Nintendo (NTDOY 1.26%) has revitalized its business over the last few years with the Nintendo Switch gaming system. The success of the hybrid console/mobile device has sent Nintendo's share price up over 300% in the past five years vs. the S&P 500's 100% return. On Thursday, May 6, before the U.S. markets open, Nintendo is scheduled to release its full-year earnings for the fiscal year that ended in March.

Here's what Nintendo investors should watch for when Nintendo reports earnings next week.

Switch sales keep rising

The majority of Nintendo's business right now comes from Switch console and game sales. It is important that Nintendo not only consistently gets more Switch consoles into the hands of consumers but that these consumers are consistently buying and playing games on the platform. The fleeting nature of Nintendo's other gaming systems, like the Wii (where some players just played Wii Sports and then quit), was a big reason why the platforms didn't have staying power. Nintendo hopes to change this with the Switch.

A mother and daughter playing video games together and smiling.

Image source: Getty Images.

So far, things are going swimmingly. Over the nine months ending in December of 2020, Nintendo sold 24 million hardware units, up 36% from 2019 and, more importantly, sold 176 million software units (games), up 43% in the same period. The big boost came from the success of first-party games like Animal Crossing: New Horizons, Super Mario 3D All-Stars, and Mario Kart 8 Deluxe. Combined, these games sold over 36 million units during the period. In fact, 29 games sold over 1 million units during the last nine months of 2020. Nine of them were from third-party developers. Obviously, the pandemic helped give a one-time boost to some of these titles, but the consistent increase in software sales four years after the Switch was originally launched is a testament to its staying power vs. other Nintendo hardware products.

Will there be Switch Pro news?

Rumored to be coming for over a year now, sources recently told Bloomberg that an updated Switch console is coming sometime this year. Nintendo typically keeps its plans closely guarded, so don't go into this earnings report expecting anything until the device is officially ready for release. An updated Switch is important for extending the life of the Switch platform. Instead of having to transition gamers from one hardware system to the next every 5 to 10 years, the Switch Pro (or whatever Nintendo calls it) can port the existing users over to the updated version, similar to how the Xbox and Playstation ecosystems function.

Another important factor of a new Switch would be updating the system's processing power. The Switch didn't have cutting-edge graphics capabilities when it launched in 2017 and now feels a bit ancient vs. the new Xbox and Playstation consoles. While not vital to the family-style games that Nintendo typically releases, updated graphics capabilities would give third-party developers a better experience when making games for the Switch.

From an investor perspective, a successful Switch iteration is important not necessarily so that it grows Nintendo's profits but makes them more consistent in the eyes of Wall Street. If Nintendo can prove that its current profit levels are sustainable and not a flash in the pan, the market might assign a higher price-to-earnings ratio (P/E) to Nintendo stock, which is currently trading at a P/E under 13 when backing out the $15 billion cash and cash equivalents on its balance sheet.

What's up with the Niantic partnership?

In March, Nintendo announced a partnership with mobile and augmented reality (AR) gaming company Niantic to combine the company's best-in-class AR technology with Nintendo's intellectual properties (IP). Niantic is the studio behind the hit Pokemon Go game, so it has a track record of success within the AR gaming market. Nintendo, on the other hand, has a terrible history when it comes to mobile gaming, even stating last summer that it has quit developing new mobile games from its internal studio.

The first Niantic-Nintendo app will be based on the Pikmin franchise, with more games to follow. Investors should look for any updates on this partnership in this year's annual report as it looks like Nintendo's sole mobile strategy going forward. While Nintendo will likely give up some profits by outsourcing development to Niantic, it actually was a Series A investor in the company after its spin-off from Alphabet's Google in 2015. If Niantic does well and raises its valuation, some of that value will eventually flow back to Nintendo. Plus, it is likely that with Niantic developing these games, the overall sales/profit potential will be substantially higher for these games than if Nintendo were to continue going after the mobile market alone.

Overall, there is a lot to be excited about as Nintendo heads into its full-year 2021 earnings report. The Switch looks to be doing as well as ever, with new hardware updates potentially coming sometime this year. The Niantic partnership is exciting and could finally give Nintendo some momentum in the gigantic mobile gaming market. Plus, with the stock trading at only 13 times trailing 12-month earnings (ex-cash), investors have the opportunity to invest in Nintendo at a discounted valuation.