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How high can the Nintendo share price go?

Nintendo shares rallied to their highest level in over one year after the release of the new Switch Lite console provided a welcome boost to sales ahead of the 2019 holiday season. But can it keep up the momentum?

Nintendo Source: Bloomberg

Nintendo smashes first-half top-line estimates

Nintendo, the Japanese gaming company best known for its suite of characters including Super Mario, comfortably beat market expectations when it released its results for six months to the end of September 2019. The company said it made ¥271.9 billion in revenue in the second quarter (Q2) – that was 58% higher than Q1 of the financial year (FY) and more than 23% higher than the same quarter a year before. That resulted in a 14% jump in first-half (H1) revenue to ¥444 billion.

Nintendo’s operating profit for Q2 totalled almost ¥67 billion, more than doubling both quarter-on-quarter (QoQ) and year-on-year (YoY). That figure smashed analyst expectations for an operating profit of just ¥50 billion.

Below is a table outlining Nintendo’s quarterly results since the start of FY 2017.

Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 H1 2019 H1 2020
Net sales (million yen) 154,069 219,971 482,971 198,669 168,157 220,748 608,390 203,264 172,111 271,856 388,905 443,967
Cost of sales (million yen) 89,339 140,985 200,382 121,434 85,249 131,637 371,335 111,147 88,693 142,170 216,887 230,864
Gross profit (million yen) 64,729 78,986 182,588 77,235 82,907 89,110 237,055 92,116 83,417 129,865 172,018 213,103
Operating profit (million yen) 16,208 23,752 116,500 21,094 30,535 30,869 158,624 29,672 27,428 66,794 61,405 94,222
Pre-tax profit (million yen) 31,363 39,844 125,167 4,714 43,499 48,048 148,018 32,206 22,301 62,930 91,547 85,231

Source: Nintendo company reports. FY runs until the end of March

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Launch of Nintendo Switch Lite provides momentum

The main driver behind the results was the release of the Nintendo Switch Lite, a cheaper and lighter version of the Nintendo Switch gaming console that was released in March 2017. The main selling point of the Switch Lite is that it can only be used as a handheld gaming device using the console’s own screen and can’t be plugged into a television like its predecessor, although there is little difference between the two when it comes to other features.

Read more about trading tech stocks and lessons to learn from major product launches

The Switch Lite was launched in September and has got off to a great start. The console was launched just two weeks before the end of Nintendo’s H1 (although it started taking orders four weeks before launch), but the company still managed to sell almost 2 million units. Importantly, Nintendo said the release of the new console has not cannibalised sales of the core Switch console. In fact, there is evidence that Switch sales benefitted from the release of the Switch Lite. Nintendo sold 2.85 million Switch consoles in the latest quarter, about 700,000 more than the previous quarter. Excluding the all-important holiday seasons, the latest quarter was the best on record for Nintendo’s hardware since the Switch was launched:

Nintendo Switch Lite reignites momentum in sales ahead of 2019 holiday season

Nintendo Switch Lite Source: Nintendo*

The cheaper price of the Switch Lite means buying a console has become cheaper for first-time gamers. Nintendo said first-time buyers accounted for nearly six out of every ten Switch Lite consoles it has sold so far. More interestingly, the rest of the sales have been made to customers that already own a Switch and have purchased a Switch Lite as second system, mainly as an ‘on-the-go’ version because of its lightweight and compact design or to supplement their family’s shared Switch console. Nintendo also said the Switch Lite has proven particularly popular with female gamers. ‘We are starting to see a higher percentage of female users among new Nintendo Switch Lite purchasers compared to the status before the launch,’ the Japanese firm said.

