Beat Microsoft's Gaming And Mobile Device Segments With These Picks

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Microsoft (NASDAQ: MSFT) is a big company with many interesting segments. But some segments are more attractive than others. As an investor, I would love to buy one chunk and cut out the parts I don’t want. Unfortunately, this is fantasy.

Fortunately, many of the competitors of Microsoft’s business units trade at lower valuation multiples, making them better deals.

A New Xbox

Microsoft announced its plans to launch a new version of its Xbox console by the 2013 holiday season. The new model is expected to generate sales during Christmas and Thanksgiving next year. The device could be called as Xbox 720 or Xbox Infinity.

Currently, the company is trying to squeeze out the sales of its current model Xbox 360, which sold over 750,000 units on the week of Thanksgiving, beyond the company’s expectations. The new version would be launched a year after Nintendo’s console, Wii U, which went on sale in the US in November 2012. Sony (NYSE: SNE) is also expected to launch an update to its PlayStation console.

The gaming market has evolved since the launch of Xbox 360 in 2005. Now games are played on the phones and tablets have attracted consumer attention. In partnership with the Kinect, the Company released full-body motion controls to console gaming. Another common add-on is subscription service to Xbox Live online, which is used to watch TV and movies and not play games. Of 70 million Xbox 360 customers, 40 million customers out of have subscription.

According to a researcher of NPD Group, the updates in the console market are overdue to boost sales, which have fallen sharply. In October, the U.S. retail sales of video-game software, hardware and accessories declined to $755.5 million, 25% lower than a year earlier.

Xbox Surrogates

Investors seem to be ignoring console-based and computer-based gaming  in favor of gaming enabled by mobile devices. Buying shares now might be a smart way to buy on the cheap. Consider these valuations:

<table> <tbody> <tr> <td> <p><span>Ticker</span></p> </td> <td> <p><span>Company</span></p> </td> <td> <p><span>P/E</span></p> </td> <td> <p><span>P/S</span></p> </td> <td> <p><span>P/B</span></p> </td> <td> <p><span>P/</span><span>FCF</span></p> </td> <td> <p><span>EPS Growth Next 5 Years</span></p> </td> </tr> <tr> <td> <p><span>ATVI</span></p> </td> <td> <p><span>Activision Blizzard</span></p> </td> <td> <p><span>14.54</span></p> </td> <td> <p><span>2.81</span></p> </td> <td> <p><span>1.16</span></p> </td> <td> <p><span>10.99</span></p> </td> <td> <p><span>10.9%</span></p> </td> </tr> <tr> <td> <p><span>EA</span></p> </td> <td> <p><span>Electronic Arts</span></p> </td> <td> <p><span>1483.5</span></p> </td> <td> <p><span>1.11</span></p> </td> <td> <p><span>2.15</span></p> </td> <td> <p><span>13.08</span></p> </td> <td> <p><span>15.1%</span></p> </td> </tr> <tr> <td> <p><span>KNM</span></p> </td> <td> <p><span>Konami</span></p> </td> <td> <p><span>14.48</span></p> </td> <td> <p><span>1.11</span></p> </td> <td> <p><span>1.23</span></p> </td> <td> <p><span>18.26</span></p> </td> <td> <p><span>32.1%</span></p> </td> </tr> <tr> <td> <p><span>SNE</span></p> </td> <td> <p><span>Sony</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.13</span></p> </td> <td> <p><span>0.44</span></p> </td> <td> <p><span>18.65</span></p> </td> <td> <p><span>NA</span></p> </td> </tr> <tr> <td> <p><span>TTWO</span></p> </td> <td> <p><span>Take-Two Interactive</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>1.27</span></p> </td> <td> <p><span>2.34</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>13.2%</span></p> </td> </tr> <tr> <td> <p><span>MSFT</span></p> </td> <td> <p><span>Microsoft</span></p> </td> <td> <p><span>14.3</span></p> </td> <td> <p><span>3.08</span></p> </td> <td> <p><span>3.24</span></p> </td> <td> <p><span>9.93</span></p> </td> <td> <p><span>9.8%</span></p> </td> </tr> </tbody> </table>

Notice that three of Microsoft’s competitors in gaming—Konami (NYSE: KNM), Sony, and Activision Blizzard (NASDAQ: ATVI)—are trading at very low price-to-book values. Investors should be salivating when stocks with significant intellectual property and brand value are trading near or below book value, because those book values typically fail to incorporate the value of this intellectual property. This makes these stocks arguably cheaper than Microsoft. Konami and Sony also trade at much lower price-to-sales multiples. Konami and Activision Blizzard have better growth prospects based on analyst estimates.

For gaming, investors should consider one or more of Konami, Sony, and Activision Blizzard as alternatives to Microsoft’s Xbox segment.

