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Will Nintendo's Switch Be Buried by Sony's PS5 and Microsoft's Xbox Series X?

By Leo Sun – Oct 2, 2020 at 9:46AM

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The latest high-end consoles could steal the spotlight from Mario and company during the holidays.

Many gamers likely consider Sony's (SONY 0.84%) PS5 and Microsoft's (MSFT -0.04%) Xbox Series X and S to be the top consoles to watch this holiday season. Pre-orders are already high for all those new consoles, which should generate fresh growth for their gaming businesses.

But fewer people are talking about the Nintendo (NTDOY) Switch, which arrived in early 2017, more than three years after Sony and Microsoft launched the PS4 and Xbox One. Nintendo subsequently shipped 64.8 million Switches, putting it in second place in the console race behind Sony's 113.4 million PS4s and ahead of Microsoft's 48.3 million Xbox Ones.

Yet Nintendo doesn't plan to launch a new Switch this year. So will Sony and Microsoft's new consoles bury Nintendo this holiday season, or does the gaming giant still have a few tricks up its sleeve?

Two adults play a game on their Nintendo Switches.

Image source: Nintendo.

How much does the Switch matter to Nintendo?

Nintendo's total sales of Switch hardware and software surged 122% year-over-year last quarter and accounted for 95% of its top line. Its Switch shipments rose 43% to 3.05 million, while shipments of the Switch Lite (which was launched last September) hit 2.62 million. Its total shipments of Switch software also jumped 123% to 5.04 million, led by Animal Crossing: New Horizons, Xenoblade Chronicles: Definitive Edition, and 51 Worldwide Classics.

Nintendo mainly attributed that stunning growth to an increase in gaming throughout the COVID-19 pandemic. Animal Crossing: New Horizons, in particular, gained significant momentum as a social platform throughout the crisis.

Will Sony and Microsoft's new consoles halt that growth?

At first glance, investors might believe Sony and Microsoft will halt Nintendo's growth during the holidays. However, four key strengths should help Nintendo weather that incoming storm.

Nintendo's Switch console.

Image source: Nintendo.

First, Nintendo produces exclusive first-party games for its own hardware. Its top franchises -- including Mario, Zelda, Kirby, Smash Brothers, Pokémon, and Animal Crossing -- aren't available on PCs or other gaming consoles. Therefore, anyone who wants to play those games beyond their bite-sized mobile spin-offs will need to buy a Switch console.

Second, the Nintendo Switch is a hybrid console that can be played in handheld and TV modes. Nintendo has cornered the market in handheld consoles ever since its only meaningful competitor, Sony's PS Vita, was discontinued last year. The Switch's hybrid form factor will likely attract gamers who want portable devices instead of Sony and Microsoft's massive TV-tethered consoles.

Third, Nintendo's ecosystem is sticky, with over 200 million Nintendo accounts created worldwide, and its Switch Online service now has 26 million subscribers. That expanding platform will lock in gamers and provide a captive audience for upcoming games like Hyrule Warriors: Age of Calamity, Pikmin 3 Deluxe, Super Mario 3D World, Monster Hunter Rise, and Monster Hunter Stories 2.

Lastly, Nintendo will reportedly launch an upgraded Switch console next year. The details remain vague, but the new Switch could sport beefier hardware, support 4K resolution, and come with a new lineup of enhanced games. That half-step upgrade would be similar to the launches of the PS4 Pro and Xbox One X, and potentially allow developers to port lower-spec versions of their latest games to Nintendo's console.

The road ahead

Nintendo's revenue and earnings grew 9% and 33%, respectively, last year, fueled by robust sales of its Switch hardware and software. But for fiscal 2021, which ends next March, Nintendo expects its revenue and earnings to decline 8% and 23%, respectively, as the pandemic-induced momentum fades amid tougher year-over-year comparisons in the second half of the year.

Nintendo's forecast implies that Sony and Microsoft might briefly steal the spotlight during this holiday season. But looking into fiscal 2022, Nintendo's outlook could brighten again as it launches an upgraded Switch console and new games. The release of a new Mario movie in 2022 could also buoy interest in the Switch as it enters its fifth year, and pave the way for the Switch's eventual successor.

Nintendo's growth might decelerate in the near term, but that slowdown will mainly be caused by tough year-over-year comparisons and its own maturing console cycle instead of direct competition from Sony and Microsoft. In short, the PS5 and Xbox One probably won't bury the Switch this holiday season.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool recommends Nintendo and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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