Evergreen games still proving popular

One of Nintendo’s biggest strengths is its suite of globally-recognised characters that have proven popular for decades, including Mario, Zelda and Pokémon. The evergreen nature of its titles means they remain firm favourites when people buy a Switch or Switch Lite. Titles that it released early on are still going strong, and Nintendo’s top-selling titles comprise a mix of both old and new. Mario Kart 8 Deluxe was released soon after the Switch was launched and is Nintendo’s top-selling game overall, and it was still the best-selling title between April and September 2019 with over 1.9 million units sold. Similarly, over 1.3 million units of the Legend of Zelda: Breath of the Wild, launched alongside the Switch console, were sold in the first half of the financial year. Still, newer titles – including New Super Mario Bros, Super Mario Maker 2 and the new Zelda game – have all performed strongly since being released earlier this year.

Top selling in-house Nintendo Switch titles

Release date Copies sold
Mario Kart 8 Deluxe April 2017 19 million
Super Smash Bros Ultimate December 2018 15.7 million
Super Mario Odyssey October 2017 15.4 million
The Legend of Zelda: Breath of the Wild March 2017 14.5 million
Pokémon: Let's Go series November 2018 11.3 million
Splatoon 2 July 2017 9.3 million
Super Mario Party October 2018 7.6 million
New Super Mario Bros. U Deluxe January 2019 4.6 million
Super Mario Maker 2 June 2019 3.9 million
The Legend of Zelda: Link's Awakening September 2019 3.1 million

Nintendo sensibly launched some big titles to coincide with the release of the Switch Lite: Pokémon Sword, Pokémon Shield, and the Legend of Zelda: Link’s Awakening – all of which are remakes of classic versions released on Nintendo’s old handheld console: the Gameboy. The release of the Switch Lite and the new games had a clear effect on software sales in Nintendo’s second quarter. Software sales jumped 60% QoQ and reached their second-highest level since the original Switch console was launched. The only other quarter where software sales were higher was during the holiday season in 2018 – suggesting new records could be made in the current quarter to the end of December.

The company has had to delay the release of some much-anticipated games. When it pushed back the release of the upcoming Animal Crossing title, it lost $1 billion in value in a single day. Still, it has largely managed to release a steady flow of titles to keep customers happy. It released at least one major in-house title per month between June and September (with two in July), and has more in the pipeline.

Nintendo in-house games: Japan upcoming releases

Release date
Pokémon Sword November 2019
Pokémon Shield November 2019
Dr Kawashima's Brain Training December 2019
Tokyo Mirage Session #FE Encore January 2019
Animal Crossing: New Horizons March 2020
Xenoblade Chronicles: Definitive Edition July 2020
Famicom Tantei Club: Kieta Koukeisha July 2020
Famicom Tantei Club: Ushiro ni Tatsu Shoujo July 2020
Bayonetta 3 To be announced (TBA)
Metroid Prime 4 TBA
Sequels to Legend of Zelda: Breath of the Wild TBA

Source: Nintendo company reports

Nintendo in-house games: US upcoming releases

Released date
Pokémon Sword November 2019
Pokémon Shield November 2019
Tokyo Mirage Session #FE Encore January 2020
Animal Crossing: New Horizons March 2020
Xenoblade Chronicles: Definitive Edition July 2020
Bayonetta 3 TBA
Metroid Prime 4 TBA
Sequel to Legend of Zelda: Breath of the Wild TBA

Source: Nintendo company reports

Nintendo in-house games: Europe upcoming releases

Release date
Pokémon Sword November 2019
Pokémon Shield November 2019
Dr Kawashima's Brain Training March 2020
Tokyo Mirage Sessions #FE Encore January 2020
Animal Crossing: New Horizons March 2020
Xenoblade Chronicles: Definitive Edition July 2020
Bayonetta 3 TBA
Metroid Prime 4 TBA
Sequel to Legend of Zelda: Breath of the Wild TBA

Source: Nintendo company reports

In-house games and digital sales help deliver superior margins

The fact Nintendo makes most of its own games is significant. It means it has greater control over quality over the games and the schedule under which they are released. Over three-quarters of all games bought are made by Nintendo. It is also beneficial to margins, with Nintendo’s gross profit margin not far away from 50%. In terms of operating margin, Nintendo’s stood at 21.2% in the three months to the end of September, which compares favourably to the 14.3% reported by Sony’s gaming division. It is also worth noting that Nintendo is selling more software to customers who download them to their console rather than buy physical copies, which is a cheaper form of distribution.

