Microsoft (MSFT) Xbox Series X/S Plagued by Shortages

Microsoft Corporation (MSFT) unveiled its new Xbox Series X and Xbox Series S gaming systems on Nov. 10, 2020, to largely enthusiastic reviews. However, during the ensuing week, a growing number of reports have indicated that demand appears to be outstripping supply by a wide margin, creating potentially lengthy delays in the fulfillment of orders that could last into the first half of 2021.

Significance for Investors

The upshot of growing shortages for the Xbox Series X and Series S is that investors and analysts may have to reduce their expectations about the sales revenue that these products are likely to generate in the current quarter, which includes the holiday shopping season. Sales also may be constrained by lingering supply problems through the first half of 2021.

Microsoft has a fiscal year that runs from July 1 to June 30. As a result, the calendar quarter ending on Dec. 31, 2020 represents the second quarter of Microsoft's fiscal year 2021.

Lengthy Shortage Expected

Microsoft began taking pre-orders for the Xbox Series X/S in September 2020, with the result that much of the initial stock was sold out well in advance of the official launch on Nov. 10, 2020. Indeed, even before the launch, Amazon.com, Inc. (AMZN) began warning customers who had entered pre-orders that they might not receive the product before Christmas.

"I think we'll continue to see supply shortages as we head into the post-holiday quarter," Xbox chief financial officer (CFO) Tim Stuart stated during the recent Jefferies Interactive Entertainment Virtual Conference. Moreover, Stuart indicted that supply is unlikely to come into balance with demand until sometime in the second quarter of calendar year 2021, which corresponds with the fourth quarter of Microsoft's fiscal year 2021.  

Facing growing criticism over the shortage, Xbox head Phil Spencer issued a brief apology during a GlitchCon stream. He blames unexpectedly high demand, rather than inadequate supply, as the problem. In either case, it reveals inadequate planning and forecasting by Microsoft. "We've been building them for almost two months now and trying to get as many into the stores as we can, but the demand is just so high," he said.

PlayStation 5 Shortages, Scalpers' Bonanza

The one saving grace for Microsoft may be reports that the new PlayStation 5 from Sony Corporation (SNE) appears to be in short supply as well, limiting the possibility of sales being lost to this rival. Meanwhile, scalpers using bots to secure supplies of Xbox Series X/S or PlayStation 5 have been reselling these devices at huge markups through online marketplaces, with their asking prices reaching as high as three times the official list prices. 

Looking Ahead

Besides Xbox Series X/S sales revenues that are likely to materialize much later, if at all, than investors and analysts initially had hoped, Microsoft faces another potential risk. Launching a new product with much fanfare and then failing to fulfill the demand thus created may create skepticism and bad will among consumers that could be damaging to the company's reputation in the longer run.