Nintendo Earnings Preview: Time to Switch Things Up

Sam Reynolds
Nintendo Switch sales

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

The Nintendo Switch has been a breakaway hit for a company used to sluggish hardware sales, but in the weeks before Nintendo (TYO:7974) reports its year-end earnings investors have a clear message for the company: It's time for the next big thing. 

After all, Nintendo's Switch has been on the market since March 2017 -- nearly three years -- and while the console continues to sell well, analysts say it was the "winner" of Black Friday and is well on its way to selling 100 million units, it's nearing the end of its lifespan. While software sales remain solid, per numbers from the UK gaming charts Switch games dominated the rankings, fund managers and investors are really going to want to see strong hardware sales as the company needs to continue to make up for the "lost generation" of the Wii U.

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If you've read Wccftech's prior reporting, Nintendo is planning on developing a new version of the Switch for mid-2020. It is said that the console will use a custom SoC developed in conjunction with Nvidia, and not the Tegra X1+ processor. The Switch Pro, as it is tentatively named, will retail for a higher price point to build up revenue for the company's hardware vertical.

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. Between November and January, funds sold off approximately 59,100 units of Nintendo's ADR worth approximately $2.8 million while a non-material amount of units of the ADR were purchased during this time (Nintendo's ADR tracks the value of its Tokyo-listed stock, but trades in significantly lower volume). While gaming is a mixed bag in general right now, with many funds reducing their positions in stocks like Electronic Arts (NASDAQ:EA), the dramatic drop in Nintendo's fortune is worth noting.

Performance of the Nintendo stock ADR during the past half-year

According to Zacks Research, Nintendo is ranked in the bottom 10% in the sector and has a strong sell ranking. According to analysts polled by the Wall Street Journal, six rate it a hold while 12 give it a buy (down from 15 three months ago). It should be noted that earnings per share has been upgraded to $2.17 from $2.15 given the positive performance of Switch sales during the US holiday buying period. Notably, Goldman Sachs and Morgan Stanley have both downgraded the stock from a Buy to Neutral and an Overweight to Underweight respectively. Goldman analyst Masaru Sugiyama cited a unclear path in 2020-2021 for Nintendo as a reason for the downgrade; while its rivals are preparing next-generation consoles that will enhance the gaming paradigm Nintendo doesn't have the same significant offerings in the pipeline.

Nintendo reports earnings on January 30 after the market closes in Tokyo.

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