Nintendo (OTCMKTS:NTDOY) fell in last Thursday’s trading on what was seen as “ultra-conservative guidance.” Traders sold off Nintendo stock as the video- game company announced sales forecasts that came in well below analysts’ consensus estimates.
Now the gaming company finds itself at a crossroads, as gamers are increasingly losing interest in the console-based games that have supported the company for decades. Although Nintendo game franchises continue to attract players, the company’s gaming consoles face a competitive threat from mobile gaming and other trends.
Nintendo Missed on Earnings and Guidance
The results of Nintendo’s fiscal fourth quarter, which ended on Mar. 31, came in below analysts’ consensus estimates . The Japan-based company reported earnings of $266 million. That fell well short of the $321 million analysts, on average, had expected.
However, the company’s forward guidance alarmed investors even more. For the 2020 fiscal year, NTDOY forecast operating profit of $2.32 billion. That fell well short of the consensus outlook of $3.13 billion.
The company expects to sell 18 million consoles in the current fiscal year, versus analysts’ consensus outlook of 18.5 million. and the 16.95 million consoles sold last year.
Concerns About China, Mobile Gaming Weigh on Nintendo Stock
This news contributed to a dramatic reversal of fortune for Nintendo stock. During the previous week, NTDOY stock had surged on news that Chinese conglomerate Tencent (OTCMKTS:TCEHY) had received approval to distribute a test version of NTDOY’s Super Mario Bros. U Deluxe for the Switch console. In the wake of the approval, the sales of Nintendo’s consoles in China could rise.
However, after Thursday’s report Nintendo stock gave back most of the 12.2% advance it had recorded following the Tencent news. Now NTDOY is saying that Switch devices may not be sold in China for awhile. That news is a meaningful negative catalyst for Nintendo stock, as the company has remained committed to consoles.
Traders may wonder whether NTDOY will be left behind, as its peers such as Activision (NASDAQ:ATVI) have begun to embrace mobile gaming. Newer, successful gaming companies, such as Zynga (NASDAQ:ZNGA) and Glu Mobile (NASDAQ:GLUU), have not made any games for consoles at all.
Do Not Ignore the Threat of PCs to Nintendo Stock
But what has made me turn negative on Nintendo stock is the threat from PCs, not mobile gaming. With console games, players can utilize controllers and virtual reality headsets that can’t be used with smartphone games. Also, mobile games tend to constantly charge players. NTDOY has purposefully avoided that practice.
However, PCs can also offer those benefits. Moreover, competitive gamers tend to choose PCs over consoles due to the latter devices’ superior memory, graphics, and speed capabilities. Consequently, consoles could easily be relegated to entry-level gaming or become totally obsolete.
If such a change occurs, much of the value of Nintendo stock would be derived from the company’s brands . Its franchises such as Super Mario, Pokémon, and Zelda have captivated gamers for decades and continue to be popular. The company also has a niche in controllers, particularly with the Wii gaming systems. Still, I do not think those assets provide enough of a reason to own Nintendo stock. Until the company focuses on its marketable strengths, I do not recommend that investors own NTDOY.
The Bottom Line on Nintendo Stock
The Nintendo Switch console offers VR and controller features that one cannot find on mobile games. However, PCs can also provide similar benefits. Additionally, PCs tend to offer superior memory, speed, and graphics. For this reason, competitive gamers have largely stopped using consoles.
Nintendo’s gaming franchises will continue to be positive for NTDOY stock. However, as long as investors continue to judge the company by its consoles, I do not believe that Nintendo stock can rise meaningfully.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.