Why is Nintendo's Share Price Surging?

Leading up to the release of the company's third quarter reports, Nintendo faces worryingly low sales of its Wii U console. Why, then, have the company's shares been on a run?

Jan 14, 2014 at 2:42PM

Despite strong sales from its 3DS handheld amid the rising threat of mobile, Nintendo (NASDAQOTH:NTDOY) has been limited by the soggy performance Wii U console. The months leading up to the system and its eventual release saw Nintendo's price take a substantial dip. 2013 saw the stock return to healthier levels on the back of a strong performance from the 3DS and software for the system. There was also some speculation that upward movement on the price had something to do with better-than-expected holiday sales for the Wii U console.

Price movement between now and the Jan. 29 release of the company's third quarter report should be interesting to watch. Nintendo has implemented a share buy-back initiative, but it is widely believed that the company is on track to miss both its operating profit and Wii U hardware sales targets by substantial margins. The likelihood of missed fiscal targets does not necessarily correlate to a plummeting share price, but it doesn't explain recent gains. Nintendo's stock just hit a more than two-year high. What is driving the new-found optimism on the company?

In spite of U
Reports that Wii U sales picked up substantially over the holiday period have been overemphasized. The system posted a decent performance in Japan, but looks to face a familiar slew of problems and uphill battles in North America and Europe. It's possible that bullish takes on the company have been spurred by internal rumblings that some type of Wii U revision or new hardware could be introduced around the time of Nintendo's latest quarterly reports. Much of Nintendo's stock is held by people close to the company, and they are the kind who would likely hear of such an announcement before it hit the media. While such a move could be introduced within the next several months, there is a more likely explanation.

News that China has lifted its ban on console sales and manufacturing inside its borders is the most likely cause for Nintendo's rapid growth in recent days. Dec. 7 saw the company's stock clime approximately 11%.Consoles sold in the country will have to be manufactured in the recently established Shanghai Free Trade Zone, but the opportunity to reach China's population is one that console manufacturers are not likely to pass up.

New market landscape works in Nintendo's favor
S
ony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) will both try to gain a foothold in the newly opening market, but Nintendo is best positioned to find success in China. While the console ban has been lifted, that does not mean that other elements of the country's cultural filter will be removed as well.

The fact that Sony and Microsoft are increasingly focused on online stores and service integration will complicate their abilities to find success in China, which takes a notoriously restrictive approach to Internet management and content distribution. The antiquated online model that is hindering Nintendo in North America and Europe actually looks to play to its advantage in China and developing markets. China's Internet policies and the fact that broadband adoption is still low in many parts of the world mean that online experiences targeted at Western audiences will not smoothly translate to other parts of the globe.

Nintendo also enjoys an advantage in China thanks to the tone and content of its games. The country's censors will still be deciding which games are acceptable and which ones are incongruous with the national vision. Games featuring Mario and company will be a much easier sell than something like Battlefield 4 from Electronic Arts (NASDAQ:EA). EA's shooter features blunt political storylines and guides players through an experience that encourages them to gun down hordes of Chinese soldiers. The nation's guidelines will see fewer violent games released and will look more favorably upon the fanciful aesthetics typically found in most Nintendo games than the darker fare that seems to pervade Sony and Microsoft's respective platforms.

Standing on the precipice of more big news
There are many factors that could be driving Nintendo's latest surge. The opening of the Chinese market is likely to be by far the biggest, but anything from an internal company shakeup to better-than-expected sales data could be at play. The company is almost certain to miss its 9 million Wii U sales target in a big way, and profit misses are likely to follow. The upcoming quarterly report should offer a more definitive look at the state of Nintendo, but the potential for growth in new markets shows that there's always more to the picture. 

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Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. 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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