Nintendo first-party software helps drive margins

Nintendo first-party software Source: Nintendo

Nintendo well placed for 2019 holiday season

There was some doubt over the longevity of the Switch console and the company’s attempt to revitalise sales with a trimmed-down version – but initial sales have put those concerns to bed for now. The evidence suggests the new Switch Lite is providing a cheaper price to attract new customers and even getting existing customers to buy one as a second system, all without hurting sales of its pricier core console. It has proven that its games are resilient and are still must-have titles for new customers, and following the recent release of several high profile games (including Luigi’s Mansion 3, RingFit Adventure and the new Pokémon titles), Nintendo looks in a better position than ever as it heads into the crucial holiday season. The final three months of the calendar year (which is Nintendo’s Q3) is always the most lucrative. In 2018, Nintendo generated more than 50% of its annual revenue and profits between August and December.

Analysts were left slightly disappointed by Nintendo’s decision to stick to its full-year targets after its latest set of results smashed expectations. Nintendo is aiming to sell 18 million bits of hardware and deliver ¥260 billion of operating profit in the year to the end of March. However, the performance in the first half means there is more room for Nintendo to beat expectations. Nintendo could be criticised for being too cautious, but it is better to under-promise and over-deliver than the other way around. Nintendo’s chief executive Shuntaro Furukawa said it would be ‘premature’ to adjust the company’s annual targets, implying there is a chance that guidance could be raised once the all-important holiday season is over.

But Nintendo still has a lot of work to do

Nintendo’s strategy around its consoles is building momentum, but investors have been disappointed with the company’s approach toward future opportunities. Not only are new players entering the market, but they are introducing new business models built around mobile gaming and streaming that threatens the future of the games console.

Nintendo accused of being slow on mobile gaming

Making games for smartphones and tablets is the most lucrative part of the global gaming business. According to games analytics firm newzoo, $68.5 billion will be spent globally on mobile gaming in 2019, accounting for 45% of all expenditure on games. That is considerably larger than the $47.9 billion forecast for the console market. However, the console market is less crowded and is growing at a faster rate, up 13% YoY in 2019 compared to a 10% increase in spending on mobile games.

Still, the mobile gaming opportunity is too big to ignore. Nintendo has experienced both success (such as the phenomena of Pokémon Go) and failure in this arena before, and its latest attempt has been so far uninspiring. The launch of Mario Kart Tour – a smartphone version of the Mario Kart series – has been a huge hit in terms of numbers. Media reports suggest it has already been downloaded over 120 million times, making it one of Nintendo’s most popular mobile titles to date. However, it has been heavily criticised because it hasn’t launched the multiplayer mode that would allow users to compete against real people, including their friends, which is regarded as the number one feature. Reports suggest testing will begin in December, but there is no detail on when it will be rolled-out. This has hurt the monetisation of the game. Mobile data firm Sensor Tower reported the game has generated average revenue per user of just 26 cents. For perspective, an older mobile title of Nintendo’s, Dragalia’s Lost, has earned average revenue per user of $16.50, which is the target to beat.

Nintendo believes it can get Mario Kart Tour downloaded over 300 million times going forward, but that will be no good if it can’t entice users to pay for it. There is a subscription service that offers in-game items and faster gameplay, but many will be unwilling to fork out a monthly fee until the multiplayer mode is launched. The fear is that interest in the game will wane before the multiplayer mode is released, and the threat that Nintendo could miss the window to turn the game into a money-spinner.

and streaming...

There are also fears that the slow progress being made in mobile gaming leaks into Nintendo’s approach to streaming. This involves streaming games directly to televisions, phones, tablets and other devices, bypassing the need to buy a console.

