Microsoft vs. Sony: Which Video Game Console Maker's Stock is a Better Buy?

This month should be a joyful holiday season for gamers as Microsoft (MSFT) and Sony (SNE) launch their next-generation game consoles after seven years. The pre-orders for SNE’s PlayStation 5 and MSFT’s Xbox Series are already showing the excitement of gamers. Which among the two stocks would benefit the most from their new game consoles.

November is a gamers’ paradise as Microsoft Corporation (MSFT) and Sony Corporation (SNE) launch their most awaited next-generation game consoles. Both will launch two variants of the game consoles. MSFT will launch Xbox Series X and Xbox Series S and has priced them at $499.99 and $299, respectively. SNE will launch PlayStation 5 (PS5) and PlayStation 5 Digital Edition and they will cost $499 and $400, respectively.

Who leads the game console market? 

Game consoles usually have a seven-year-long product life cycle. MSFT and SNE launched the previous generation game consoles PS4 and Xbox One in 2013 and a refresh in 2016. And in all last generations, SNE won the market share from Microsoft. According to Vgchartz, Sony shipped 113.6 million PS4s, while Microsoft shipped 48.4 million Xbox Ones.

Sony is a clear winner in terms of market share for game consoles. Gamers who use PS are unlikely to switch to Xbox unless MSFT offers discounts. Now, imagine how the first-year sales look like for a product with a seven-year-long cycle.

Both companies would witness the highest console sales in the fourth quarter. MSFT is running ahead with the launch date of November 10th while Sony is falling behind with a November 12th launch in select regions, and a worldwide launch on November 19th. But does a few days matter for gamers who have waited so long?

Which is a Better Buy: Microsoft’s Xbox Series or Sony’s PS5

A consumer’s buying decision is influenced by various factors like performance, visuals, features, portability, aesthetics, and price. The higher-end models of both the Xbox Series and PS5 have the same pricing, which leaves one factor out. Going by portability, Xbox Series beats PS5 with its smaller form factor. I won’t talk about aesthetics as it is a matter of choice. The key factors that will set them apart are:

Performance: Both consoles use Advanced Micro Devices' (AMD) Zen 2, 8-core CPU, and Custom RDNA 2 GPU. MSFT is differentiating itself by offering higher CPU clocks, teraflops, and compute units, which will give the Xbox Series X a better framerate for third party games.

Visuals: Users buy consoles keeping in mind the next three to four years of gaming graphics. Both PS5 and Xbox Series X offer 8K resolution. But MSFT compromises on the visuals in its lower-end Xbox Series S with 1440p resolution, making Sony’s lower-end PS5 Digital Edition a winner.

Other features: MSFT has made Xbox Series compatible with all previous generation Xbox consoles, while SNE has made PS5 compatible only with PS4. This means users can use their Xbox and PS4 accessories and games in the new consoles. However, SNE also offers gaming accessories like virtual reality headsets, which MSFT doesn’t.

Would the Xbox Series reduce the game console market share gap between MSFT and SNE or would PS5 widen it? Users will decide. One question that haunts investors is which of the two stocks is a better buy in the run-up to the next-generation game consoles.

Microsoft Corporation (MSFT)

MSFT is a bigger player in the technology space, with its core revenue coming from its cloud business and office software suites. Hardware forms a small part of MSFT, and within hardware, gaming is a sub-segment. Gaming generates only 8% of its revenue. Even then, it is a big player in the game console space. It is also expanding into the cloud gaming space with xCloud.

NewZoo expects the Video Gaming Industry’s revenue to increase by 9.3% year-over-year to $159.3 million in 2020. MSFT’s fiscal 2020 revenue was $143 billion.

As the game console business is going through a generational shift, its gaming revenue fell 7% year-over-year in the fiscal 2021 first quarter. But this decline did not prevent MSFT from beating estimates and reporting 12.4% revenue growth. This shows that Xbox Series performance would not be a differentiator for investors to decide on whether or not to buy MSFT stock.

Investors have many reasons to be bullish on MSFT, especially the growing demand for its Azure cloud platform. The stock surged 70% in the pandemic-driven rally, between March 23rd and September 2nd. It has declined by 12.6% since then because of the market correction. It is trading at a 15.4% discount to its average price target of $233.68. The new Xbox Series game console could give investors one more reason to be bullish.

MSFT is a “Buy” in our POWR Ratings system. It holds “B” in Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is also the #11 ranked stock in the 96-stock Software - Application industry.

Sony Corporation (SNE)

On the other hand, SNE will significantly gain from the new PS5 game console as it earns 21% of its revenue from gaming. Its other revenue sources include Sony Music, Sony Pictures, electronic products, and imaging solutions, all of which have been declining except financial services. The PS5 is Sony’s flagship product and could be a game-changer for this Japanese conglomerate.

In its recent earnings, SNE increased its full-year fiscal 2020 guidance. It expects its revenue and net income to rise 3% and 37% year-over-year, respectively, in fiscal 2020. The company raised its gaming revenue growth forecast from 26% to 31%, reflecting the demand for PS5.

How would PS5 impact SNE’s stock price? When SNE launched its PS4 in November 2013, its stock surged 70% in 18 months. And when it launched PS4 refresh in 2016, its stock surged more than 85% in two years.

At a time when the tech stocks are falling with the market pullback, SNE stock surged 8% after the robust guidance to a 20-year high of $83.66. The Street has set an average price target of $96.98, which represents a 16% upside. But the PS5 could push the stock up more than 80% in the next year or two.

Hence, SNE is rated a “Strong Buy” in the POWR Ratings. It holds straight “A” in Trade Grade, Buy & Hold Grade, and Peer Grade. It is also the #1 ranked stock in the Entertainment - Media Producers industry.

Which is a better buy?

Both MSFT and SNE have strong growth drivers. But if you want exposure to the pent-up demand for next-generation game consoles, SNE is a better buy. PS5 is SNE’s flagship product and the market demand is reflected in its revised gaming revenue guidance. A glimpse of its stock rally was visible last week post-earnings.

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MSFT shares were trading at $200.53 per share on Monday afternoon, down $1.94 (-0.96%). Year-to-date, MSFT has gained 28.17%, versus a 3.38% rise in the benchmark S&P 500 index during the same period.

About the Author: Puja Tayal

Puja is a seasoned writer working with financial publishing companies like Motley Fool Canada and Market Realist. With over 13 years of experience in the field of fundamental research, she brings a blend of comprehensive, well-researched insights into her articles.


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