Nintendo's (7974:JP) share price has historically depended on two things: video game and console sales. Two years after going public, the share price hit an all-time high of 70,500 JPY (634.46 USD) in 2007, as families flocked to buy the Wii. By 2013, shares plummeted to 12,060 JPY (107.75 USD) as sales in the Wii U, its follow-up to the Wii, stalled. 

Some suggested it was game over as rivals Sony and Microsoft became the dominant industry players. All Nintendo had left was the Switch: a risky hybrid console that mixed home and mobile gaming.

The experiment paid off. Released in March 2017, the Switch became the fastest selling console in US history, with 19.67 million units sold by June 2018. Shares in the company rocketed throughout 2017 to peak at 57,000 JPY (509.182 USD) at the start of 2018 - a huge turnaround.

Elsewhere, the company’s foray into mobile gaming has also been a success. Super Mario Run, its first mobile title, has been downloaded over 200 million times. Nintendo’s mobile gaming business grossed 9 billion JPY (81 million USD) last quarter.

 

Nintendo’s recent earnings performance

Results for its previous quarter saw Nintendo record a 30.5 billion JPY (275 million USD) operating profit, up 88% year-on-year. Overall revenue also grew 9% to total 168 billion JPY, or $1.5 billion. High-margin digital sales also rose by 68% year-on-year to account for 11% of revenue.

Yet shares in the company have dipped since then. Back in July, shares hit a 52-week low of 34,510 JPY (304.932 USD) as a lack of new games releases – which has long been Nintendo’s Achilles’ heel – and a fall in Switch sales dragged on the share price.

Also tugging on the share price has been a spate of poor earnings results for companies listed on the Tokyo exchange. On Friday, the Nikkei 225 lost 84.13 points (- 0.40%) as Canon Inc. (CAJ) announced weak consolidated earnings for the year.

Coming into the Tuesday’s second-quarter earnings announcement, investors had reason to be optimistic with growth in Nintendo’s mobile gaming business and the September launch of Switch Online.

Second quarter profit hit 30.9 billion JPY (271.11 million USD), up 30% from a year ago for the July to September period. Despite being an eight-year high, it was below some analysts’ expectations. 

Switch sales came in at 5.07 million for the April to September period. While Nintendo is maintaining its target of 20 million sold by 30 March, it will have to go some way over the holidays to meet that goal. 

Promisingly, software sales performed strongly, with 42 million Switch games sold in April-September, compared with 22 million last year. 

The share price closed Wednesday’s session at 35,160 JPY (310.665 USD), down 0.26%.

 

What’s the next level for Nintendo?

CEO Shuntaro Furukuwa believes Nintendo’s smartphone games portfolio could grow to a $900 million business. Upcoming releases Mario Kart Tour, Super Smash Bros. Ultimate and Pokémon: Let’s Go titles should also see the share price spike.

Switch Online looks like it will be a lucrative revenue stream. The online multiplayer service costs $20 a year, a fraction of what its rivals charge. At this price, market penetration should be high and provide opportunity for Nintendo to leverage its substantial back catalogue as digital downloads.

With the global games market expected to be worth $180.1 billion in terms of revenues by 2021 (up from $137.9bn in 2018), Nintendo needs to translate the Switch’s strong hardware penetration into sustained video game sales. Providing it maintains a roster of must-have games to go with its latest console, the home of Mario could see a levelling up in its share price.