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This past holiday season, much of the gift talk was focused on video game systems — Nintendo’s (OTCPK:NTDOY) Wii, Sony’s (NYSE:SNE) PlayStation 3, and Microsoft’s (NASDAQ:MSFT) Xbox.

It appears that Santa may have been good to the latter, which could see improved margins for its Entertainment and Devices division due to sales of 10.4 million Xbox consoles by the end of December and strong sales for its Gears of War video game, RBC Capital Markets analyst Robert Breza said in a research note.

He sees potential upside for Microsoft Corp. shares if second quarter 2007 revenue comes in near the high end of the company’s guidance of $11.8-billion to $12.4-billion.

Mr. Breza, who has an “outperform” rating on Microsoft shares and a $32 price target, estimates its revenue will be US$12.1-billion.

These results will be reported after market close on today.

Going forward, Mr. Breza thinks Microsoft will be able to attract consumers and larger customers to higher-priced versions of its new Vista operating system and the Office 2007 software package.

“As the company enters its large multi-year product release cycle, and takes market share in its emerging divisions, we believe Microsoft deserves to trade at a multiple closer to its peer group,” he said.

Source: Xbox Sales: Potential Upside For Microsoft