According to reports, Xbox's first-party handheld has been "sidelined" internally as the company focuses on optimizing Windows 11 for gaming and supporting Asus' upcoming Xbox handheld, Project Kennan.

The details:

As reported by Windows Central's Jez Corden, Microsoft has halted the development of its native Xbox handheld, which is no longer expected to be released alongside the next generation of Xbox consoles in 2027. According to Corden, the tech giant has shifted its priorities to improve Windows 11 gaming performance, mainly to better support third-party OEM handheld systems such as Asus' Project Kennan.
Project Kennan is a PC gaming handheld developed by Asus in collaboration with Xbox that is set to release later this year. It is claimed that the device's hardware is "essentially finished," with the two companies now focusing on its software. The system is expected to run a modified version of Windows 11, similar to Asus' ROG Ally, but it will likely include several improvements and changes.
Corden has also shared that at least three prototype systems are being developed by Microsoft as part of its tenth-generation gaming plans, one of which is the aforementioned handheld. It's almost certain that at least one of the systems will be the next major Xbox console, after Microsoft Gaming CEO Phil Spencer confirmed the company's commitment to the console market.

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Xbox's first-party handheld "sidelined" as Microsoft continues work on Windows 11 and third-party devices