Physical media is so 2000 and late. First, CDs gave way to digital music thanks largely to Apple (NASDAQ:AAPL) iTunes. Then, buying DVDs started to fall to the wayside as more people turned to services like Netflix (NASDAQ:NFLX). Now, Microsoft (NASDAQ:MSFT) is changing the way people game.
Microsoft's new Xbox One, available in November, does things a little differently. The system operates in the cloud. This means users can access their games from any Xbox One -- your entire game library will be stored in the cloud whether you install your game via disc or digital download. However, there are restrictions -- games will stop working if you go 24 hours offline and you can forget about loaning, renting, or selling your games, except to approved retailers.
At its E3 press conference on June 10, 2013, the company announced that it would be releasing 13 next generation titles available exclusively on Xbox One -- including the new Forza Motorsport 5 which allows user "drive-a-tars" learn the way you drive and uses that profile to race competitors even while you are not playing -- but that doesn't mean Microsoft is kicking Xbox 360 to the curb.
A New Xbox 360
Xbox 360 will still be around. In fact, Microsoft announced a new version of it available June 10. The new device has a look similar to the Xbox One -- all dark and sleek -- and it is quieter. But, that doesn't mean Microsoft wants you to buy one or the other over the Xbox One. In fact, the company is trying to drum up sales through its gold member program. Beginning July 1 through the release of Xbox One, Gold members will receive two free game downloads, including titles like Assassin's Creed II and Halo III.
Don't worry, the upcoming releases of Grand Theft Auto V and Final Fantasy XIII will still be available on Xbox 360 -- as well as the new World of Tanks, which is only available on Xbox 360.
Microsoft's E3 conference may put a pretty spin on its Xbox business, but less than a quarter of the company's business comes from online services and entertainment. The real question for investors is whether or not the company is worth the investment -- and right now, things are not looking good. Microsoft is trading at $35.30 on a 52-week range if $26.26 to $35.78, with a one-year target estimate of $34.36.
What's more though, looking at the company's current fundamentals compared to its past performance, there are some big warning signs.
Microsoft's operating margin is at 29.5%. This may be higher than 75% of the companies in its industry but it is on the low end of the company's performance over the last 10 years, during which its operating margin ranged from 24.5% to 50.9%. Microsoft's revenue growth has also slipped, coming in at 7.5% on a 10-year range of 6.3% to 15%. And, insiders are noticing. David Einhorn slashed his fund's position in the company by nearly 44% during the first quarter, while Steve Cohen cut his stake by roughly 70%.
The new Xbox is only going to take Microsoft so far. The tech titan has been pursuing restructuring toward a more "devices and services" oriented company and launching some other efforts such as discounted rates on its Windows RT (a version of Windows 8 for tablets) and pushing its Office platform to the cloud (Office 365) -- but that doesn't mean those efforts are going to push Microsoft into generating large returns for investors, especially over the short term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.