What Microsoft has been saying about Xbox lately strongly implies that this is a Windows handheld designed to solve software and user experience problems with using current Windows handhelds. And signs are pointing toward the next Xbox console coming sooner than the next PlayStation and essentially being a PC running a console version of Windows. Some speculation on my part, but I’m not the only one coming to those conclusions.
I think they’ll be fine. They don’t need to be the most powerful. Steam Deck is weaker than Rog Ally but remains the more popular option due to a better user experience and the Switch was significantly underpowered compared to the competition but remains a popular option to other things they bring to the table.
Microsoft won’t push for an expensive handheld so anything they bring out would likely be weaker than the top end of the market. It really comes down to what other offerings they bring.