It has been an interesting year for Nintendo (NASDAQOTH:NTDOY) stock. January saw its shares climb above $19 thanks to the arrival of key software and an uptick in optimism about the company's Wii U console. Then, the release of a dour quarterly report and the announcement of revised sales estimates tanked the stock. It's been an up-and-down ride ever since.

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Can Nintendo prosper amid strong competition from Sony (NYSE:SNE), Microsoft, Apple, and Google? What would it take for the company's stock to be a smart investment? Let's take a look.

Nintendo is reliant on hardware sales
The last fiscal year saw approximately 55% of Nintendo's revenue derived from the sale of its gaming systems, and company President Satoru Iwata has made it clear that the company will stick to the hardware-software model as long as he's steering the ship. Transitioning to a software-only business would require significant downsizing, and open Nintendo up to many of the unfavorable conditions that come with being a publisher on other companies' platforms. Unfortunately for Iwata, Nintendo's position in the hardware market has never looked weaker, and current trends suggest that its platforms will continue to struggle.

After more than 20 months on the market, the Wii U installed base is somewhere in the range of 7 million units, substantially below the 9 million units Nintendo initially projected to sell in the last fiscal year. Most third-party publishers have significantly reduced, or altogether dropped, support for the system. For comparison, Sony's market-leading PlayStation 4 has sold over 10 million units in less than a year on the market, and third-party support stands as a major strength.

Can Nintendo preserve the deteriorating handheld market?
On the portable front, Nintendo reported 44.14 million 3DS systems sold as of June 30, but Q1 sales were down about 40% from the year-ago quarter. .

It's not just Nintendo that's suffering from the decline of the dedicated portable market. Sony won't even release specific sales figures for its PS Vita handheld. Even so, its installed base is likely well below 10 million units, and sales outside of Japan are anemic.

Sony's last-gen portable, the PSP, managed to sell approximately 80 million units globally, while Nintendo's DS shifted over 154 million units. Even if combined sales of the 3DS and PS Vita reach 100 million units, an optimistic projection, the handheld hardware market will have declined by approximately 57% in the span of a (hardware) generation.

What the "New 3DS" platforms say about Nintendo
Portable consoles and hardware have long been Nintendo's bread and butter, and lagging sales for the 3DS line necessitated the introduction of a new model. The very literally named "New Nintendo 3DS" and "New Nintendo 3DS LL" are the company's attempt at injecting life into its portable business until it can ready a truly next-generation successor. The feature sets of these devices suggest that the systems are intended to appeal to the dedicated gamer more than the casual audience, a move that represents a notable change in strategy for the company.

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The "New Nintendo 3DS LL" ; Source: Nintendo.co/jp

The rise of mobile devices as gaming platforms has drawn many casual customers away from Nintendo's ecosystem. Now, the company looks to be concentrating on generating more business from its established fan base as it quietly attempts to devise the next big thing. The New 3DS portables give the company an opportunity to sell new hardware to existing 3DS customers, more-easily port old software, and provide its Amiibo NFC figurines a chance of greater success. Similar to the New 3DS systems, the toy-software initiative looks to be a smart way to increase spending from existing Nintendo customers, but it remains uncertain as to whether Amiibo can meaningfully expand the company's base.

Can Nintendo's gaming platforms succeed without third-party support?
An erosion of third-party support has burdened Nintendo with the task of creating enough software to drive the sale of two distinct hardware platforms. In response to this situation, Nintendo has indicated that it is aiming to unify its future gaming consoles, allowing titles to be more easily ported between them. Nintendo will also create low-cost hardware for developing markets. While it's impossible to say with certainty exactly how the company's next gaming platforms will perform, they face significant challenges. Mobile devices will continue to shrink the dedicated portable market, and Sony and Microsoft are better equipped to compete in the home console segment, while also taking advantage of interplay with smartphones and tablets.

It all comes down to "Quality of Life"
As Nintendo heads into the next gaming hardware cycle with weak developer support and a shrinking consumer base, there isn't much cause for optimism that the next round of hardware will bring better results than the current one. This bestows incredible importance on the company's mysterious "Quality of Life" project. Very little is known about what this initiative entails, other than that it will not be based around wearable technology and that the product is being designed with the intent of improving the health of its users. Whether Nintendo represents a good investment is highly dependent on how Quality of Life shapes up.

Final Foolish thoughts
Nintendo's IP and software catalog are great assets, but it looks increasingly ill-equipped to thrive in the dedicated gaming hardware market. Sony and Microsoft are winning the triple-A, enthusiast crowd, while Apple's and Google's mobile platforms are attracting the casual audience that Nintendo used to thrive on. With that in mind, Quality of Life looks to be a make-or-break test for the company. For those willing to bet that the project will be a significant success, Nintendo could be a good buy at current prices. For those unwilling to put faith in a virtually unknown product and a company that's had a spotty track record as of late, steering clear of Nintendo stock appears to be the smart move.

Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.