This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Microsoft's Mission Implausible

The Numbers Game

Microsoft expects to sell as many as 3 million consoles in the first three months after launch and 4.5 million to 5.5 million consoles by the end of its fiscal year on June 30.

Those sales will be key to accelerating the company's top-line growth. In the December-ending quarter alone, Goldman Sachs software analyst Rick Sherlund estimates Xbox hardware and software sales will soar 36% to $1.5 billion from $1.1 billion a year earlier. (Sherlund has an outperform on Microsoft and his firm has done banking with the company.)

Microsoft has forecast its home and entertainment division, including Xbox, will grow 50% or more in fiscal year 2006, helping total annual revenue growth climb to about 11% from 8% a year earlier.

However, that won't immediately translate to the bottom line, because Microsoft loses money -- an estimated $50 to $100 -- on every console sold. The company expects the Xbox business to swing into the black in fiscal 2007.

"Going from unprofitable to profitable is probably a part of the margin story that many investors don't appreciate," says Tony Ursillo, an analyst with Loomis Sayles & Co., which holds Microsoft shares.

Ursillo estimates Microsoft's video-game business will generate an additional $500 million in operating income between this fiscal year and next fiscal year, which translates into an additional 3 cents a share in earnings.

Although that only amounts to a 2% increase in earnings, Ursillo says that's the difference between earnings growth of 10% and 12%.

"I'd say of all of Microsoft's emerging business efforts in the past five years, to me this has clearly been the most successful one -- better than MSN, better than business solutions, better than their mobile device effort," he says.

But that doesn't mean Xbox 360 will be able to unseat Sony, whose Play Station 3 is expected to have even more technical horsepower than Microsoft's when it launches next spring.

For one thing, Sony has a far larger installed base of fans to tap for next-generation sales than Microsoft. Sony has shipped 90 million Play Station 2 systems worldwide as of June, more than three times Microsoft's 21.9 million Xbox consoles. And the Play Station 2 commands nearly 60% of the U.S. market, far higher than Xbox's 23% share.
2 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
ATVI $37.18 0.92%
MSFT $53.96 -0.54%
SNE $26.54 -1.60%
AAPL $118.36 -0.44%
FB $106.31 0.54%


Chart of I:DJI
DOW 17,831.70 +19.51 0.11%
S&P 500 2,090.83 +1.69 0.08%
NASDAQ 5,113.3180 +10.51 0.21%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs