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Will the Switch spark a Nintendo renaissance?

With Nintendo shares waking from the Pokemon Go and Super Mario Run success, could the Switch console spark a resurgence for the gaming giant?

Data
Source: Bloomberg

Nintendo shareholders are a patient lot, with the firm’s share price losing over 90% during the 2008-2013 period, only to consolidate those rock-bottom prices in the following two years. However, with the release of the Pokemon Go and, subsequently, Super Mario Run games, the giant appears to be waking from its slumber

While both games have been a success, they were unlikely to garner anywhere near the type of revenues associated with the good old days of the Nintendo Wii. So it is with great interest that on 3 March 2017 the gaming and investing communities watch the release of the latest Nintendo console, the Switch.

Aiming to be a bit of everything, this console is made for the home and on the go, both for the sofa gamers and those wanting the physicality of the Wii. The big question is, will this console spark the resurgence of the company, providing an opportunity for investors to pick up shares on the cheap ahead of a renaissance. It is going to come down to how popular this console is, and whether the company follows it up with enough titles to justify the platform becoming as profitable as the Wii.

Pros:

The number one benefit of the Nintendo Switch is the demographic and target audience, which to some extent will help override some of the cons below. Unlike the Xbox One and PlayStation 4, Nintendo consoles are geared more towards a family and social audience. With the failure of its last machine, the Wii U, this audience has largely been starved of the type of fun, social games the Wii delivered, as Sony and Microsoft sought to target the hardcore gamers.

High end graphics evident within both the Xbox and PS4 are arguably best showcased in realistic games, with the top selling games for both consoles highlighting the emphasis is more on single-player (with an online multiplayer element), violence based games. Conversely, the game which comes out on top of the pile for the Xbox is the ‘Kinect Adventures!’ much more akin to a Nintendo offering than a typical Xbox game.

Xbox PS4
Kinect Adventures! Uncharted 4: A Thief's End
Grand Theft Auto V Killzone Shadow Fall
Halo 3 Blooborne
Minecraft: Xbox 360 Edition Driveclub
Call of Duty: Black Ops Final Fantasy XV
Halo 4 Infamous Second Son
Call of Duty: Modern Warfare 2 The Last of Us Remastered 

 

When you look at the top selling games of all-time (below), they are predominantly Nintendo-owned, family-friendly games. This is a nod to the fact its games have been a staple in previous years, but also that there is a universality to Nintendo's output, with men, women, young and old, all finding something appealing in its games. Many of those listed below are only available through Nintendo platforms, whereas games available on the PlayStation have often also been offered on the Xbox, thus splitting the benefit of a strong game. On the list of top-selling games below, it is noticeable that eight of the top 14 games have only been available on a Nintendo device

Game Year Nintendo only?
Tetris 1984 No
Minecraft 2009 No
Wii Sports 2006 Yes
Grand Theft Auto V 2013 No
Super Mario Bros. 1985 Yes
Mario Kart Wii 2008 Yes
Tetris  1989 Yes
Wii Sports Resort 2009 Yes
New Super Mario Bros. 2006 Yes
The Elder Scrolls V: Skyrim 2011 No
Diablo III 2012 No
New Super Marion Bros. Wii 2009 Yes
Wii Play 2006 Yes
Grand Theft Auto: San Andreas 2004 No
Call of Duty: Modern Warfare 3 2011 No

 

This brings us to the next differential, which is the question of who actually creates the games we all play. You can play most PS4 games on an Xbox and most titles are developed by external companies rather than the creator of the platform themselves. This can have both positive and negative effects, as it provides a wider range of games on offer, thus raising the likeliness of someone buying the console. However, it also means the likes of Sony and Microsoft rely heavily on console sales and online licenses, whereas Nintendo will benefit from the lifespan of a consumer use of the console.

The fact Nintendo had to develop its own games was actually one of the downfalls of the Wii U, which, to a large extent, was a failure owing to the poor amount of games on offer. The relationship between games and sales is two-way traffic. Strong initial sales increase the funds allocated to developing games, while an increase in the number and quality of games raises sales. With that in mind, keep an eye on sales figures once the console goes live, as this could dictate the amount of resources Nintendo may throw at the console in the future.

Cons

There have been a number of complaints arising in the pre-release period, with hardware being one of the main issues. This is summed up perfectly below, with a comparison of the Switch to the PS4 and Xbox. Bear in mind both competitors have since announced more powerful, upgraded versions of their consoles. The Switch pretty much loses across the board, with some areas showing huge differentials.

The issue we have to consider here is whether this is necessary for the type of game on offer. There is no doubt a ‘first-person shooter’ requires more lifelike, detailed graphics compared to the likes of Mario. The target audience is going to be more interested in the interactive element and quality of gameplay rather than the feeling of being in the game. 

  Xbox One Playstation 4 Switch
CPU 1.75GHz 8-core AMD custom CPU 1.6GHz 8-core AMD custom "Jaguar" CPU 1020MHz Nividia custom Tegra SOC (*Clockspeed TBC)
GPU Integrated AMD graphics at 853MHz with 1.31 teraflops of performance Integrated AMD graphics clocked at 800MHz. 1.84 teraflops of performance 768MHz (docked)/307.2MHz (undocked) Nividia custom Tegra SOC (*Clockspeeds TBC)
RAM 8GB DDR3 8GB GDDR5 4GB (*TBC)
Storage 500GB (5,400rpm) hard drive, supports external hard drive storage 500 GB (5,400rpm) hard drive, storage drive can be swapped 32GB, storage can be expanded via MicroSDXC card
Optical Drive Blu-ray/DVD Blu-ray/DVD N/A
Networking Gigabit Ethernet, Wi-Fi A/B/G/N 2.4GHz and 5GHz Gigabit Ethernet, 802.11 B/G/N, 2.4GHz, Bluetooth 2.1 Wireless LAN/ Bluetooth 4.1 (wired LAN connection possible through LAN adapter)
Integrated Display N/A N/A 6.2-inch 1280x720 resolution multi-touch capacitive display

 

The second issue many raised is the price, which, at £279, is significantly more expensive than its older competitors. However, when the Playstation 4 (£349) and Xbox (£300) consoles were first released, they were both more expensive than the Switch. If the Switch is sufficiently desirable, users will likely be happy to pay a little more for a newly released console. 

The chart below highlights the long-term trajectory of Nintendo shares, with the beginning of 2008 marking the decline of the company’s market value. However, we have started seeing a resurgence in both price and volumes over the past year, raising the likeliness that we have seen the company bottom out. 

Long-term Nintendo chart

Looking on the weekly chart now, it is clear we are moving back into a stepped uptrend, with the current pullback expected to resolve with another sharp leg higher. With that in mind, bullish entries around the 61.8% (¥20,819) and 76.4% (¥17,975) retracements make sense as means to ensure the risk-to-reward is maximised. As long as we do not see a break back below ¥13,393, then a bullish outlook is in play. It is highly unlikely that we will see the share price return to the ¥70,500 highs of 2007, yet at such a low base, there is a good chance that a strong launch could provide the spark for a substantial period of upside. 

Weekly Nintendo chart

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