Nintendo's (OTC:NTDOY) stock price recently slumped after Valve announced the Steam Deck, a handheld gaming PC that can play games from a user's Steam library. The Steam Deck is more powerful than Nintendo's Switch, but its base model will cost $399 -- just $50 more than the Switch.
The Steam Deck stole the spotlight from Nintendo's Switch OLED, a newly upgraded model which will launch this October, and the media is saying the device is the Switch's first big competitor. However, I don't believe the Steam Deck will seriously compete against the Nintendo Switch, for four simple reasons.
1. Nintendo's exclusive first-party games
Nintendo's first-party franchises -- which include Mario, Zelda, Metroid, and Animal Crossing -- are tied to its hardware. It's occasionally released spin-offs of those franchises on mobile devices, but their main releases are restricted to Nintendo's own consoles.
That key strength differentiates the Switch from Sony (NYSE:SONY) and Microsoft's (NASDAQ:MSFT) gaming consoles, which play many of the same cross-platform games, and enabled Nintendo to ship 88.1 million Switches worldwide since the device's initial launch in April 2017. By comparison, Sony and Microsoft have shipped 115.8 million PS4s and 50.2 million Xbox Ones, respectively, since their initial launches in November 2013.
Nintendo's upcoming exclusive games this year include The Legend of Zelda: Skyward Sword HD, WarioWare: Get It Together, Metroid Dread, Super Mario Party All-Stars, and two Pokémon remakes. People who don't already own a Switch and want to play those games will likely buy a Switch OLED instead of a Steam Deck.
2. The Steam Deck is built for PC gamers
The Steam Deck is ideal for PC gamers who have already purchased a lot of games on Valve's Steam platform. It's also a convenient option for gamers who want to access those games on the go.
Some people will claim Steam Deck users can also emulate Nintendo's first-party games with its more powerful hardware. But doing so is illegal, and it's highly doubtful Valve will encourage its players to download ROMs of Nintendo games instead of buying more games on Steam.
In other words, Nintendo's Switch OLED will strengthen its walled garden and help it sell more first-party games, while the Steam Deck is merely a handheld version of a gaming PC. These are different products that target different markets -- so they shouldn't be considered competing consoles.
3. Valve's hardware has flopped before
Back in 2015, Valve tried to disrupt the gaming console market with its Steam Machines. These gaming PCs were packaged like gaming consoles, linked to users' Steam libraries, and used Valve's own Steam Controllers. But instead of designing and manufacturing the consoles on its own, Valve relied on PC makers to launch a fragmented lineup of Steam Machines.
Most of those models were pricier than the PS4 and Xbox One, and the platform's Linux-based OS only supported a fraction of Steam's games. Those flaws doomed the devices, which Valve quietly killed off in 2018.
Valve clearly learned some lessons from that flop. It's producing the Steam Deck on its own instead of relying on unpredictable third-party partners, and it already supports more games than the Steam Machines ever did. The Steam Deck might fare better than the Steam Machines, but it could also struggle to overcome Valve's infamous hardware legacy and win over gamers again.
4. Microsoft could take out Valve instead
Many people have compared the Steam Deck to the Switch, but Valve's actual competitor might be Microsoft, which integrated Xbox Cloud Gaming into its Xbox Game Pass in June.
This means Xbox Game Pass members can now stream more than 100 Xbox games to Windows 10 PCs, Android devices, and iOS devices without downloading and installing them. Players can simply mount their phones onto compatible controllers and play those high-end games over the cloud.
The Steam Deck doesn't offer cloud gaming, which is problematic because its $399 base model only offers 64GB of internal storage. That's only enough space to store a few high-end PC games -- which means gamers will need to constantly uninstall games to make room for new ones.
If PC gamers gravitate toward Xbox Cloud Gaming's streaming approach instead of the Steam Deck's locally installed games, Microsoft could become Valve's biggest challenger instead of Nintendo. Other nascent cloud gaming platforms, including Stadia and Luna, could exacerbate that pressure.
What does all of this mean for Nintendo?
Nintendo's revenue grew 34% last year as consumers bought more Switch consoles and games during the pandemic. Its console and software shipments both improved 37%, and its net profit rose 86%.
But this year Nintendo expects its revenue and earnings to decline 9% and 29%, respectively, as the pandemic passes, new rival consoles like the PS5 compete for attention, and the ongoing chip shortage throttles its supplies. However, the new Switch OLED -- along with its upcoming first-party games -- could cushion the blow.
The upcoming launch of the Steam Deck in December might be causing some Nintendo investors to rethink that thesis, but I doubt this new device will be a "Switch killer" during the holidays.