Nintendo Shares Plummet After Mixed Earnings, Plans for New Switch Axed

Nintendo (TYO:7974) had a rough day on the market after it missed estimates for quarterly profit earnings and its full-year earnings were short of analysts' expectations. 

Shares of the company dropped approximately 4.7% as the Friday trading day kicked off in Tokyo. Nintendo's ADR, which trades in New York, experienced a similar decline during its respective trading day after it announced earnings. On Thursday, Nintendo announced an operating profit of about $1.55 billion (168.7 billion Yen) in the key October-December quarter. This accounted for a 6% increase from the same period last year, but it missed mean expectations of $1.61 billion (175 billion Yen) from analyst estimates compiled by Refinitiv.

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Investors were also likely unimpressed with the big decline in some of Nintendo's key metrics. Nintendo reported that its net sales were up by 2.5% on year, compared to an increase of 16.4% from a year earlier; Operating profit was up by 19.5% for the period, compared to 40.6% from the same time last year. These are tell-tale signs that the company's best years of growth are behind it.

Despite Nintendo having some of the world's most recognizable video game characters, Nintendo's president, Shuntaro Furukawa, who has had the role since 2018, has approached licensing its IP to mobile game makers with hesitation while his predecessors outright rejected this. Although Pokemon Go was a smash hit, there's been no notable follow-up. All the while, revenues from mobile have topped $1 billion, analyst firm Sensor Tower estimates, and digital revenue is 28.6% of Nintendo’s total software and services revenue, compared to 21.8% in the same period last year. Investors are likely going to be wanting to see this number increase, and a concerted effort by Nintendo management to grow the company's presence in this crowded space.

The elephant in the room is no doubt Nintendo's reliance on the Switch to grow the company's bottom line. As the Financial Times pointed out, the Switch is three years old in March and "teetering on the brink of becoming outdated". While sales of the Switch were up, as a category, shipments of the original console dropped by 13% during the last nine-months of 2019 compared to the same reporting period in 2018. The Switch only grew as a category because of the launch of the Switch Lite, which shipped 5.19 million units globally during the last quarter, and the console's launch in China.

Investors are likely to be doubly dismayed that Nintendo has announced that it has no plans for launch a new Switch console in 2020. As Wccftech reported, according to a briefing put out by Nintendo, the company plans to expand the install base of its current Switch consoles throughout the remainder of the year. “Please note that we have no plans to launch a new Nintendo Switch model during 2020,” the briefing reads.

With a reluctance to further expand its offering of mobile games, and no plans to release a new Switch console in 2020, Nintendo is in a tough spot. Everyone that wants a Switch already has one, so to keep revenue up Nintendo will have to rely more on digital gaming, IP licensing, and software sales. The company's software sales metrics are impressive, but they are made on the backs of blockbuster games -- which take time to make.

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But investors already knew all of this. According to 13F filings for Nintendo's ADR reviewed by Wccftech, there was a 45% drop in institutional holdings of Nintendo during the last quarter with a big sell-off occurring late in the year and in the early weeks of January.

But what will be Nintendo's next big switch?