Microsoft’s Mobile Device Projects

Microsoft, the world’s largest software maker, now seeks to exploit the possibility of combining software and hardware products to edge out stiff competition from Apple’s (NASDAQ: AAPL) iPad surface tablet computer, as revealed by company CEO Steve Ballmer.

The revelations of an overhaul in its product line come in the wake of the dismissal of the Windows Division chief, Steven Sinofsky, as Ballmer pushes for more cross-product coordination to fight back against Apple and other mobile-device makers.  In Sinofsky’s place, Ballmer has built up a new team that constitutes Julie Larson-Green who will be in charge of all software and hardware for Windows and Tami Reller, who will also oversee Windows in addition to her marketing and finance responsibilities.

Microsoft is relying on its newly released operating system, Windows 8, to revive interest in the personal computer despite predictions that the PC market will contract by about 1% to around 3,489 million units this year. In a similar direction, Microsoft released Surface, its first foray into the mobile device market. This is an attempt to revive its sales, which fell 8% in September (Microsoft’s fiscal first-quarter) as revenues from Windows and Office both dropped. According to Ballmer, Microsoft, which has single-digit market share in smart phones, now aims at getting a 10% to 15% market share. He believes Microsoft products stand a better chance since the iOS ecosystem is controlled and high-priced and because Android is too wild. While defending the company’s next move, CEO Ballmer said, “Windows-based smart phones and tablets have an opportunity to stand out because all these phones look the darned same. With technology companies you either move forward or you die.”

Alternatives to Windows Mobile

There are better valuations than those afforded by Microsoft in the mobile device space:

<table> <tbody> <tr> <td> <p><span>Ticker</span></p> </td> <td> <p><span>Company</span></p> </td> <td> <p><span>P/E</span></p> </td> <td> <p><span>P/S</span></p> </td> <td> <p><span>P/B</span></p> </td> <td> <p><span>P/</span><span>FCF</span></p> </td> <td> <p><span>EPS Growth Next 5 Years</span></p> </td> </tr> <tr> <td> <p><span>NOK</span></p> </td> <td> <p><span>Nokia</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.35</span></p> </td> <td> <p><span>1.42</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>1.8%</span></p> </td> </tr> <tr> <td> <p><span>RIMM</span></p> </td> <td> <p><span>Research In Motion</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.42</span></p> </td> <td> <p><span>0.66</span></p> </td> <td> <p><span>12.77</span></p> </td> <td> <p><span>5.0%</span></p> </td> </tr> <tr> <td> <p><span>MSFT</span></p> </td> <td> <p><span>Microsoft</span></p> </td> <td> <p><span>14.3</span></p> </td> <td> <p><span>3.08</span></p> </td> <td> <p><span>3.24</span></p> </td> <td> <p><span>9.93</span></p> </td> <td> <p><span>9.8%</span></p> </td> </tr> <tr> <td> <p><span>GOOG</span></p> </td> <td> <p><span>Google</span></p> </td> <td> <p><span>21.44</span></p> </td> <td> <p><span>4.73</span></p> </td> <td> <p><span>3.3</span></p> </td> <td> <p><span>17.74</span></p> </td> <td> <p><span>15.7%</span></p> </td> </tr> <tr> <td> <p><span>AAPL</span></p> </td> <td> <p><span>Apple</span></p> </td> <td> <p><span>12.08</span></p> </td> <td> <p><span>3.21</span></p> </td> <td> <p><span>4.24</span></p> </td> <td> <p><span>12.1</span></p> </td> <td> <p><span>19.6%</span></p> </td> </tr> <tr> <td> <p><span>MSFT</span></p> </td> <td> <p><span>Microsoft</span></p> </td> <td> <p><span>14.3</span></p> </td> <td> <p><span>3.08</span></p> </td> <td> <p><span>3.24</span></p> </td> <td> <p><span>9.93</span></p> </td> <td> <p><span>9.8%</span></p> </td> </tr> </tbody> </table>

If you want to buy growth at a reasonable price, Apple beats Microsoft handily. Its earnings multiple is lower than Microsoft’s, and if analysts are even close to right, forward earnings multiples for Apple will be cheaper still than Microsoft’s forward earnings multiple. Apple is arguably cheaper, has a greater market share, and has higher earnings growth expectations. This is an easy win for Apple.

On the other hand, if you want to speculate, there are cheaper underdogs to root for. Nokia (NOK) and Research In Motion (RIMM) are much cheaper in this space than Microsoft. Purchases of these companies should be small since they are much riskier than stocks that have been able to turn a profit.


In today’s market you can buy cheaper rivals in the gaming and mobile device space at current prices than you can buy shares of Microsoft. Consider these rivals as better ways to play some of the more interesting industries in which Microsoft participates.

BillEdson11 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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