Nintendo Shares Jump on Optimism That Game Sales Will Pick Up

(Bloomberg) -- Nintendo Co.’s shares jumped as much as 2.9 percent in Tokyo, reversing losses, as investors bet that the company’s lower-than-anticipated operating profit forecast will be raised when more people buy games for the new Switch hybrid console.

Operating profit for the fiscal year through March 2018 will be 65 billion yen ($584 million), the Kyoto-based company said Thursday, which was short of analysts’ average projection for 102.5 billion yen. Still, Nintendo met analysts’ prediction for 10 million Switch hardware shipments for the period.

Most people are focusing on the outlook for 35 million software titles, which means the company is expecting 3.5 games for each Switch, a relatively low bar. Analysts are projecting the equivalent of 4.7 titles for each unit, and based on the quality of games slated to debut this year, some are predicting higher attachment rates. The Wii, Nintendo’s last blockbuster hit, also initially had low software forecasts that later had to be revised upward.

“Typically, you’ll see about 5 to 6 software titles for each hardware unit in the second year of a console,” said Kazunori Ito, an analyst at Morningstar Investment Services in Tokyo. “So they’re really lowballing it. As long as the big titles come out on time, we should see more software sales and that will pull up profits.”

Nintendo Shares Jump on Optimism That Game Sales Will Pick Up

This isn’t the first time Nintendo has set low targets. In 2007, actual Wii software sales were 70 percent higher than the company’s initial projections, while the following year they were 117 percent higher, according to Jefferies Group analyst Atul Goyal.

“Nintendo’s guidance of Switch volumes and operating numbers could very well underwhelm the market,” Goyal wrote to clients before the earnings release. “Looking at the initial strength of Switch sales, we believe once this event is out of the way, we’re likely to see the start of a strong upward earnings revision cycle.”

Nintendo has already mapped out plans to release strong titles this year, including highly-anticipated games such as Splatoon 2 and Super Mario Odyssey. Nintendo President Tatsumi Kimishima also pointed to higher marketing costs, which will impact operating profit. “Even after the debut in March, we plan to continue promoting the Switch rather aggressively,” he said at a news conference in Osaka. The company plans to spend 65 billion yen on marketing this fiscal year, the highest in five years.

For the fiscal year that ended in March, operating profit was 29.4 billion yen, compared with analyst predictions for 24.2 billion yen. Sales during the period fell 3 percent to 489 billion yen as Wii U sales came to an end.

Net income rose sixfold to 102.6 billion yen, mainly due to the sale of Nintendo’s stake in the Seattle Mariners baseball team. Profit was also helped by Nintendo’s entry into smartphone gaming with titles like Pokemon Go and Super Mario Run, which Kimishima said was approaching 150 million downloads. Revenue from smartphone games and intellectual property royalty jumped five-fold to 24.3 billion yen from a year ago, with almost half coming from Japan.

Strong demand since the console’s debut on March 3 has made investors increasingly confident in comparing the Switch to the 2006 debut of the Wii, which sold 101 million units to become its most successful home console in history. If the company meets its Switch shipment forecasts, it will have sold 12.74 million units in total by March 2018.

“It’s a huge relief -- we’re off to a good start,” Kimishima told reporters in Osaka on Thursday of the new hardware debut. Switch sales “seem to be going at a similar pace to the Wii.”

One key question is whether the Switch, which lets gamers take the device outside the house, might cannibalize Nintendo’s portable gaming business. Citigroup predicted this month that Nintendo may release a mini-sized Switch in 2019 to replace the portable 3DS systems, which have sold 66 million units to date since 2011.

Nintendo also announced that Genyo Takeda, one of its longest-serving executives responsible for technical development, will retire. He will be replaced by Ko Shiota, another technical expert, pending the approval of shareholders at a general meeting in June.