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Morningstar | Nintendo's Launch of Big Titles Will Accelerate Switch Shipment Momentum in 2019; Shares Undervalued

Switch console shipment in the September quarter was 3.19 million units, which was 9% above the previous year’s number but lower than our expectation of JPY 3.6 million. Nintendo shipped 5.07 million units in total for the first half, which seems to be somewhat insufficient to accomplish its 20 million shipments target for this fiscal year, even if the launch of big game titles is skewed on the holiday season. On the other hand, Switch games shipment was 24.2 million, up from 18 million of the previous quarter and 13.9 million of the previous year, which is an encouraging number outpacing its 100 million software shipment target for this fiscal year. The lifetime tie ratio (number of games sold per hardware) raised to 4.9 from 4.4 on the previous quarter, which implies the improving user engagement of existing users. We thus will retain our view that the pipeline from this winter is attractive to reignite the console shipment momentum, which is not embedded to the current share price. We plan to revise our forecast numbers after meeting with the company in early November but do not expect to make material change to our fair value estimate of JPY 51,000.

While lack of big titles temporarily slowed down the hardware shipment momentum this summer, we are encouraged with the future pipeline. The company mentioned that Super Mario Party, launched in October, made a solid start, globally shipped more than 1.5 million in only one month. Pokemon Let’s go Pikachu/Let’s go Eevee, launching in November, will be connected to Pokemon Go, which is downloaded more than 800 million devices worldwide, and this is expected to induce some Pokemon Go users to the Switch plartform. Moreover, Super Smash Bros Ultimate, which is known as one of the largest IPs of Nintendo, will be launched in December. We view that the momentum will be accelerated in 2019, as brand-new titles of Animal Crossing and Pokemon are expected to be launched.

Nintendo’s challenge is how to mitigate the cyclicality of game consoles in the longer run, and we believe that Nintendo needs to establish its ecosystem and diversify its revenue source by expanding mobile games and online subscription businesses. For instance, while Sony earned approximately 60% of its gaming revenue from the online business this quarter, the proportion was still 19% for Nintendo, which suggests that the proportion of monthly subscription fee and add-on contents for Sony is much larger than those for Nintendo. We consider that selling old games online will help earn solid cash flow, and also, selling additional contents for existing titles contributes to prolonging the lifetime of games and the entire platform. Therefore, we will focus on how quickly Nintendo can ramp up the non-hardware business in the near future.