Nintendo out to prove Switch's longevity this holiday season

Nintendo Co.’s Switch console is poised for its best holiday shopping season yet.

The company will probably sell 9.46 million units of Switch hardware and 64.73 million units of software in the quarter ending in December, according to analyst estimates compiled by Bloomberg. While the forecast console numbers would mark only a slight improvement over last year’s results, games deliver most of Nintendo’s profit, and software sales may climb about 23 percent.

Achieving those numbers could prompt Nintendo to revise its conservative earnings outlook for the year ending next March. The Switch’s performance in its third holiday season will also hold clues for the console’s longevity in an industry where hardware is typically overhauled every five years and rivals Microsoft Corp. and Sony Corp. are already planning new machines for the end of 2020.

“This is typically where sales begin to peak out, but it looks like the Switch may have a longer life cycle,” said Kazunori Ito, an analyst at Morningstar Investment Services in Tokyo. “With a desktop console and a portable player in a single machine, Nintendo has a very effective platform for selling game software.”

Nintendo designed the console so that it can be used on the big living room screen as well as on the go, and in September it also introduced a cheaper Switch Lite focused on expanding the mobile market. Combined sales have already topped 40 million units since launch in March 2017 and many analysts expect the Switch will last long enough to reach the 100 million record set by the Nintendo Wii.

The Kyoto-based company has stuck with a conservative forecast for operating profit of ¥260 billion ($2.4 billion) on ¥1.25 trillion in revenue for the year ending March 2020. That’s short of analysts’ expectations of ¥308.8 billion and ¥1.28 trillion, respectively.

Nintendo also expects to sell 18 million Switch units and 125 million new software titles this fiscal year. That compares with the average of four analysts’ estimates for 19.07 million, and the 147.43 million average of nine estimates.

“Last year’s holidays is a high hurdle to clear,” said Masaru Sugiyama, an analyst at Goldman Sachs Group Inc. “But there is a good chance for year-on-year growth.”

The 2018 lineup included a Pokemon double issue that sold a combined 10 million units in a month and a half to the end of the year. Super Smash Bros. Ultimate launched on Dec. 7 and raked in sales of over 12 million units. Nintendo sold 9.42 million Switch consoles in that holiday quarter and a total of 52.5 million units of software.

This year, Nintendo is again targeting the Pokemon fan base with two new titles — Pokemon Sword and Pokemon Shield. The games, which debuted Nov. 15, have come under criticism from fans unhappy with the quality of graphics and animations and the lack of the full stable of “pocket monsters.” Still, sales exceeded 6 million units during the launch weekend, making it the fastest-selling Switch game to date.

“It’s a Pokemon title, so unless you are giving up on the franchise, it’s hard to imagine fans not buying it,” said Damian Thong, an analyst at Macquarie Group Ltd. “Pokemon Sword and Shield will probably end up being the single largest game in terms of launch year revenue, probably bigger than Smash Bros.”

In October, Nintendo released Ring Fit Adventure, an $80 exercise game that comes with a flexible plastic ring that tracks the player’s motion by slotting in one of the Switch’s Joy-Con controllers and having the user strap the other to their leg. With that basic motion-capture setup, gamers wage heroic battles and clear stages by jogging and doing squats.

Nintendo is looking to repeat the success of the Wii Fit — the exercise game that broke new ground when it was introduced in 2012 along with a Balance Board peripheral. It sold more than 50 million units and was key to broadening the appeal of the Wii console to new audiences. Ring Fit Adventure is off to a promising start, as Nintendo on Friday apologized for being unable to keep up with overwhelming demand.

The Wii went on to sell over 101 million units of hardware and 900 million games, setting a high standard of success that Nintendo has struggled to live up to since. The company’s share price hit its peak in the year following the Wii’s 2006 launch and the stock now trades about 40 percent below its 2007 record.

So far, the Switch has held its own against its storied predecessor and has even done better in hardware sales during its first two holiday seasons.

“The Switch can sell 20 million units annually for the next three years,” said Michael Pachter, an analyst at Wedbush Securities Inc. “So it should easily get to 100 million.”

Not everyone agrees. Macquarie’s Thong thinks a lot of the casual gamers that helped power the Wii’s runaway success have moved on to free-to-play games on smartphones, such as Nintendo’s own wildly popular Mario Kart Tour. There is also a lot more competition for people’s free time from social media and streaming video. Still, Nintendo’s prospects remain bright in the near-term.

“The focus is the game, not the console itself,” Thong said. “2021 might be an even bigger year for title launches. There is a new Zelda game and it will be time for a midcycle refresh for all major Nintendo titles.”