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China Could Still Be a Catalyst for Nintendo Stock

By Steve Symington - May 4, 2019 at 4:43PM

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Why the Japanese gaming giant is playing coy over Switch's China debut.

After news broke last month that Nintendo (NTDOY -1.80%) is teaming up with Chinese tech giant Tencent (TCEHY -1.74%) to finally launch its Switch gaming console in the Middle Kingdom, shares of the Japanese gaming leader initially soared soared, with good reason

After all, it's been more than two years since Nintendo officially introduced Switch to the rest of the world. But China remained an elusive geography -- at least outside of existing grey-market Switch sales in the country -- given its complicated regulatory environment and the need for a domestic partner to facilitate new console launches.

Pumping the breaks

But investors shouldn't get too excited just yet. With its fiscal fourth-quarter 2019 report last week, the stock fell after Nintendo took the opportunity to temper shareholders' enthusiasm over Switch in China.

Man playing game on a Nintendo Switch with red ear buds plugged in

IMAGE SOURCE: NINTENDO.

In particular, Nintendo noted that while it's Tencent collaboration is "in progress," it still hasn't factored China Switch sales into its new fiscal-year guidance as "the launch timing is undetermined."

To that end, for its fiscal year ended March 31, 2020, Nintendo is targeting modest revenue growth of 4.1% (1.25 billion Japanese yen), assuming a 6.2% increase in Switch unit sales to 18 million, and a 5.4% bump in Switch software unit sales to 125 million. However you slice it, these targets represent significant decelerations from Nintendo's fiscal 2018 growth in revenue (13.7%), Switch units (12.7%), and Switch software units (86.7%).

The silver lining

Though Switch sales last fiscal year fell slightly short of management's guidance for 17 million units, we should recall that target was only recently lowered at the end of January from Nintendo's initial goal of 20 million. The revision caused Nintendo shares to plunge almost 20% over the ensuing weeks.

After coupling that relative shortfall with the uncertain nature of the gaming industry in China -- where consoles were banned from from 2000 to 2015, and where government regulators more recently imposed a nearly year-long freeze on new game title approvals from all developers in the country, including Tencent -- it's hard to blame Nintendo for declining to include Switch China sales in its forecast in these early stages.

That said, investors shouldn't rule out the chance that Nintendo could be under-promising with the intention of over-delivering, particularly if Nintendo is doing so in modeling its existing core business outside of China for now. With shares down around 18% over the past year, and when more specifics begin to surface -- think launch dates, pricing, profit-sharing with Tencent, and unit-volume expectations for Switch in China -- any incremental contributions from the deal could serve as a catalyst to drive Nintendo shares higher in the coming quarters. And I think patient, long-term shareholders would do well to consider opening or adding to their positions before that happens.

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Stocks Mentioned

Nintendo Co., Ltd. Stock Quote
Nintendo Co., Ltd.
NTDOY
$54.57 (-1.80%) $-1.00
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$45.14 (-1.74%) $0.80

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