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Nintendo is a Japanese multinational video game company which started out as the maker of hand-painted playing cards and since then has evolved into one of the biggest manufacturers of gaming consoles in the world. Additionally, the company is responsible for creating some of the most memorable video games over the last few decades. These include gaming franchises like Donkey Kong, Super Mario, The Legend of Zelda, Pokémon and Animal Crossing, among others.
Headquartered in the Japanese city of Kyoto, Nintendo’s roots can be traced back more than 130 years when Fusajiro Yamauchi founded the company back in 1889. Nearly a hundred years after its humble beginnings, the company released its first video game console in 1977. With the debut of Donkey Kong in 1981 and the Nintendo Entertainment System and Super Mario Bros. in 1985, the company received international recognition.
The Japanese gaming behemoth is now primarily involved in the production and sale of electronic home entertainment equipment. This involves both hardware and software development for portable and home video gaming consoles such as the Nintendo Switch, Nintendo DS, and Nintendo Wii.
Also, the firm deals with multinational consumer electronics, dedicated and digitally enhanced video game platforms, as well as Japanese-style playing cards and other gaming-related products.
As of 2022, Nintendo has sold over 5.4 billion video games and over 800 million hardware units worldwide, with business operations in the Americas, Europe and the Asia Pacific, among other regions.
Business model of Nintendo
The business model of Nintendo can be divided into hardware, software, licensing, and digital distribution.
One of the most significant aspects of Nintendo’s business model is the production of hardware devices. Essentially, Nintendo develops consoles that offer unique and innovative gaming experiences. For example, the Wii, released in 2006, was a console that focused on motion control, allowing players to use physical gestures to control gameplay.
Another example is the Nintendo Switch, released in 2017, a hybrid console that can be used as a home console or a portable device, offering players flexibility and convenience. The company designs and manufactures these devices, often in collaboration with third-party manufacturers, and sells them to consumers at a profit.
In addition to hardware, Nintendo also generates significant revenue through the sale of software. The company creates and publishes games for its consoles. These games are developed in-house or in partnership with third-party developers.
The Japanese gaming giant has now started focusing on upgrading current games and charging gamers to unlock various new features like new maps, adventures and gaming levels. This is known as the ‘unfold system’, and it helps the company to avoid rising costs and risks involved in launching a new game in an existing franchise.
Another aspect of Nintendo’s business model is licensing. Nintendo has licensed its intellectual property to third-party companies to create products such as toys, clothing, and other merchandise. In addition to traditional licensing agreements, Nintendo has also entered collaborations and partnerships with other companies to create unique and innovative products.
For example, the company has partnered with Universal Studios to create theme park attractions based on its iconic franchises and with LEGO to produce building sets featuring popular Nintendo characters.
Also, the company has embraced digital distribution as a significant part of its business model. Previously, the company was averse to digital transformation unlike its market competitor Sony. This almost caused them to go bankrupt in the mid-2010s. However, since then, the company has made a lot of changes.
The most crucial move they implemented in this area was the release of a monthly subscription option for Nintendo Switch players in 2018. This allowed members access to free games, additional online features, and the opportunity to store their games on the cloud. Along with that, the company has created an online store, the Nintendo eShop, where players can purchase games and other content digitally.
Financial performance of Nintendo
In the nine months from April to December 2022, Nintendo’s net sales amounted to 1.3 tn yen (~$15.84 bn), a 1.9% decrease over the same period last year. Overseas sales, which totalled 988.8 bn yen (~$12.09 bn yen), made up 76.4% of the total sales.
During this period, sales of hardware units fell by 21.3% year on year to 14.91 million units. Total software sales shrank by 4% to 172.11 million units. On the other hand, digital sales were up by 21.5% from last year to 310 bn yen (~$3.79 bn). Royalty income was stable from mobile and IP-related business, but income from smart-device content declined by 2.3% year-on-year to 38.9 bn yen (~$0.48 bn).
All in all, operating profit for the corporation fell by 13.1% year on year to 410.5 bn yen (~$5.02 bn). While ordinary and net profits fell by 6.1% and 5.8% from the previous year to 482.5 bn yen (~$5.90 bn) and 346.2 bn yen (~$4.23 bn), respectively.
“Looking at the Nintendo Switch business during the nine months ended December 31, 2022, Pokémon Scarlet and Pokémon Violet got off to a strong start, recording total sales of 20.61 million units during the period,” said Nintendo in its most recent earnings report.
“Other new titles released during this fiscal year also performed well, with Splatoon 3 selling 10.13 million units, and Nintendo Switch Sports selling 8.61 million units…As a result of these factors, the total number of million-seller titles during this period was 27, including titles from other software publishers,” the report added.
Stock performance of Nintendo
Nintendo is primarily listed on the Tokyo Stock Exchange (7974:JP). The company’s stock has fallen by 11.5% in the past year as of April 26, 2023. With a market capitalisation of 6.54 tn yen (~$80 bn), the company has a PE ratio of 14.33 and a forward PE ratio of 21.37.
Also, Nintendo has a price-to-book ratio of 2.93. Since May 2021, the company’s stocks have fallen by 10.4%, hitting an all-time high on June 1, 2021. Besides, the stock has its American Depository Receipt (ADR) that is listed on NASDAQ (NTDOY) in the US and is accessible through over-the-counter transactions.
“Despite its longevity in an industry where success is fleeting and failure frequent, market pundits are pondering Nintendo’s prospects,” said Baillie Gifford & Co.
“Having navigated changes within the industry for over a century, we believe that Nintendo’s unrivalled and attractive portfolio of gaming characters will remain core to its competitive advantage and allow it to capitalise on the advent of changes to content delivery,” the asset manager added.
What is next for Nintendo?
Nintendo has a wide range of plans and strategies for the future. The company opened their first-ever theme park, Super Nintendo World, in Universal Studios Japan two years ago. Now, the company has plans to expand this theme park to other locations around the world, including Universal Studios Hollywood and Universal Orlando Resort.
Additionally, Doug Bowser, the CEO of Nintendo USA, stated in a recent interview that he had nothing to divulge when asked if a new Nintendo Switch will be released next year. He did, however, state that the company is feeling ‘very bullish’ about the hybrid console.
Also, Nintendo has committed to sustainability. They plan to reduce their carbon footprint by using renewable energy sources and minimising waste. In addition, they have set a goal to make all their packaging materials recyclable by 2025.
Looking forward, Nintendo has slashed its earnings forecast for the next fiscal year. The company changed its net profit outlook from 370 bn yen (~$2.8 bn) to 400 bn yen (~$4.89 bn) for the next financial year. Furthermore, it reduced its predicted sales for the Nintendo Switch from 19 million units to 18 million units. Now, the company expects software sales to plunge to 205 million units from the previous estimate of 210 million units.
“For next fiscal year, the lineup that has already been announced includes games for very important IP like Zelda and Pikmin, and the Mario movie is planned to be released as well, so our approach is to maximise the appeal of each IP and game to greatly increase sales momentum,” said Shuntaro Furukawa, Representative Director and President at Nintendo.
“By continuing to increase the appeal of the Nintendo Switch Online service, we would like to further expand memberships,” he added.
