Extra Life for Nintendo

Source: Morningstar Direct. Data as of July 7, 2021.

Now, as vaccines show us a light at the end of the tunnel, we are hopeful that soon we’ll no longer be trapped indoors. Will the normalised backdrop result in a U-turn for the Japanese console maker, Nintendo (7974)?

Kazunori Ito, director of equity research at Morningstar, says Nintendo Switch has some more distance to go, although it has already outlived the company’s typical shipment peaks which usually fall in the second or the third year. “Switch has entered the fifth year, but we believe it is still in the middle of the console cycle,” says Ito, who elaborates with two reasons. 

Everyone Knows Mario

First, Nintendo has a healthy game pipeline through 2022. Ito says Nintendo game titles are ready for an upgrade in Switch console, and the next year is attractive. There will be sequels of blockbuster Pokemon, The Legend of Zelda and Splatoon as well as remakes of past Pokemon and Zelda classics. 

“Most of these franchises have more than 20 years of history and constitute Nintendo’s strong intangible assets,” say Ito, adding that strong intelligence property in household titles and characters is the foundation of Nintendo’s narrow economic moat. Plenty of well-developed Nintendo characters have been key to drawing audience onto its own console and mobile app platforms. For example, the most iconic character, Mario has appeared in more than 200 titles since 1981 and sells more than 600 million games throughout its history. Ito says: “These IPs are hardly replicable by competitors and continue to contribute to the company’s revenue stream, which is in cyclical nature.”

Moreover, the company has been venturing into other growth areas to avoid being overly reliant on games based on legacy character branding. The strategy includes packaging games as paid smartphone apps, allowing Universal Studios to use its characters, producing animation movies, and selling character figurines.

Go-Kart Speed Ahead?

Second, the upgraded console will come with improved processing speed, higher resolution, and faster frame rate.

“Although the company has not officially announced it, we think that Nintendo is well prepared to reveal the new terminal whenever the shipment of the existing Switch console shows signs of slow down.”

That said, Ito sees an intact momentum of Switch shipment because of Nintendo’s devoted resources in strengthening the franchise. Thus, the console’s lifetime shipment will likely surpass 160 million units overtaking Sony Group (6758)’s PlayStation 2 to become the world’s best-selling game console ever. 

The growth trajectory will also push back Switch’s profit peak to the first quarter of 2023 from his original estimate of 2021.

©2021 Morningstar. All rights reserved. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided as of the date written, solely for informational purposes; and subject to change at any time without notice. This content is not an offer to buy or sell any particular security and is not warranted to be correct, complete or accurate. Past performance is not a guarantee of future results. The Morningstar name and logo are registered marks of Morningstar, Inc. This article includes proprietary materials of Morningstar; reproduction, transcription or other use, by any means, in whole or in part, without prior, written consent of Morningstar is prohibited. This article is intended for general circulation, and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Investors should consult a financial adviser regarding the suitability of any investment product, taking into account their specific investment objectives, financial situation or particular needs, before making any investment decisions. Morningstar Investment Management Asia Limited is licensed and regulated by the Hong Kong Securities and Futures Commission to provide investment research and investment advisory services to professional investors only. Morningstar Investment Adviser Singapore Pte. Limited is licensed by the Monetary Authority of Singapore to provide financial advisory services in Singapore. Either Morningstar Investment Management Asia Limited or Morningstar Investment Adviser Singapore Pte. Limited will be the entity responsible for the creation and distribution of the research services described in this article.