Here's the Most Important Announcement Nintendo Hasn't Made This Year

Nintendo will likely fall short of its profit estimate without this important product.

Jul 15, 2014 at 12:40PM

Nintendo (NASDAQOTH:NTDOY) had a better E3 than many industry watchers had anticipated. The company's presentations to the media had been weak in 2012 and 2013, but this year introduced a new pre-recorded conference format and additional live coverage throughout the remainder of the trade show that was well-tailored and effective. The company debuted a slew of new games for its 3DS handheld and Wii U home console, and did so in a novel fashion. 

Nintendo also debuted its toy-software integration platform, Amiibo. Whether or not the new product line succeeds will be a huge factor in whether President Satoru Iwata can make good on projections of a $393 million operating profit. Complicating Amiibo's future, the figurines will be competing against similar products from Activision Blizzard (NASDAQ:ATVI) and Disney (NYSE:DIS).

At the beginning of May, the company's share price hit a year-long low of $12.90, but the strong E3 showing, successful launch for Mario Kart 8, and belief that Nintendo can make Amiibo a hit have helped propel it to the $15 range. While there has been a recent uptick in optimism about Nintendo, there was one announcement that the company didn't make that investors should pay special attention to.

New hardware was a no-show
In the lead-up to E3, a rumor circulated that Nintendo would introduce new hardware at the show. This speculation was bolstered by code found in the HTML version of the company's conference press site reading "new Nintendo console," and then further propagated by sites claiming to have inside information on an impending hardware reveal. With the Wii U still early in its lifecycle and the 3DS needing a momentum boost, a new iteration of Nintendo's handheld was a likely candidate for an E3 debut. Such an announcement never came. If the company does not introduce a new model of the 3DS this year, odds are very high that it will miss its profit targets.

3DS is suffering from a sales decline
Nintendo forecasts global 3DS hardware sales of 12 million units for the current fiscal year. The previous year saw the company move 12.24 million units after initially projecting sales of 18 million units. Now, the 3DS is facing rapid sales decline and will fall significantly short of the hardware maker's target unless a new model is introduced or a substantial price cuts are put into effect.



Sales of 3DS in Japan are down approximately 50% year-to-date compared against the same period in 2013. Momentum is also dropping in America and Europe. The remainder of the year will see the release of some titles that should help the system catch up a bit in Japan, but the upcoming Super Smash Bros. and Pokémon games look to be the only big hardware drivers in other territories. As a result of Nintendo devoting significant resources to Wii U software development this year and beginning to work on its next-generation hardware and health-based business, 2014's 3DS software lineup pales in comparison to what was put forth in 2013.

A new 3DS looks essential to profitability
There appear to be only two ways that Nintendo can meet its 12 million hardware sales target for the 3DS this year. The company must either introduce a new, suitably appealing model or substantially cut prices across existing versions of the platform. The latter option may be the less desirable of the two because of President Iwata's stated operating profit goal.

Other than substantially reducing operating expenses, Amiibo figurines are the only way Nintendo will meet its profit forecast without introducing a new 3DS model. Such a scenario even gives the company the benefit of the doubt and assumes that it will meet or slightly exceed hardware and software targets for Wii U.

Will Amiibo figurines push Nintendo to profit?
Nintendo's Amiibo figurines will be up against stiff competition from Disney's Infinity 2.0 and Activision's Skylanders Trap Team. These new entries in big series will also be available on Nintendo's Wii U and 3DS, as well as platforms from Sony and Microsoft. The Skylanders series has generated more than $2 billion in revenue, while Disney predicted in June that Infinity would soon become a $1 billion franchise.

Nintendo's Amiibo figurines have yet to be tied to a gameplay experience in the way that Activision and Disney's respective products are.  Additionally, the company's Amiibo initiative won't be compatible with 3DS until 2015. As such, expecting the small Wii U installed base to drive the figurines to incredible success amid strong and established competition is a shaky proposition.

Foolish final thoughts
The lack of announcement for a new 3DS iteration doesn't mean that such a product won't arrive this fiscal year, but Nintendo needs to debut it soon if it hopes to hit its hardware sales target. At the latest, the company should want to have a new 3DS with a built-in NFC sensor (current versions of the handheld will require an add-on to interact with Nintendo's figurines) available for purchase by the time it's ready to tie Amiibo into its handheld ecosystem.

Every day that passes in which a new model of the portable gaming system isn't announced is one that renders the company's hardware and profit targets increasingly unrealistic.

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Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard, Apple, and Walt Disney. The Motley Fool owns shares of Activision Blizzard, Apple, Microsoft, and Walt Disney. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

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Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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