on whether customers choose an Xbox Series X or S over a Sony PlayStation 5. Last time the two companies went head-to-head, Microsoft lost out, selling 46.36 million Xbox Ones over the console’s lifespan compared to Sony’s 106.99 million PS4s. Microsoft will be hoping it's different this time round, as will those with an interest in Microsoft’s share price.
Microsoft’s share price has an average $229.83 target from the analysts tracking the stock on Yahoo Finance. Hitting this would see a 9.3% upside on Microsoft’s share price as of 30 September’s close.
|PE ratio (TTM)||36.52|
|Quarterly Revenue Growth (YoY)||12.8%|
Microsoft share price vitals, Yahoo Finance, 1 October 2020