The 2006 Wii remains Nintendo’s highest selling console of all time. But it may soon lose that crown to the Nintendo Switch. The latest console remains out of stock at most retailers. The places where it is still available are selling it at ridiculously high prices. Nintendo sold close to 1.5 million units in the first week of launch last month. According to Bloomberg, stock traders have sent clear signals that Nintendo Switch is on its way to becoming the most successful console in the company’s history.
Hardware issues fail to deter buyers
Since the launch of Switch, Nintendo stock has outperformed the broader Japanese stock index by 20 percentage points. By comparison, the stock had outperformed the broader market by 8.9 percentage points in 2006 following the launch of Wii. GameStop said last month Nintendo would continue to chase the consumer demand throughout this year despite ramping up its production capacity.
What’s even more interesting is that consumers are lining up to buy Nintendo Switch despite the reports of various hardware issues. A large number of gamers have also complained about its limited lineup of games. Buyers have reported that the Switch gets physically deformed when placed in the dock mode for longer periods. Other issues have been related to poor reception with its Joy-Con controllers, scratched screens, and dead pixels.
Welcome to our latest issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring Point72 Asset Management losing about 10% in January, Millennium Management on a hiring spree, and hedge fund industry's assets under management swell to nearly Read More
Nintendo Switch showing signs of a ‘potentially big success’
In a research note obtained by ValueWalk, Jefferies analyst Atul Goyal told investors that Nintendo’s April 27 guidance on Switch sales and operating profits could “underwhelm the market.” But after the April 27 event, we would witness a “large earnings upgrade cycle,” said Atul Goyal. Likening the Nintendo Switch to the Wii launch in 2006, the analyst said the Switch was showing “rare signs of a potentially big success.”
Jefferies pointed out that Nintendo has a long history of “underestimating” the upside of its hot consoles and the downside of its poor products. Goyal estimates that the company sold 2.5 – 3 million Switch units in March, much higher than Nintendo’s target of 2 million units. Supply constraints might have hurt the March sales to some extent. Goyal has a Buy rating on the stock with a price target of 39,200 yen, which points to a 52% upside from the current stock price.
Consumer demand yet to slow down
Inside sources recently told The Wall Street Journal that Nintendo had doubled its production target from 8 million to 16 million units. The increased production indicates the Japanese company expects to sell more than 10 million units during the first year. The Switch witnessed record sales in March, which is historically a quiet time for the gaming industry. GameStop COO Tony Bartel said during the company’s earnings call that every time a GameStop store got a restock, the devices were sold out within hours.
It implies that demand for the Nintendo Switch is yet to slow down. Bartel predicts the Switch would surpass Wii sales in the long run. There has also been a ridiculously high attach rate between the console and The Legend of Zelda: Breath of the Wild. Almost 90% people who bought the Switch also purchased the Breath of the Wild.
As the console is frequently running out of stock at most retailers, you may not get the Nintendo Switch at its retail price of $300 anytime soon. Supply will likely be short for the next several months. The console is currently available on Amazon with Gray Joy-Con controllers and Neon Blue and Neon Red controllers. But you have to shell out more than $425 for either one. Currently, GameStop has a “family bundle” in stock, which is priced at $459.
Switch’s bill of materials stands at $257
Meanwhile, a teardown of Nintendo Switch by Japanese firm Fomalhaut Techno Solutions reveals that Nintendo might not be earning even a decent profit from the console. They estimated that it would cost $257 to manufacture each unit of Switch. The console has a maximum retail price of $300, which means there is little room for profits. According to Fomalhaut, each Joy-Con controller would cost $45 to make. Nintendo sells a single Joy-Con for $50 if you want to buy one separately.
The power supply unit and the powerful Nvidia processor add further to the bill of materials. IHS had conducted a similar teardown of the XBox and PlayStation back in 2013. They found that the PS4’s bill of materials added up to $381. Sony sold the console at $399, which means it might have incurred a loss on each unit sales. The cost calculations were even worse for Microsoft. The Xbox One including the Kinect sensor package cost $471 to manufacture.