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Why I’m Buying This Japanese Value Stock

Nathan Parmelee
August 31, 2012

Nintendo (OTC: NTDOY.PK) has had a rough 2012, though it certainly brought some of the pain on itself.

With the Wii home game system getting long in the tooth, Nintendo launched the 3DS system last year to reinvigorate its portable game sales and profits, while putting the final touches on its next generation system for the home.

Unfortunately, things didn’t work out as planned for Nintendo. Smart phones and tablets from Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) had already gained valuable mindshare in portable gaming, and Nintendo hurt its competitive position by initially setting its price point for the 3DS too high.

Nintendo eventually lowered the price of the 3DS in response, which gave a boost to system sales, and created the large market Nintendo wanted for game titles. But the price cut also means Nintendo is selling the system as a loss leader and relying on game titles to claw back probability.

A catalyst on the horizon
Unprofitable 3DS hardware sales have made profitability elusive for Nintendo over the last 12 months. But I expect better graphics, and new game play Wii U will push the company into the black when it launches this fall. Rumors point toward a November launch, and Nintendo has already said that at least 20 titles will be available at launch, and broad support from third party game developers.

One mystery remains for the Wii U, and that’s its price. This will likely be revealed on September 13, when Nintendo holds a media event in New York. The dynamics of playing games at home mean that Nintendo should have to worry about competition from Apple and Google’s Android for the Wii U, but with new home systems on the way from Sony (NYSE: SNE  ) and Microsoft (Nasdaq: MSFT  ) in 2013, Nintendo will need to set a price point that makes holiday sales of the Wii U as close to a no-brainer for parents as possible.<