The Winning Formula Behind Nintendo's Growth

Super Mario has certainly been delivering for Nintendo (NASDAQOTH: NTDOY) shareholders this year. Since the new Nintendo Switch hit store shelves about one year ago, the company's stock has more than doubled.

So what has made the Switch such a hit? Well, for one, it has a number of interesting features, like the ability to be played both as a home console as well as a handheld device. It's also technologically advanced, with a slick thin frame and high-resolution screen, and most notably, it's the company's first new console since the Wii-U came out in 2012.

However, another reason for the Switch's success -- and what may determine its ability to hit management's target of 20 million units in 2018 (versus 17 million last year) -- is a two-pronged strategy to expand the device's target market. Here's how management is going about it.

Appeasing moms ...

With family-friendly games like the Super Mario and Zelda series, Nintendo has made kids a large part of its audience. But to expand this customer base, Nintendo must also win over parents who are wary of giving their kids a video game console too early in life -- or at all.

To appeal to concerned moms, the company recently introduced Labo, two custom cardboard-construction sets, which are meant to playfully integrate with the Switch. Labo features a number of formats that essentially allow kids to build their own intricately designed toys out of carboard, such as a fishing rod, steering wheel, and piano. In addition, these creations can actually interact with the Switch.

It's a creative way to enhance the playability of the console and may also convince reluctant parents that these accessories are more of a learning tool than fun distraction (but also that).

Management appears to believe Labo could eventually stand as its own platform, even without the electronic device: "Nintendo Labo is a product intended to broaden the possibilities of Nintendo Switch. We hope to develop Nintendo Labo into a product that is not bound by the conventional boundaries of video games, and that endears itself to an even broader range of consumers."

By launching Labo and other accessories, management also hopes to lengthen the typical five to six year life cycle for video game consoles. The introduction of these new peripheral products is apparently one of the ways to achieve that.

... and hardcore gamers

And while Nintendo's roots may be in kid-friendly games and characters, much of the growth in video gaming over the past few years has been with adult gamers who are willing to pay big bucks for high-end, adult-themed games. That was, according to The Wall Street Journal, one of the failures of the Wii U.

But Nintendo has now changed its tune, allowing and encouraging software developers of either violent or risque games to create software for the Switch. That may be because higher-capability software and smartphone applications now allow parents to more easily monitor what games their children are playing -- and for how long.

The openness to a wide range of game genres is a new development and does come with some risks. For instance, parents could become confused about the Nintendo brand. But so far, it hasn't stopped Nintendo's red-hot growth: Management just raised its trailing 12-month guidance for Switch games sold from 50 million to 53 million units.

The next level

Nintendo hopes the new Switch will appeal to a greater audience at both ends of the gaming spectrum -- young children and mature adults. Obviously, the stock's incredible run over the last year may invite skepticism that its sales surge is a one-off event due to the 2017 introduction of the Switch. However, if management's new strategies for lengthening the console life cycle and expanding Nintendo's audience pay off, its recent outperformance could become a "new normal".

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Billy Duberstein has no position in any of the stocks mentioned. His clients may have positions in some of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.