Investors have likely noticed the pronounced outperformance of Microsoft Corporation (NASDAQ:MSFT) shares over the past several weeks. Indeed, shares have rallied more than 20% just since mid-January. Long derided as being ‘dead money’ and a boring technology giant starved for innovation, Microsoft Corporation (NASDAQ:MSFT)’s share price performance in only a few months’ time is more indicative of a start-up in high growth.
Beneath the excitement, however, is a disturbing lack of a suitable catalyst for such a rally. Should investors jump on the train? Or would investors be better served putting the uptrend under a microscope for further analysis?
Console mania in perspective
Presumably, a significant catalyst behind the rally in Microsoft Corporation (NASDAQ:MSFT) shares has to do with the likely revelation of a new Xbox video game console during a company event to be held May 21. It’s been eight years since the last new Xbox console release, so investors and video game fans alike are likely excited by the recent developments.
Fellow console maker Sony Corporation (ADR) (NYSE:SNE) is on a similar trend. After trading for less than $10 per share as recently as last December, the developer of the popular PlayStation console has rallied 70% in just a few months to its recent level of $17 per share.
Sony Corporation (ADR) (NYSE:SNE) released its PlayStation 3 device in the fall of 2006, and not wanting to be outdone by its closest competitor, will likely release a PlayStation 4 console around the same time of Microsoft Corporation (NASDAQ:MSFT)’s new release.
Curb your enthusiasm
Microsoft shares are in a clear uptrend, but for both video game enthusiasts and investors, the excitement surrounding new video game consoles needs to be put in the proper context.
Microsoft's Entertainment and Devices Division is the business segment responsible for developing and producing the Xbox console. This division saw 35% revenue growth in 2006 and 28% revenue growth in 2007, thanks to the newly released Xbox 360.
However, it’s worth noting that Microsoft Corporation (NASDAQ:MSFT)’s Entertainment and Devices Division actually reported operating losses in both 2006 and 2007. That means that unfortunately, the Xbox itself was not a profitable venture for Microsoft when the last new console was released.
Furthermore, even in 2006 and 2007, the Entertainment and Devices Division accounted for less than 11% of Microsoft’s total revenue. And in fiscal 2012, the division made up just 13% of total revenue. To be blunt, the Xbox console is a drop in the bucket. What really matters for Microsoft
A new video game console generates a lot of buzz from the media, for obvious reasons. However, for all intents and purposes, the Xbox just doesn’t matter for Microsoft.