May 9, 2017 12:00 pm JST

Switch flips the script for Nintendo

Pessimism gives way to optimism over hit console -- at least for now

SHIKO UEDA, Nikkei staff writer

OSAKA -- With its bullish targets for the current fiscal year, Nintendo has sent a clear message: It's back. But analysts say the real test for the company -- building on the early success of the new Switch game console -- is still to come. 

On April 27, Nintendo announced a consolidated operating profit target of 65 billion yen ($576 million). That would mark a 120% increase over the year-earlier figure. The company is also shooting for a 53% increase in consolidated revenue, to 750 billion yen.

If it pulls that off, it would be the first revenue growth in nine fiscal years.

Many analysts are optimistic about Nintendo's prospects after seeing the brisk sales of the Switch. Introduced in March, the console was quickly in short supply across the globe. Investors, too, are climbing back on board.

Following the earnings briefing, Nintendo shares set fresh year-to-date highs on April 28 and after. On May 1, the stock closed 3% higher than the April 27 close.

The Switch sales figure for March was one of the biggest buying cues. Nintendo sold 2.74 million units, exceeding its target of 2 million. The company now aims to move 10 million units in the current fiscal year.

Still, Nintendo is nowhere near returning to its most successful years. The new operating profit target is a little over 10% of the record high -- 555.3 billion yen -- earned in the year through March 2009. That was also the last year in which Nintendo's revenue grew.

Nintendo President Tatsumi Kimishima struck a cautious note with reporters on April 27, saying, "I don't think we can readily achieve the target [of selling 10 million consoles]."

Lose and learn

Based on the console's strong initial momentum, though, some analysts say Nintendo might do even better. Yasuo Imanaka at Rakuten Securities' research division said he expects to see 14 million Switches sold. Other market watchers, too, expect the company to beat the target.

Not a few analysts have the impression that Nintendo has learned from its mistakes with its previous console, the Wii U. The company has sought to make it easier to create games for the Switch by expanding the scope of development tools. It is also pushing developers to expand the Switch game lineup quickly. An executive at one software company said Nintendo asked it to introduce major releases "as early as possible."

Hideki Yasuda, an analyst at the Ace Research Institute, said overseas game developers that have released few games for Nintendo platforms may be more inclined to serve up titles for the Switch.

Meanwhile, Nintendo has major releases of its own lined up through the winter, including "Splatoon 2" and "Super Mario Odyssey." A similar strategy contributed to the success of the original Wii console, which was released in 2006 and eventually sold over 100 million units.

The Wii's sales were also driven by "Wii Fit," a home exercise game that helped broaden the user base. This was in line with the company's business model of using software to drive hardware sales.

Nintendo is putting a new twist on that model with the Switch -- aiming to expand the ways users can enjoy the platform. A paid membership service, scheduled to start this fall, will allow gamers to play online and to download titles developed for past Nintendo consoles, including the old Nintendo Entertainment System.

The company is also stepping out of its hardware-software comfort zone to further drum up interest, promoting its game franchises and characters at theme parks and in films.

Despite the positive vibes, though, analysts caution that hardware platforms -- no matter how successful -- can quickly lose their luster in the ever-evolving game industry. This started to happen with the Wii just three years after its introduction.

For now, the Switch looks destined for strong sales, driven by an attractive lineup of games. But an analyst at a foreign securities company warned investors not to get ahead of themselves. Before bidding Nintendo shares to new heights, the analyst said, market players need to see how the flagship games actually perform. 

Nintendo Co., Ltd.

Japan

Market(Ticker): TKS(7974)
Sector:
Industry:
Consumer Durables
Recreational Products
Market cap(USD): 62,956.66M
Shares: 141.66M

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