Nintendo’s stock (NTDOY) has been on fire since last July when the company’s hit mobile game, Pokemon Go, was released, peaking at $37.37 on July 18. It is now hovering around the $32 level. Now, the company released a new console dubbed the “Switch”, raising the idea the trend may continue.
The console is sold out on just about every outlet. The company’s most popular game, The Legend of Zelda: Breath of the Wild, will likely go down in history as the highest rated video game of all time.
On the surface, it appears as though everything is peachy-keen for Nintendo shareholders. Dig deeper, however, and you will find Nintendo is a deeply troubled company with a flawed business model and limited prospects for growth.
The Truth About the Nintendo Switch
Head out to your local Gamestop, Toys R Us, Walmart or Target and you probably won’t be able to find a Switch. Unfortunately, Nintendo failed to produce enough units to meet consumer demand. Ask anyone who has taken a college-level business course, and he will tell you Nintendo has committed the cardinal sin of capitalism. A business should always have enough product available to meet demand.
Many gamers and industry insiders are adamant that Nintendo intentionally produced a limited supply of Switch consoles to generate hype. This conspiracy theory rests on the notion that the inability to acquire an in-demand item ultimately results in more sales than if initial consumer demand was met.
Regardless of whether Nintendo intentionally limited Switch production, the bottom line is the company left money on the table. Tons of it.
Why the Switch Will Fail
Most of those who follow the video game industry are highly skeptical of the upcoming lineup of Switch games. Mario Kart 8 Deluxe is a rehash of the original Mario Kart 8, and while Super Mario Odyssey looks intriguing, it won’t be released until December of 2017 or later.
If you were to survey current and prospective Switch owners about the rest of the games coming down the pipeline, most would find it hard to pinpoint a game beyond Arms that generates considerable excitement.
There is a significant lack of third party support for this under-powered and overpriced console. Add in the fact that Nintendo will charge its users to play games online and it is easy to see why most people aren’t enthused about the once-dominant game maker’s latest console.
The problem with charging for online play is that a sizable portion of Nintendo’s audience has to convince their parents to shell out the monthly fee for Nintendo’s online service. That’s a fairly steep hurdle to overcome.
Switch by the Numbers
Analysts anticipate about 11 million Switch units will be sold by year’s end. Extrapolate this sales pace across the next half-decade, and the company will likely sell about 35 million units. This is about one-third of the 102 million Wii consoles sold.
Sure, 35 million units represents a tripling of the number of Wii U consoles sold, yet it pales in comparison to its competitors. Consider the fact that an estimated 55 million PlayStation 4s are currently in use. About 26 million Xbox One consoles have sold to date.
The Illusion of Pokémon Go
“What about Pokémon Go?”, Nintendo fanboys ask, referring to a game that was trendy for all of two weeks. Though this augmented reality program managed to stay relevant in the couple of months following its release, its popularity sank fast.
The little known truth about Pokemon Go is that it’s simply not profitable. Nintendo receives only 10 percent of the game’s revenue as it was co-developed by Niantic and Pokémon Company.
Nintendo is trading beyond 100 times its anticipated annual earnings. The company’s market capitalization is $36 billion. The resulting price-to-operating profit ratio is egregiously high. Add in the fact that Nintendo shares trade at an absurdly high premium compared to other gaming companies and it is easy to see why the “smart money” is exiting Nintendo for greener pastures.
Regards,
Ethan Warrick
Editor
Wealth Authority