Major players have announced tentative plans to launch new services, and Nintendo looks slow off the mark. Google is launching Stadia, a subscription-based service based on a Netflix-style model for gamers. Apple is launching a similar but slightly different proposition through Apple Arcade. NVIDIA Shield is another rival. But the biggest concern is that Microsoft and Sony – the makers of the Xbox and PS4, respectively, and Nintendo’s two biggest rivals – announced earlier this year that they intended to work together on streaming. The news was a surprise. For Sony, it is seen as a way of tapping into Microsoft’s experience in cloud-computing, which is the backbone of providing a streaming service. But for Microsoft, the deal has been touted as defensive and a reaction to the amount of competition, particularly from the likes of Google. There is already a string of streaming services up and running that gamers can use today, so the big guys are playing catch-up. If these companies that already have streaming plans underway are nervous, it is understandable that investors are even more concerned about Nintendo and its lack of movement so far. The firm has said it is evaluating its options and admitted the need to keep up in the fast-pace race but is yet to unveil any firm plans.

Investors keen to hear more on Nintendo-Tencent tie-up in China

Excitement has been building that Nintendo will soon break into China, which is the largest gaming market in the world, through a partnership with Tencent. The Japanese firm has been cautious about China because the gaming industry is complex: there was an outright ban on foreign-made consoles until as recently as 2015 and the government has been strict. For example, it recently ended a nine-month freeze on approving new video games.

Reports of a partnership were fuelled in April when Tencent won a key approval that allowed it to sell the Nintendo Switch in China in April. The pair confirmed they were working together to localise the Japanese firm’s games for the Chinese market in August using Tencent’s servers, payment services and distribution capabilities. However, there has been virtually no official news about the partnership since, which has turned the initial excitement into disappointment. However, investors should be patient because the opportunity is worth it, and consider that the silence from both Nintendo and Tencent is down to the pair working on delivering rather than boasting. There have been reports that Tencent has listed job vacancies for a new Nintendo Switch division and that an official e-store has already been registered on Alibaba, China’s largest ecommerce site.

Read more about Tencent rolling out test version of Game of Thrones smartphone game

The outlook is unclear, but investors should consider the catalyst this could provide rather than the lack of news. Breaking into China could be transformational for Nintendo, and Tencent could prove to be the partner it needs to launch a streaming service: Tencent is the second largest cloud-computer provider in China. Some analysts have suggested the pair could launch in China within the next six months, but there are plenty of reasons to think it could take longer than that.

Nintendo: where next?

Nintendo has always been the outlier within the gaming space, targeting an different style of gamer to that of Sony and Microsoft. The launch of the Nintendo Switch Lite has shown the company’s ability to innovate and supports its controversial belief that the console could have a lifespan of close to a decade. If current trends persist, this will comfortably be the best year for Nintendo since the start of the Switch era in terms of both hardware and software, signalling that we are yet to hit peak Switch. While Nintendo is on the up, sales of both the PS4 and the Xbox have been declining.

Read more on Nintendo vs Sony, and on who’s winning the console war in handheld gaming

Investors are concerned that Nintendo is acting to slow to capitalise on new opportunities in areas like mobile gaming and streaming services. It looks like the company won’t be a first mover, but it has unique strengths that should make it a formidable player across the gaming spectrum over the long term. It is the dominate force in handheld gaming and its suite of characters like Mario and Pokémon are perfect for smartphones and for on-the-go gaming.

All-in-all, there are several catalysts that could propel Nintendo shares higher. Investors are keen to see how Mario Kart Tours performs once the multiplayer feature has been enabled – although that doesn’t look likely to happen until next year. The string of new games and the release of the Switch Lite, which is attracting new types of gamers, means Nintendo should enjoy solid demand over the holiday season. And when the Nintendo-Tencent tie-up comes to fruition, it could be a game-changer for the business.

*Nintendo Switch released in March 2017, meaning Q2 2017 includes one extra month and runs from the start of March to the end of June.

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