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Next-generation Xbox 720 Preview And The Companies To Watch

Much of the upside in shares of Microsoft (MSFT) in the second half of 2012 was supported by the anticipation that Windows 8 would reignite demand for desktop and laptop computers. As this thesis continues to be played out over several quarters, investors may renew their interest in the company when the successor to the Xbox is released. [Related Lists: Sony PlayStation 4 Preview: 5 Tech Stocks to Watch]

The next Xbox will have these specifications, if the leak from VGleaks is accurate:

- 8-core x64 processor at 1.6Ghz from AMD (AMD) or IBM (IBM
- Blu-ray player·       
- AMD 800Mhz graphics processor

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Analysis

It is commonly thought that next-generation consoles could revive the gaming industry, but this is a misnomer. Games made for current-generation consoles do not rely on advanced technologies to be top-sellers. Game-makers are making fewer titles which cost more to produce and have a greater-level of game-complexity and entertainment.

Still, Microsoft’s implementation of Kinect for games added another dimension of entertainment for the industry. The refreshed Xbox, if it implements IllumiRoom, could improve game sales for the industry.

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Business Section: Investing Ideas

Advanced Micro Devices (AMD) and NVIDIA (NVDA) are the graphics chip makers to watch. Since bottoming at $2, AMD traded recently at $2.60. AMD stands to benefit more than NVIDIA if it is selected by Microsoft and Sony (SNE) to supply the graphics chip. This view makes sense: by selling low-cost chips, AMD gains on unit sales. Microsoft and Sony gain on keeping console costs as low as possible.

This view could explain why NVIDIA shares remained in a price range of between $11.50 and around $13.50 in the last year.

A refreshed Xbox could sell at a loss when it is released, but Microsoft (MSFT) is used to operating as a loss-leader in this segment. Higher sales could make its other cloud-based products worth more. The reason is that accessing cloud-based data storage, email, and entertainment amongst all device types would be more convenient.

Sony (SNE), whose PS4 is set to be released, will need to keep the price of its console competitive. Investors already bid up shares in Sony, as shares closed above $15 recently. Sony traded as low as $9.57 in early-December 2012.

Nintendo (NTDOY.PK) should be watched closely. The company now has a market capitalization of around $1.5 billion. Nintendo recently reduced the sales forecast for its Wii U. This is the second quarter in a row that the company reduced its full-year sales forecast.


(List compiled by Kapitall contributor Chris Lau)

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