Nintendo has had a rough run since their stock hit $77.35 back in 2007 when retailers could not keep their Wii gaming console units on the shelf. While Sony Corporation (ADR) (NYSE:SNE) and Microsoft Corporation (NASDAQ:MSFT) fought over the traditional gamers with the PS3 and Xbox 360 respectively, Nintendo targeted the casual gaming market, which proved to be a huge source of new customers and when combined with a much higher profit margin per console than Sony Corporation (ADR) (NYSE:SNE) or Microsoft Corporation (NASDAQ:MSFT), a sweet deal for investors. Times have changed for Nintendo though, as their new console, the Wii U, has been largely disappointing since its release. The company took a beating after the company lowered their sales forecast in January, which is cause for alarm when their console had only been on the market for a few months. Still, while Nintendo faces a challenge, I think Mario and company have more up their sleeves than what analysts and the market give them credit for.
Gaming has become an increasingly competitive industry, as smartphones and tablets are cutting into the mobile market share that at one time was dominated exclusively by the GameBoy. Sony Corporation (ADR) (NYSE:SNE) and Microsoft Corporation (NASDAQ:MSFT) both have new consoles coming out this year, which will compete with the Wii U for market space. The key for Nintendo is to trust their competitive advantage: first party games. Think classic characters such as Mario, Donkey Kong, Zelda, StarFox, and Metroid who are usually showcased in blockbuster games. None of these are represented under the current Wii U game line-up. There are currently no blockbuster games for the Wii U, which is why consumers are staying away: there is no compelling reason for them to rush out and buy one.
It seems to me that management released the Wii U prematurely. While the hardware was ready, the games are still severely lacking, which is bad for current sales and their stock price, but good for value investors. The company’s biggest customer base, the casual gamer, is not ready for the next generation of consoles right now. As the Wii becomes older and more obsolete, look for sales of this customer base to gain traction.
Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE) are both looking at a October or November release date for their next generation consoles, leaving the Wii U to be the economical, and possibly only available, choice during the holiday season if the PlayStation and Xbox have limited supply. Nintendo is a powerful brand name, and being the cheapest will make it an enticing option for cost-conscious parents and consumers.