Nintendo won the pandemic. How will the gamemaker confront COVID’s end?
Nintendo benefited big from the COVID-19 pandemic, with stay-at-home orders boosting demand for its gaming products. On Thursday, the 132-year-old Kyoto-headquartered firm announced a record year for operating profits, which skyrocketed 82% year over year to 640.6 billion yen ($5.9 billion).
Net sales of hardware and software jumped 34.4% to 1.76 trillion yen ($16.1 billion yen). Nintendo sold 28.8 million Switch consoles in the year.
Nintendo’s share price has climbed 90% since March 2020, but it closed down 1.72% to 61,610.00 yen on Thursday as the company also predicted an 11.5% drop for the upcoming fiscal year sales and potential production hurdles because of the global semiconductor chip shortage. (Nintendo shares continued to slide on Friday.) Market watchers are weighing whether sales of the four-year-old Switch have peaked and if the company can maintain its profit momentum beyond the pandemic.
Breaking the cycle
Some analysts are bullish on the gamemaker.
“The stock will [grow] over time,” said Han Joon Kim, division director at Macquarie, and he set a 12-month price target of 101,600.00 yen.
Mario Stefanidis, vice president of Roundhill Investments, called the last fiscal year, which ended March 31, an “evolutionary” year for the company since it grew revenue for a fourth consecutive year and experienced its highest revenue growth ever outside a console launch window.
He interpreted the results as evidence that Nintendo has broken out of “console cyclicality”—whereby growth and shares surge alongside the launch of a new console—and is transitioning to a service-based model that focuses on selling online content, games, and subscriptions.
Nintendo’s standout game of the pandemic is, without a doubt, Animal Crossing: New Horizons, an island simulation game launched early in the pandemic that is “extremely social,” said Serkan Toto, CEO and founder of Kantan Games, a Japan-focused game consultancy. It gave users a way to interface with one another at a time when human contact was off-limits. New Horizons was Nintendo’s most popular title of the year, selling 20.85 million units, boosting Switch’s popularity and expanding Nintendo’s user base. Total sales of New Horizons are nearing 33 million, closing in on Mario Kart 8 Deluxe, the bestselling Switch game of all time with 35 million units sold.
Production and disruption
Switch and New Horizons met the pandemic moment, but now the pandemic is receding in some parts of the world. Daniel Ahmad, senior analyst for pan-Asia video game research firm Niko Partners, predicts the first two quarters of this year will be tough for Nintendo, with stay-at-home orders easing and no “Animal Crossing–level hit” set for release.
What could buoy Nintendo in coming months is the release of the Switch Pro, which is rumored to use A.I. tech to upgrade game graphics to 4K-resolution (also known as Ultra HD). Nintendo competitors like Sony’s PlayStation 5 already feature 4K.
Nintendo president Shuntaro Furukawa has shot down rumors of new hardware releases in the near term, stating in a February release that Nintendo does not “have plans to announce a new model.” But analysts are confident that the new iteration of the Switch will be released in late 2021 to high demand and just in time for Western markets’ holiday season.
But the global chip shortage could hinder the success of the Switch Pro—and the current Switch, for that matter. “All console manufacturers [worldwide] will struggle to fully meet demand this year,” said Ahmad.
A Nintendo spokesperson told Fortune on Wednesday that it has the chips needed for immediate production. But Furukawa acknowledged in the company results that the “production of products might be affected by obstacles to the procurement of parts—including the increase in global demand for semiconductor components.”
Whenever the Switch Pro is released, it’s likely to extend Nintendo’s ongoing growth “supercycle,” said Stefanidis, and refresh the Switch as it approaches its fifth year, when game consoles usually peak.
Beyond hardware supply and demand, Nintendo’s future performance may also depend on whether it can diversify beyond its bread-and-butter console-based gaming business.
Mobile gaming and IP-related income earned Nintendo 57 billion yen ($522 million), just a fraction of the 1.7 trillion yen ($15.6 billion) brought in by video game hardware and software. Still, Nintendo is looking to the smaller segment for growth.
Nintendo has become “a lot more [aggressive] in recent years [in its IP space], monetizing its franchise with Lego, Levi’s, and Uniqlo deals for example,” said Kantan Games’ Toto. In its earnings release, Nintendo also announced that it has added Illumination Entertainment CEO Chris Meledandri to its board of directors. Illumination is the studio Nintendo has partnered with for the Super Mario animated film to be released in 2022.
Its IP licensing business got another boost on March 18 when Super Nintendo World finally opened at Universal Studios Japan. But the much-hyped theme park closed a few weeks later as Osaka declared a COVID state of emergency.
“One big question mark is when the new theme park can kick into gear” and contribute to profitability, said Toto.
More Super Nintendo Worlds are slated to open at Universal Studios locations in Singapore, Hollywood, and as part of Universal Studios’ Epic Universe in Florida, but the pandemic has pushed back construction.
In mobile gaming, Nintendo has fallen behind. Its last major mobile release was Mario Kart Tour in September 2019, meaning Nintendo hasn’t reached its goal of releasing two to three new mobile titles per year and has, perhaps, lost its zeal for this segment given the roaring success of its legacy game franchise, which is best suited for its own consoles.
Nonetheless, Toto cautioned that one surprise launch from the company that “turns into a blockbuster can change the story instantly.”
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