Nintendo Needs Upgraded Gaming System to Boost Earnings

The earnings prospects of Nintendo Ltd (NTDOF) are under pressure until the company unveils a successor to its Switch video game console, which has seen its sales declining over the past two years.  Despite this year’s rally in technology stocks, Nintendo is up less than +2% this year, while rival Sony Group (SONY) is up more than 20% from its improved PlayStation. Shares of Microsoft (MSFT) are up more than +7% this year, despite falling sales of its Xbox system.

Quarterly earnings from Nintendo are due Tuesday, and analyst expectations are for its Q4 operating profit to fall -5% to 240.3 billion yen ($1.8 billion).  That would be the first year-on-year decline in the important holiday quarter since 2017 when Nintendo introduced its Switch gaming system.  Nintendo projects that sales of Switch in fiscal 2023 will fall -17.7% y/y to 19.0 million units, the fewest units sold since 2019.

Sales of Nintendo’s flagship Switch game console are falling back from a peak of 28.8 million units sold in the financial year ending March 2021, when the pandemic boosted demand for the gaming consoles.  As a result, UBS Securities Japan said, “investors do not have high expectations for Nintendo’s 2023/24 earnings as this year is perceived to be a big limbo period in terms of the platform cycle.”  Nevertheless, speculation is building that Nintendo will likely launch a new Switch gaming system next year.

Unlike its main rivals, Sony and Microsoft, which have diverse operations in technology and media fields, Nintendo stock is more of a pure play on video games.  As a result, Nintendo is trading at about 13 times forward earnings, several points below Sony and nearly 10 points lower than Microsoft.  In addition, UBS Securities Japan said that Nintendo’s earnings results for the latest quarter might also show a negative impact from the yen’s recent rebound, noting that a gain of 1 yen per dollar lowers the company’s annual operating profit by 3 billion yen ($22.6 million).

Mitsubishi UFJ Kokusai Asset Management said that “sales of Nintendo’s Switch platform are entering a downtrend, and that’s why Nintendo’s share prices have not risen much. Thinking in terms of catalysts for Nintendo, they aren’t the stock you would choose now.”  Also, UBS Securities Japan said, “people will soon start speculating about next-generation hardware and are likely to refrain from buying the old system.  A slowdown in Switch sales momentum is unavoidable.” 

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