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Nintendo Delivers Record Quarter, But Misses Estimates

Brad Moon

Nintendo (OTCMKTS:NTDOY) reported its second-quarter results yesterday, and delivered another record quarter along with yet another Switch milestone. However, the company missed analyst estimates and Nintendo is going to need a smash holiday quarter to meet its full-year Switch sales targets. Slowing Switch momentum continues to make investors nervous and Nintendo stock is down 1.89%.

Nintendo Reports Q2 Results

NTDOY’s Q2 earnings results were packed with positives that should have had upside for Nintendo stock. 

The company reported an operating profit of $274 million for the quarter. That’s Nintendo’s most profitable Q2 in eight years and a solid increase from the $211 million it booked last year. Software sales were up significantly compared to a year ago, with 24.2 million units sold, compared to the 13.9 million units Nintendo sold last year. And sales of the Nintendo Switch — the company’s all-important hybrid video console — also edged upward to 3.2 million, from 2.9 million in the previous year.

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Those numbers meant the Switch hit another milestone. After passing lifetime Wii U sales in January, this quarter the Switch hit 22.86 million units sold since launch. That eclipses the lifetime sales of Nintendo’s GameCube console (released in 2001), which managed 21.74 million units.

The company also maintained its full-year forecast, confident it will hit the target of 20 million Switch sales in 2018.

So why was Nintendo stock down?

Missed Estimates and Need for a Big Holiday Quarter Weigh on Nintendo Stock

Nintendo stock has been on a downhill trajectory since hitting decade-long highs in March, dropping over 30% during that time. 

In July, a slip in Switch sales resulted in a 2% drop in Nintendo stock, despite an otherwise solid quarter. This quarter, the company did manage to grow sales of its console, but only slightly. Although Nintendo maintains it expects to hit its target of 20 million units for the fiscal year, with 1.88 million in Q1, and the 3.2 million it sold in Q2, that’s just over 5 million for the first half of the company’s year. The fourth quarter is traditionally a relatively slow one — last year, NTDOY sold 2.92 million Switch consoles in Q4. 

Add those numbers up and as Engadget points out, Nintendo needs a “bumper holiday quarter” to meet its full-year target of selling 20 million Switch sales. Last year, Switch sales were 7.23 million units for the holiday quarter. This year, Nintendo has to hit double-digit million Switch sales for Q3 if it’s going to hit that goal.

In addition to worry about whether NTDOY can hit its full-year targets, the company also missed analyst expectations for this quarter. Bloomberg noted that the operating profit of roughly $274 million was well below the $335 million analysts had been looking for.

The combination of the miss and concern about the pace of Switch sales was enough to push Nintendo stock down.

Can Nintendo Hit That Full-Year Switch Sales Target?

When you add up Switch sales to date for Nintendo’s fiscal year, then include the number of consoles it sold in its previous Q4, that comes to 8 million units. Assuming the Q4 sales see an increase on the year, NTDOY still likely needs to move 10 million or more Switch consoles over the holiday quarter to hit that 20 million full-year sales target. 

Can they do it?

Last year, the Switch sold 7.23 million units over Q3, but finding one was sometimes difficult for consumers. Stores frequently sold out of their stock and with tight supply, Switch discounts were virtually unheard of over the holidays.

This year, Nintendo has the production lines humming, so limited supply won’t be an issue. The company is releasing the highly anticipated Super Smash Bros. Ultimate and a pair of Pokemon games for the Switch, just in time for the holidays. And there may be some discounts to goose sales. Sony (NYSE:SNE) Playstation 4 and Microsoft (NASDAQ:MSFT) Xbox One consoles at sale prices have been a big draw for retailers over the holiday season. With the Nintendo Switch past its launch year honeymoon and now readily available, retailers are likely to offer deals on it this year as well.  

If Nintendo does have that smash holiday season (no pun intended) putting its ambitious 20 million unit full-year Switch sales target within reach, we may finally see an end to the Nintendo stock slide. 

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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