Nintendo (NTDOY -0.67%) is a producer of video game hardware and popular titles filled with beloved characters like Mario, Yoshi, Pokemon, and Zelda. Nintendo's fiscal year ends in March, so the company recently disclosed its full-year 2018 results, along with guidance for its upcoming fiscal year. 

The market had a very volatile reaction to Nintendo's report, plunging some 5% the next day but then recovering nearly 7% the day after. Investors appeared to initially worry over the company's tepid guidance before coming around to the conclusion that that guidance was conservative. Here are all the ins and outs of Nintendo's latest outlook.

A family plays video games together sitting on the floor.

Image source: Getty Images.

Guidance underwhelms

For the full year, Nintendo grew revenue 13.7% and net income a whopping 39.1%. The strong results came from a second year of solid, if not spectacular, Nintendo Switch sales, along with outperformance on the software side. Nintendo's Switch, its newest gaming system unveiled in early 2017, sold 16.95 million units, up 12.7% year over year. But it was the gaming software that really picked up in 2018, growing a massive 86.7% to 118.55 million units. Software sales are higher margin than hardware, which is why Nintendo's profits surged as much as they did.

On the other hand, 2019 guidance wasn't quite so encouraging. Nintendo guided for only 18 million Switch units and 125 million software units for the upcoming year. Nintendo also forecast only 4.1% revenue growth and 6.3% operating profit growth, far lower than the figures posted in fiscal 2018.

Beyond the guidance, Nintendo executives were very cautious on the outlook, indicating that they wouldn't be unveiling a new low-cost Switch at this June's Electronic Entertainment Expo, which some industry followers were expecting. Management also didn't give a timeline for China sales after recently announcing a partnership with Chinese gaming giant Tencent. Investors had been hoping for more optimistic figures in 2019, given recent reports of new Switch models and the Tencent partnership.

Slow and steady wins the Mario Kart race

However, some analysts think the Japanese giant is being conservative with these estimates. Last year, the company originally offered an aggressive outlook for 2019 -- at least for Switch sales. Nintendo initially anticipated 20 million units, but that was later revised downward, and the final figure came in at 16.95 million. As a result, it's possible Nintendo's current guidance reflects more conservatism on management's part, so as not to underwhelm expectations this time around.

However, it should not go unnoticed that while Switch sales underwhelmed initial expectations last year, overall software sales trounced expectations, driven by the runaway success of Super Smash Bros. Nintendo initially forecast only 100 million software units this time last year, yet software units wound up beating that figure by 18.5%. That outperformance allowed Nintendo to meet its yearly guidance for revenue and handily beat its overall operating profit guidance by 11%. Given that the company underestimated its software units sold by over 18% last year, the mere 5.4% unit growth forecast for 2019 could certainly prove low.

More specifically, the current forecast doesn't include any potential China sales from the Tencent deal. While it may take some time for Nintendo to get the Switch and its related software modified and approved by the Chinese government, there's a clear possibility of sales in that important market this year, given that we're only at the end of April.

In addition, Nintendo is set to release two new mobile games this summer, Dr. Mario World and Mario Kart Tour. These will be just the fifth and sixth mobile apps by Nintendo, which has been cautious in its approach to mobile gaming. Since mobile gaming is big business but something of a new venture for Nintendo, management is likely being cautious around its mobile sales as well.

Nintendo continues to be a leading IP player

Based on the company's current profit forecast for fiscal 2019, Nintendo trades at roughly 22 times forward earnings. That's not screaming cheap, so investors bullish on the stock must have faith management is in fact being relatively conservative with its outlook. But with two new Switch models due out later this year, two more mobile titles, the Tencent agreement, and several other initiatives to leverage its beloved IP, from T-shirts to the soon-to-be-released Pokemon Detective Pikachu movie, investors have every right to believe Nintendo could outperform its lackluster guidance.