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Nintendo Rebounds as Optimistic Signs Emerge After a Brutal Year

Bloomberg logoBloomberg 1/20/2019 Yuji Nakamura and Yuki Furukawa

a sign in front of a building: Attendees walk past signage for the Nintendo Co. Switch video game console during the E3 Electronic Entertainment Expo in Los Angeles, California, U.S., on Wednesday, June 14, 2017. For three days, leading-edge companies, groundbreaking new technologies and never-before-seen products is showcased at E3.© Bloomberg Attendees walk past signage for the Nintendo Co. Switch video game console during the E3 Electronic Entertainment Expo in Los Angeles, California, U.S., on Wednesday, June 14, 2017. For three days, leading-edge companies, groundbreaking new technologies and never-before-seen products is showcased at E3. (Bloomberg) -- Nintendo Co. investors, battered by slower-than-anticipated sales of the Switch and a steep share decline last year, are starting to feel optimistic again.

The possibility of price cuts for the machine, an improving software pipeline and the upcoming launch of Nintendo’s biggest mobile game in two years are all boosting confidence. That’s helped to fuel a 22 percent stock jump since a December low, following a peak-to-trough slump of 44 percent in 2018.

It’s not that Nintendo has suddenly solved its biggest challenge: expanding Switch’s user base. But concerns over last year’s missteps — fewer game releases, the flop of cardboard toy accessory Nintendo Labo, and falling short of its goal for Switch shipments — are fading away. With software sales for the last three months of 2018 showing strength, profits should stand up despite weaker hardware revenue when Nintendo reports results on Jan. 31, according to Pelham Smithers, who runs Pelham Smithers Associates Ltd. in London.

“We favor the stock now,” Smithers said. “I have a real problem thinking where the disappointment will come from this year.”

He’s not alone. Following a steady stream of downgrades since May, analysts have settled on an estimate for about 18 million Switch shipments for the fiscal year that ends in March, according to the average of more than a dozen projections tracked by Bloomberg. While that’s short of Nintendo’s target of 20 million, the impact is already partially reflected in the current share price.

Of the 22 analysts tracking the Kyoto-based company, 19 have given it a buy rating, at an average 12-month target price of 49,313 yen, according to data compiled by Bloomberg. That suggests a potential 46 percent return from Friday’s closing price of 33,850 yen.

One key question is whether Nintendo will revise its forecasts when it reports results next week. Switch hardware sales during the quarter — which accounts for about half of annual revenue — are seen climbing 22 percent from a year earlier to 8.7 million units, according to the average of six estimates compiled by Bloomberg. Sales of holiday titles Let’s Go Pikachu/Eevee and Super Smash Bros. Ultimate could also help lift operating profit by 27 percent to 151 billion yen ($1.4 billion), according to the average projection.

A stronger Switch game lineup is in store for 2019, including highly-anticipated sequels to Pokemon, Luigi’s Mansion and Animal Crossing. Third-party publishers are also boosting output with the re-release of old blockbusters from the Final Fantasy and Resident Evil series. Then there’s Mario Kart Tours, the mobile debut of what is arguably the world’s most popular racing game, which Nintendo has promised to release by the end of March. That may also help Nintendo regain lost ground in an industry that’s migrated to smartphones.

“First-party is kicking into higher gear and third-party is finally catching up,” said Kazunori Ito, an analyst at Morningstar Investment Services in Tokyo, referring to games published by Nintendo, and outside developers. “I don’t see them hitting their 20 million target, but frankly that’s no longer critical for predicting the stock price.”

Still, even as it recovers from a tough year, Nintendo’s biggest challenge remains unresolved: how to get people unfamiliar with its products to buy the Switch, a portable console that can be played at home or on the go. Last year’s big bet for broadening the audience was Nintendo Labo, a unique set of cardboard accessories that combine Switch games with craft building. But sales were weak, leaving the company once again tethered to its main strategy of selling sequels to consumers and parents who grew up with the company’s products.

“The fact is the Switch was a successful piece of hardware targeted at their core audience, which tends to be younger children and adults who grew up with the Nintendo brand,” said David Cole, founder and chief executive officer of DFC Intelligence. “The big challenge they face for growth is: how do they expand that audience?”

With Sony Corp. and Microsoft Corp. likely holding off on the release of their next-generation consoles for at least another year, Nintendo still has plenty of chances to attract more gamers, especially if it decides to cut the Switch’s $300 price tag or offers upgraded hardware.

“It’s necessary to look past the 20 million target and start asking how can Nintendo grow hardware shipments,” Morningstar’s Ito said.

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©2019 Bloomberg L.P.

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