After months of speculation, Nintendo (NTDOY 3.03%) officially unveiled a new version of its popular Switch gaming system. As its name implies, the Nintendo Switch OLED model comes with an upgraded organic light-emitting diode (OLED) screen that is designed to display more vivid colors and better contrast compared to the original model's LCD screen. It will launch on Oct. 8 at a retail price of $349, which is $50 higher than the original Switch.
Switch demand has been high over the last year, so it makes sense for the company to pounce on that momentum with an updated release. But to really boost sales, the big challenge for Nintendo is convincing existing Switch owners to upgrade at a higher price point. Is a better OLED screen enough to spur new purchases?
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A new, bigger screen for handheld players
One drawback of the OLED model is that it doesn't come with any internal upgrades to the processing capabilities of the device. It had been rumored that Nintendo would release a Switch "Pro" version with 4K support and a faster processor to better compete with the Sony PlayStation 5 and Microsoft Xbox Series X, which have experienced high demand since launching last fall.
The new OLED screen is larger than the screen on the original Switch, coming in at 7.0 inches in size compared to 6.2 inches for the original. Other than a bigger screen, another key selling point of the new model is that it offers twice the storage capacity of the original Switch's 32 GB drive, which many users will appreciate. The OLED model also retains the same battery life as the regular Switch and Switch Lite.
An updated, bigger screen is a nice addition, but many Switch owners may choose to hang onto their $350 to eventually buy a PS5 or Xbox Series X, especially if these powerhouse consoles become more widely available by the time the OLED Switch launches this fall.
One important thing to know is that far more Switch owners use their device in handheld mode than connected to a TV. This explains why Nintendo made the decision to forego upgrading the graphics capability of the device, instead focusing on giving users a larger screen to enjoy their video games.
Nintendo's strategy
Nintendo's net sales growth was tapering off heading into the pandemic, but it accelerated from a 9% growth rate in fiscal 2020 to 34% in fiscal 2021. Analysts are very bullish on the sales potential for the new Switch this holiday season. Nintendo is launching the system on the same day as the release of a new installment in the long-running and very popular Metroid franchise (Metroid Dread), which should fuel additional demand.
Consistent with previous hardware launches, Nintendo is using the new Switch to prop up sales of higher-margin software titles heading into the holidays. This is a smart way to keep sales and profits up as the pandemic momentum fades.
In fiscal 2021, strong hardware sales translated into matching demand for games, boosting operating profit for the company 82% over the prior year.
Don't expect a massive boost to sales
The Nintendo Switch is entering its fifth year since launch, and the company's most recent guidance shows sales trends starting to flatten out. Through March, life-to-date unit sales of Switch hardware reached 84.6 million, and the company is calling for another 25.5 million units to be sold during fiscal 2022 (ending in March of next year). But that won't be enough to grow sales year over year as Nintendo's guidance calls for total net sales to decline 9% in fiscal 2022.
Keep in mind that this guidance was issued before the announcement of the Switch OLED model, so depending on how the marketplace responds to the launch this fall, there could be upside to management's forecast. But given the lack of more substantial upgrades to the internal specs of the unit, I expect the upside to remain limited.
Investors shouldn't expect a major boost to sales. For that, investors should watch for a possible "Switch Pro" release down the road, which has also been widely rumored and would provide a more robust graphical upgrade to better compete with Sony and Microsoft's new game consoles.
