Not long ago, Nintendo (NASDAQOTH: NTDOY) was in a tough spot. Sales for its handheld and home consoles were down dramatically compared to previous models, leaving the video game giant with a diminished consumer base for its software, and putting a serious damper on its outlook. However, concerns that Nintendo's glory days were all in its past seem to have been misplaced, however, as the company has bounced back with a series of smart moves and successes that have lifted its stock to seven-year highs.
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Let's look at how the company has managed its impressive comeback, and examine what will drive its business going forward.
The Switch platform is a hit
Nintendo's software is consistently high quality, but the company's hardware-dependent business model means that its games won't reach their sales potential if its consoles are not hits. But the Wii U was a significant failure, turning in the lowest sales numbers of any mainline platform in Nintendo's history and weighing down the company's performance from 2012 to 2016. The Japanese gaming giant's future was at risk if it could not deliver a more successful console follow-up.
Luckily, the Switch (which hit stores in March) is on track to be a huge success. This quote from Nintendo's most recent earnings report summarizes the platform's hardware and software performance last quarter.
During the first quarter of this period (April through June 2017), for Nintendo Switch, we released Mario Kart 8 Deluxe in April to favorable response, selling 3.54 million units worldwide. ARMS, released in June, is also off to a good start with 1.18 million units sold globally. In addition, The Legend of Zelda: Breath of the Wild, released in the previous period, has also continued to perform well, selling 1.16 million units worldwide (3.92 million units on a cumulative basis). Altogether the sales volume for Nintendo Switch hardware and software during this period came to 1.97 million units and 8.14 million units respectively.
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While The Legend of Zelda: Breath of the Wild is currently the system's best-selling game, and played a big role in moving hardware units, the performance of Mario Kart 8 Deluxe is actually the best news from a shareholder perspective. The game is an updated version of Mario Kart 8, which released on Wii U in 2014, and, as such, was likely inexpensive for the company to produce. A similar dynamic is at play with the success of Splatoon 2, officially a sequel to the series 2015 debut on Wii U -- but one that reuses a great deal of its assets. Nintendo has the most valuable back catalog in the video game industry, and it looks like there's a big opportunity to re-release many of its previous hits from Wii U.
Finding success in mobile
Mobile is both the largest and fastest-growing segment of the video game market, and it presents a huge opportunity for Nintendo. Prior to 2015, the company was hesitant to release games for smartphones and tablets -- fearing that making its franchises available on mobile would hurt sales for its hardware platforms. The company is now taking a different tack, and has released a handful of mobile titles that have achieved very encouraging results. Here's President Tatsumi Kimishima discussing the company's mobile success and outlook at Nintendo's July shareholders meeting:
We offered three applications for smart devices during the previous fiscal year, and, though the content and consumers playing the applications were different, each one was received extremely favorably. Super Mario Run, for example, achieved 150 million downloads worldwide, and consumers who had never played our games before were able to experience our IP on their smart devices. We believe that we can further expand our core integrated hardware-software business by providing our software on smart devices and increasing the number of consumers who experience our IP.
Nintendo is still a newcomer to the world of mobile gaming, and it's experimenting to see which methods of game design and monetization work best. Given that, its early successes are very encouraging, and suggest that it will be able to continue leveraging its blockbuster franchises to drive engagement and sales in the mobile space. Expanding the reach of its characters also has the potential to increase the appeal of its hardware and bring new customers into its ecosystem -- so long as the hardware itself is appealing, which the Switch clearly seems to be.
Branching its characters into new mediums
Nintendo has the most valuable cast of characters in the video game industry, and it should be able to reap the benefits in other mediums as its properties become increasingly mainstream. The company has already joined forces with Comcast to bring its characters to Universal theme parks in Japan, and will be expanding that partnership to American parks. Here's Kimishima discussing those plans in his most recent letter to shareholders:
We are hoping to pursue every business possibility and add value to our company by actively offering Nintendo IP in a variety of different ways so that not only current players of our video games but all consumers -- including those who used to play but currently do not and even those who have never played our video games before -- will also come in contact with Nintendo IP.
Combined sales for smart device games and revenue from licensing its characters increased 450% year over year in the last quarter, reaching roughly 10% of overall sales. That's an impressive contribution given how young both those businesses are, and Nintendo is still exploring the idea of an expanded presence for its characters in television and film and at other Universal theme parks around the globe. Similar to its mobile efforts, broadening the reach and appeal of its characters creates opportunities to bring new and lapsed users back into its core ecosystem.
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