A little more than a week ago, Hirotoshi Murakami, an analyst who had been upbeat on Nintendo (OTCMKTS:NTDOY) stock for some time, downgraded NTDOY from a “buy” to a “neutral.” Nintendo stock subsequently fell more than 6%, adding to a downtrend that had been in place since March of last year.
The downgrade of Nintendo stock was understandable, as was the market’s reaction. Nintendo’s popular gaming console — the Switch – has indeed likely peaked in terms of unit sales, as Mitsubishi UFJ Morgan Stanley’s Murakami suggested. And, inasmuch as the Switch platform is seemingly the company’s most important pillar right now, the owners of Nintendo stock can’t readily identify other, meaningful growth catalysts.
Those growth engines are actually in place, however. They’re just difficult to see within the fast-moving, ever-changing world of video games.
Peak Nintendo?
Murakami, the Mitsubishi analyst, wrote: “We think the (Nintendo) shares priced in the earnings peak in 2018 and are headed for a post-peak phase.”
And late last month, the company dialed back its sales forecast for the current quarter (ending in late March) from 20 million units to 17 million units.
It’s not the end of the world. But it’s certainly far from encouraging.
It may also be irrelevant.
Philosophical Shift
The average investor who’s not much into video games will struggle to understand this, but this is not the Nintendo of old, that launched the Switch’s disappointing predecessor, the Wii U.
The old Nintendo, in the Wii and handheld DS era of a decade ago, sought to create simple games that would be accessible and eventually lead casual gamers to more complex titles. Gamers flocked to the Wii at a time when the market was hungry for something new, but not enough players made the leap to the more complex games, perhaps explaining the lackluster interest in the novel-but-similar Wii U.
Indeed, neither gamers nor Nintendo ever fully understood the Wii U’s position in a world that included higher-performance consoles from rivals Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE). and a world with tablets and smartphones that offered more than enough casual games to keep many players interested. Nintendo’s limited library of casual games kept the Wii U from becoming a big hit.
The Switch arguably changed that dynamic, offering console quality and plenty of portability.
The Switch also brought more in-depth, hard-core titles to the table than the company’s previous consoles had offered, enabling it to take some market share from the PlayStation and the Xbox.
GamesIndustry.Biz’s Ishaan Sahdev summed up the years-long evolution last week, explaining:
“While the DS and Wii were fantastic innovations for their time (and helped spark the smartphone gaming boom that would play a major role in expanding the gaming population), Nintendo’s long-term strength has always been its ability to create deep, engaging games that keep bringing people back for more. With the industry finally at a point where games are a widely accepted hobby, the company can be confident in its game design philosophy, without feeling the need to reinvent the wheel every time.”
The Switch will never catch up with the Xbox or PlayStation in terms of sales, but it’s provided a much-needed learning experience for NTDOY. It’s also led to Nintendo embracing new ideas rather than resisting them.
Life After Consoles
Chief among those ideas is the advent of Nintendo’s non-console, mobile division.
Pokemon Go, released in mid-2016, confirmed what many had suspected: A familiar Nintendo franchise had a place in smartphone ecosystems, providing a new kind of mobile gaming experience. Super Mario Run, released later that year, verified that there was a market for Nintendo’s mobile games.
Owners of Nintendo stock have heard little about the company’s mobile, non-console efforts since then, but it’s clear that the video-game maker has learned and forged ahead. Its Fire Emblem Heroes game, for Android and iOS, has generated $500 million of revenue since launching in early 2017.
It’s a data nugget that underscores a comment from Nintendo President Shuntaro Furukawa. In January, he explained “In the long-term, perhaps our focus as a business could shift away from home consoles – flexibility is just as important as ingenuity,” adding, “I’d like to increase the (amount of) games on smartphones that have a continuous stream of revenue.”
It’s not just mobile’s potential for recurring revenue that is causing Furukawa to adopt that view , however. Stealing a page from the playbooks of Sony and Microsoft, NTDOY is increasingly viewing consoles as a recurring revenue center.
Furukawa says “I think that the number of hardware units in active use is an equally important KPI (key performance indicator) … The reason why these numbers in active use are important is because consumers who continue to play with the hardware have more opportunities to purchase subsequent software.”
Aside from a willingness to make deeper, more engaging titles that heavy-duty gamers can latch onto and driving more recurring revenue, Furukawa is looking for more licensing opportunities. “We’re also dabbling in theme parks and movies – different ways to have our characters be a part of everyday life,” he notes.
The Outlook of Nintendo Stock
Don’t misread my message. The fading Switch will take a toll on Nintendo’s bottom line, putting more pressure on Nintendo stock.
But investors would be wise to look beyond the rhetoric and the temporary headwind working against NTDOY stock. The company has learned much in just the past year and a half, and Shuntaro Furukawa stepped into the role of President in the middle of last year with a pretty clear understanding of what Nintendo was, and wasn’t, and the directions in which it needs to go.
The company’s financial outlook may not be as weak as it seems on the surface, even as the Switch loses steam. This is not the aimless NTDOY of just a few years ago.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
