Nintendo Switch Has Arrived as a Major Player

Nintendo's (NASDAQOTH: NTDOY) Switch reached 20 million units sold faster than any other gaming console in history. It's fair to say that the system has been a game changer for its parent company, keeping it in the console business. Switch now represents 70% of Nintendo's revenue between hardware and software, giving the company a very different future than it would have had without a successful console.

A full transcript follows the video.

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This video was recorded on Dec. 14, 2018.

Dylan Lewis: Why don't we start with the Nintendo Switch? I'm sure that this is something that is on a lot of holiday wish lists this year.

Dan Kline: It is. And let me tell you, not only was I an early adopter of the Switch, I actually paid slightly extra. Remember when there was a shortage of it a holiday season ago? I paid, not a lot extra, but maybe $15-20 extra to get one for my son, thinking that this would be the video game system that brought the whole family together. [laughs] In reality, it perhaps brought my son and I together a little bit. We'll play some Splatoon, we'll play Mario Kart. My wife perhaps played one round of Mario Kart.

The Switch -- we'll get into the business aspects of it later -- it is what it promises to be. It is a game system that does not require a high level of learning. You can pick up most of the games and just play them and have them be fun. A lot of the games don't give you a huge advantage for being younger and good at gaming. Now, Fortnite is on the platform, there are lots of traditional games on the platform. But a lot of the Nintendo software is this sort of "hey, it's fun" video game system.

Lewis: And that's what Nintendo has been so good at for such a long time. They've been able to make these very accessible games. The Wii is the perfect example of that.

Kline: This is the real successor to the Wii. When the Wii came out, it was the video game system that you didn't buy instead of the current Xbox or PlayStation, you bought it in addition to. And if you had kids, you could play with little kids. If you had your friends over, you could play Wii Tennis or something and have it be a little bit of fun. The console after that, the Wii U, was just too complicated. It overshot things. It's sort of a variant of what the Switch is. But what the Switch is, it has a portable screen. You can play like a tablet, hold it up in front of you, two controllers on the side. You can also put it on a stand and use that screen, or you could plug it into your TV. It makes it this incredibly versatile game system. And honestly, it's fun to play in the TV, but it's also really fun to play in the backseat of the car, too.

Lewis: This is the console that Nintendo really desperately needed. You mentioned that they overshot with the Wii U, and maybe didn't quite nail the functionality. We're seeing already that the Switch is selling quite well. It's already outsold the Wii U. And it looks like the holiday season's going to be blockbuster for this console.

Kline: This was a game saver for Nintendo. They were downplaying it, but the reality was, the Switch is about 70% of their sales, and sales skyrocketed. What happened was, they were looking at getting out of the console business. When the Wii U failed, you started hearing a lot more talk about them licensing to other platforms. Nintendo owns very strong IP, but it's hard to think that Nintendo games on Xbox or PlayStation were going to sell as well as they do on their own dedicated platform, where each release is a very, very big deal. So, this was kind of a last chance. And it came out strong. But last year, when it sold two or three million units, there were shortages. That said, OK, there's a hardcore Nintendo base. What we didn't see until this year is, this year, it's on track to sell about 20 million units, the fastest video game console to sell 20 million units. That puts it well ahead of where PlayStation 4 and Xbox One were at the same place in their development. If you assume maybe an eight-year lifespan on a console, maybe even a little longer, that gives Nintendo six, seven more years to wring out some life from this and maybe figure out what the successor to it is.

Lewis: You mentioned that 70% figure of their top line being Switch-related. That's a blend of hardware sales and software sales. This is the kind of thing where if you get that installed base, then you can just enjoy the fact that they're there. You can sell them games, you can work with the Nintendo universe, but you can also bring other stuff into the mix.

Kline: Up until this Christmas, when they sold some limited Mario Kart bundles, and maybe a couple of other game bundles, when I bought my Switch, it came with nothing. If you assume that the console makers break even on the console, I had to immediately go out and buy a game. I probably immediately went out and bought four or five games and have since bought maybe another five or six this year. It's an absolute moneymaker. Something like Mario Kart is a lot like Madden. You can't put a new one out every year, but if you put a new Mario Kart out every three years, people are going to buy it. The big hit right now is Super Smash Brothers, which is obviously another sequel. Then, they have two Pokémon games. Not only are those outselling previous Pokémon games, they're drawing in some of the adult audience that plays Pokémon Go. I play Pokémon Go, but have not bought the Switch game yet, though.

Lewis: This is the hit that Nintendo desperately needed. You look back at this company, they struggled for quite some time. You mentioned before, they were lost a little bit. Over the last couple of years, the points of enthusiasm for them have been the Pokémon Go craze, which hit in 2016. You look at Nintendo's stock, and there's a distinct spike right around where that started to catch on. I think what people quickly realized was, "This doesn't quite have the staying power that we thought it might." I think it's really good for Nintendo that they have this new flagship console, and by all indications, sales look great for it.

Kline: Do you remember the Sega Genesis? Are you old enough to remember that one?

Lewis: My first console that I owned was a PS2. And the reason for that -- yes, I'm younger than you, Dan -- but the reason for that was, my parents insisted that I had to buy my own first console.

Kline: Ah, OK. So, in 1991, when I was in college, '91 to '95, the Genesis was pretty much the dominant console. It's what we played Madden on. That was absolutely the dominant game. And the sequels to that failed. If you look at where Sega is, where it basically owns a little intellectual property, and it's kind of just a game brand. I'm not even sure how the ownership works anymore. Nintendo would have been a bigger version of that. It has stronger licensing power. The upcoming Nintendo Land at Universal Studios, obviously, is going to bring in some money. But, the 3DS is a slowly dying system. Nintendo might have been just an intellectual property and a software company.

Lewis: And look what they've managed to do. I think, safe to say that if you see Nintendo Switches outpacing even the estimates, which are pretty impressive, it's going to mean good things for Nintendo down the road.

Kline: Absolutely. They honestly haven't even gotten to the life cycle where PS4 and Xbox One now cost much less than they did it launch. You got some bundle deals this holiday season, and maybe some gift-card-back deals, but you are not getting much in the way of a deal. And, the whole online universe for the Switch has just barely launched. That's going to be a revenue center, as well.

Daniel B. Kline has no position in any of the stocks mentioned. Dylan Lewis has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.