For Nintendo (NTDOY -1.16%), 2017 produced some memorable results, as Switch became the fastest selling game console in U.S. history, with more than 4.8 million units sold within its first 10 months.
After years of declining sales from weak demand for its Wii U, Nintendo saw sales grow 52% year over year for the trailing 12-month period ending in September 2017. Operating profit more than doubled for the same period, as brisk sales of Switch hardware stimulated higher margin sales of games. Those numbers helped send the stock price up 74% in 2017.
IMAGE SOURCE: NINTENDO.
Revenue opportunities expand
Nintendo has successfully designed and marketed Switch as both a console and handheld game system you can play anywhere. The system went on sale in March 2017 and has experienced supply shortages ever since. It's on pace to be Nintendo's most successful product ever.
As impressive as that sounds, management admitted in its fiscal second-quarter earnings release that sales could have been even higher if they had more accurately foreseen demand. Management anticipates sell-in figures for Switch to meet or exceed 16 million by the end of its fiscal year in March 2018, and at least a few analysts have already upped their lifetime sales forecasts to well over 100 million units.
| Period | 2013 | 2014 | 2015 | 2016 | 2017 | *2018 |
|---|---|---|---|---|---|---|
| Net sales | 635,422 | 571,726 | 549,780 | 504,459 | 489,095 | 960,000 |
| Operating profit | (36,410) | (46,425) | 24,770 | 32,881 | 29,362 | 120,000 |
Amounts in million yen. Data source: Nintendo. Years are fiscal years. *2018 numbers are based on management's guidance.
Other than Switch, Nintendo also continued to see stable sales growth of its 3DS handheld game system. Even after the launch of the new 2DS XL in July, sales of the 3DS family of products haven't slowed down, and remain on pace to break 70 million unit sales to date very soon.
Calendar 2017 was also the year when Nintendo's mobile game strategy began to gain footing. Nintendo launched Super Mario Run in December 2016 which recently hit 200 million downloads worldwide.
Other mobile game releases include Fire Emblem Heroes and a mobile version of Animal Crossing, which was released in Australia in October with a worldwide launch coming soon. Management is targeting two or three new mobile games per year, which will position Nintendo to capture a piece of a $46 billion market that is growing much faster than console or PC.
During 2017, Nintendo also tapped into the nostalgia many of its fans have for its classic game systems with the debut of the SNES Classic in September, which sold through 2 million units very quickly. This follows the launch of the NES Classic edition in 2016. These miniature versions of Nintendo's classic consoles were relatively affordable and, I assume, cheap to make. They should have provided a small, but very profitable, boost to Nintendo's bottom line.
Because of overwhelming demand, Nintendo plans to continue shipping SNES Classic and will resume shipment of NES Classic in 2018.
What to expect in 2018
Nintendo roared back to life in 2017, but that could be just the start. It has more than 300 third-party developers making games for Switch, and this helps encourage gamers to buy the unit.
In addition, Nintendo has great content that should help the company reach potentially new customers on mobile devices. It can use these mobile games to steer those players to purchase a Switch or 3DS.
The most important thing about growth in Switch and mobile is what it means for Nintendo's ability to implement the lucrative digital distribution strategy that has been so beneficial to game publishers, such as Activision Blizzard and Take-Two Interactive. With Switch on pace to sell over 100 million units over its life, Nintendo will have a large enough player base on console to pad the bottom line selling additional game updates for some of its best-selling Switch titles.
For example, this winter, Nintendo will release the second major game extension for The Legend of Zelda: Breath of the Wild. There are also ongoing free game extensions for ARMS and Splatoon 2 that management believes will not only keep current players engaged, but also generate enough buzz to encourage new customers to buy more games.
In short, Nintendo seems well positioned to grow sales and profits centered around its three main platforms -- Switch, 3DS, and mobile games. Investors will likely look back in five years and see 2017 as a pivotal year for Nintendo that began a great run of growth.
