Before the market opens next Monday, Nintendo (NTDOY -1.16%) will release its financial results for the holiday quarter. It is a big quarter for the company, as the holiday season in December typically marks the highest demand for its video game products. Here are five things Nintendo investors should keep an eye on when reading the report next week.

Woman and girl playing video games.

Image source: Getty Images.

Hardware sales

Nintendo's business starts with hardware sales. And when I say hardware, I mean units of its newest video game console called the Nintendo Switch. The Switch came out in March 2017 and has been one of the most, if not the most, popular gaming consoles for the majority of its existence.

In the first half of Nintendo's fiscal year (April 2020 through September 2020), the company sold 12.5 million Switches, up 81% from the prior year. Last holiday quarter (ending December 2019), the company sold 10.8 million Switches. It is tough to predict how many it sold this holiday season, but investors should expect the number to be at or above the units sold last year. 

Software sales

If the Nintendo Switch is going to have staying power, its users need continual interaction with the product. The best way to track this usage is by looking at how many units of software (i.e., the actual games consumers play) Nintendo is selling.

Last holiday quarter, the company sold 64.6 million units of software. As with hardware units, investors should expect close to the same or better results this holiday season. If game sales start lagging, that is a sign consumers are growing tired of using the Switch. 

Digital downloads

A small part of the report, but one very important for Nintendo's financial profile, is the percentage of software sales that come from digital downloads. Why? Because when games are bought online without having to manufacture packaging, discs, or cartridges, Nintendo's profit margins for its software sales go up.

From April 2020 to September 2020, 47% of Nintendo's game sales were digital, up significantly from 36% in the same period in the prior year. If this trend continues over the long term, and digital downloads become the majority of Nintendo's software sales, the company's overall profit margins should expand materially.

New console update

With the Switch coming up on its four-year anniversary, rumors are floating around about a potential console successor. Nintendo hasn't officially announced anything, but leaks have indicated an upgrade could be released sometime in 2021.

Management is notoriously tight-lipped, so investors may not get an update until the formal press release, but they should be watching for updates this quarter nonetheless. A successful second-generation console is vital for the company's long-term success, as it doesn't want to repeat the horrors of the Wii-U flop that sent Nintendo's stock down 80% from 2007 to 2013. 

Theme park delays

While the majority of Nintendo's business is humming along during the COVID-19 pandemic, the opening of its new theme park in Japan has been delayed once again. Super Nintendo World, the park built in conjunction with Universal Studios, was supposed to open on Feb. 4 in Osaka, but that date has been pushed back to later in 2021. With no new start date as of this writing and a state of emergency declared in Japan, investors shouldn't expect a fully opened Super Nintendo World until the majority of Japan gets vaccinated. 

Overall, while Nintendo isn't a fast-moving enterprise and likes to stay out of the limelight, the video game company is currently riding high on the success of the Switch console. This next earnings release will indicate whether that momentum has continued.