November 25, 2013 | In: Technology

The XBox One Release Had Little Effect on Microsoft’s Stock (NASDAQ:MSFT)

The XBox One was released last Friday, and according to reports, it has sold a million units in just one day, which huge backlog demand. Now, the big question is, what did that do MSFT on Monday? The answer is short: Nothing, zilch, nada, zero! The stock has closed at $37.64, just 0.2% more than last Friday.

Now, of course, you might be wondering, why did the stock just go up 0.2% when the XBox represents about 20% of Microsoft’s revenue, why not 20%? Well, there are several answers to this question:

  • Microsoft is losing money on the XBox One. In fact, Microsoft has never made any money on XBox hardware. It only made money on the games and on online services.
  • The XBox One, like the PS4 is still to prove its performance. First day, even first quarter sales are meaningless, because these are usually reserved for die hard fans. What really matters is the sales after the first quarter. In short, investors are waiting for the second quarter to judge Microsoft’s new console.

  • Investors don’t think highly of Microsoft’s entertainment division. While that division is making 20% of Microsoft’s revenue, most of that revenue is diluted by high hardware costs (again, Microsoft has never, ever made a penny on an XBox console). The Windows division constitutes about the same revenue, but the margin on Windows is much, much higher. Windows’ profits are about 90% of the division’s revenue.

  • With the exception of Windows, investors have learned not to be bullish on any Microsoft product.

  • Microsoft has made some terrible mistakes prior to the XBox One release – mainly when they told their clients that they will need to “authenticate” their console periodically and that they can’t trade-in games and rent games. This angered many clients which ultimately forced Microsoft to step back from that decision. The harm was done, however, and many converted to the PS4.

Well, these are the reasons I can think – if anyone wishes to add something, feel free to comment. Only time will tell whether the XBox One will be Microsoft’s next big hit – but for some reason, I really doubt that it’ll happen.

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