The Market May Be Wrong About the Wii U

I'll admit that I found aspects of the Nintendo (OTC BB: NTDOY.PK) Wii U puzzling at first -- but I found the market's reaction even more baffling. Based on the beating Nintendo's stock price took in the days following its announcement, the market has declared this upcoming system a failure. I wouldn't venture to label the Wii U gaming's next big hit, but I do think investors have judged it prematurely.

What we know
The Wii U will finally bring Nintendo into the HD era, but the real story is its new controller, which looks like the unholy union of a tablet and an Xbox gamepad. It's seriously the most tricked-out controller I've ever seen. In addition to the standard collection of buttons, triggers, and joysticks, this beast sports a 6.2" touchscreen, microphone, camera, gyroscope, and accelerometer. It's so packed with features that no one is really sure what developers will do with it -- but that uncertainty isn't the cause of investors' alarm.

Why the market's running away
Part of the reasoning behind Nintendo's slide is that analysts don't think the Wii U will bring casual gamers back from smartphones and tablets. You can pretty much blame Nintendo's recent history for their concern. The Wii appealed to a lot of consumers who wouldn't normally play videogames, which led to unprecedented hardware sales. The console was so successful that Microsoft (Nasdaq: MSFT  ) and Sony (NYSE: SNE  ) both rushed to release their own motion controllers. For a while, it seemed that gaming was shifting toward casual players.

I think this apparent sea change led many investors to focus too much on casual games. That would explain why the success of Zumba Fitness has helped boost revenue and the share price for Majesco Entertainment (Nasdaq: COOL  ) , while Call of Duty: Black Ops has become the best-selling game of all time, yet failed to nudge Activision Blizzard's (Nasdaq: ATVI  ) stock price.

Why they're wrong
Unfortunately, keeping casual players interested is a lot harder than attracting them in the first pace. Since peaking in 2009, sales of both the Wii consoles and software have steadily declined. After the novelty of bowling in their living rooms wore off, casual gamers abandoned the system. And because it doesn't have the horsepower to create the visuals that core gamers demand, the system's only support comes from the die-hard Nintendo fans.

I don't think that Nintendo will abandon the casual crowd -- it appears that players have the option of using the old Wii remote, so you can probably still bowl -- but I believe that the company has recognized that core gamers keep consoles alive. To appeal to these players, the company has secured third-party support from developers such as Electronic Arts (Nasdaq: EA  ) and THQ (Nasdaq: THQI  ) . During its E3 press conference, Nintendo brought EA CEO John Riccitiello onto the stage to praise the console and hint at how franchises like Madden NFL and Battlefield could use the new controller.

What I'm watching for
Right now, I believe it's too early to make a call. I'd like to know how much the console will cost -- that controller can't be cheap -- and what third-party developers will do with the system. I can guess what Nintendo will bring to the party, but the success of the Wii U really depends on third-party developers. If the console can offer both Nintendo's special brand of whimsy, and the sophisticated gameplay that core gamers want, then I think the Wii U will be a winner.

If you're interested in keeping an eye on Nintendo, click here to add it your watchlist.

Fool contributor Patrick Martin owns shares of Activision Blizzard. The Motley Fool owns shares of Microsoft and Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard, Nintendo, and Microsoft, and creating a diagonal call position in Microsoft and a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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