Can the Kinect Move Microsoft’s Stock?

| About: Microsoft Corporation (MSFT)
This article is now exclusive for PRO subscribers.

Microsoft (NASDAQ:MSFT) recently announced that it sold more than 2.5 million Kinect motion sensors for its Xbox 360 game console globally since it was launched on November 4th, 2010.[1]

Microsoft competes with Nintendo (OTCPK:NTDOY) and Sony (NYSE:SNE) in the video gaming console market, and we believe that Kinect’s success could help Microsoft gain considerable market share in the coming years. Greater console sales also helps impacts game and console chip makers such as nVidia (NASDAQ:NVDA) and provides insight into consumer demand as we approach the holiday season.

However, we estimate that Xbox unit constitutes less than 2.5% of our Microsoft stock estimate of $31.56, and if Microsoft were able to gain market share of close to 30% by the end of our forecast period and if the console market grew faster than we currently expect at 10% per year for the next 3 years rather than 5% as we estimate, this would add around 3-4% to our price estimate. So while continued sales are encouraging, it doesn’t move the needle that much.

A Revival in the Console Market

Kinect motion technology allows gamers to play by simply moving their bodies with no need for a physical controller. This technology also enables advanced voice recognition and uses a unique combination of cameras to accurately detect depth and movement.

We believe that it gives users a more intuitive and physical way to connect with games and heightened the player experience. Kinect motion technology could help Microsoft compete effectively against Nintendo Wii that uses a physical controller to play a game while the Kinect allows users to play game without a handheld device.

In the last few years, the Wii helped Nintendo gain market share from around 19% in 2007 to around 24% in 2009; however, the Kinect could take the gaming experience to a new level. [2] The new technology for gaming consoles might spur higher console sales. We currently estimate console sales will increase by around 5% a year for the next 3 years and if this was came in closer to 10% a year, would bump our estimates slightly higher by 1-2%.

Xbox Market Share to Rise

We believe that Kinect’s success could propel Xbox 360 share in the gaming console market in 2010. We estimate that Xbox share could increase from around from 17% in 2010 and to around 20% by the end of Trefis forecast period [2]. If this increased to around 30% market share in the next 3 years, it would add around 1-2% to our price estimate.

In 2010, Microsoft’s market share also got a boost from the huge success of the “Halo” video game series. After the resounding success of Halo 3, the new Halo Reach racked up $200 million in global sales on the first day of its launch [3]. The success of video games has a direct impact on the sales of gaming consoles and so Microsoft should benefit from other blockbuster games such as Halo.

…But It Won’t Move Stock That Much

Xbox and Zune together constitute around 2.5% of our stock price estimate for Microsoft. Given the combined benefits of faster growth in the gaming console market and Microsoft gaining 30% share in the next few years, this would imply around 3-4% upside from our current estimates.


  1. See Microsoft Press Release: Xbox360 Surpasses 2.5 Million Kinect Sensors Sold
  2. See VGChartz Hardware Annual Summary
  3. See Reuters: Microsoft “Halo: Reach” Sales Hit $200 Million on 1st Day

Disclosure: No positions