Microsoft Corporation (MSFT), Sony Corporation (ADR) (SNE): Wii U Numbers a Catch-22 for Nintendo

Nintendo stands as one of the biggest hardware and software players in the videogame industry. Its properties include the Mario series and its spinoffs, Pokemon, and The Legend of Zelda.

Microsoft Corporation (NASDAQ:MSFT)

The company enjoyed extended periods of market dominance over the last decade as a result of its DS and Wii systems, which attracted new gamers with touchscreen and motion-based innovations respectively. Nintendo has not demonstrated an ability to continue such growth, however.

Numbers game

The end of July saw the release of the company’s April to June quarterly report and some troubling numbers. While the company managed to squeeze out a net profit of around $88 million, this was accompanied by a number of worrying indicators.

The company posted an operating loss of approximately 4.92 billion yen, or $50.2 million for the quarter, managing to stay profitable largely on the backs of solid performance from its 3DS handheld and the benefits of a weak yen. The company neglected to revise its annual forecast for a 100 billion yen operating profit and its projections of selling 9 million Wii U systems in in the 2013-2014 fiscal year.

For these reasons, I believe that the company’s stock is currently overvalued at a price of around $17.

Wii who?

To be sure, companies frequently miss projections and face little in the way of serious market ramifications. Nintendo President Satoru Iwata has attached particular significance to meeting these figures, however, and the extent by which the company stands to miss them could be spectacular.

From the beginning of April to the end of June, the company shipped a paltry 160,000 Wii U consoles to retailers. Granted, the actual sales figures for the system were slightly higher as vendors sold their existing, clearly over-shipped stock, but these numbers provide indisputable evidence that the system has garnered little in the way of consumer interest. Even worse, Wii U software sales for the period tallied just over a million units worldwide. As if that weren’t enough bad news, the system was out-shipped by its predecessor, the Wii, a system many regard as close to death if not already there.

At this point, Nintendo has to know that there is virtually no way that it can hit its target of 9 million Wii Us sold in the current fiscal year. Whether it can reach its operating profit goals remains only a slightly less dubious prospect even with strong titles like Pokemon X and Y launching on the 3DS in the fall.

The company faces a decision as to whether it should drastically miss its Wii U sales projections or its profit estimates. If Nintendo wants a shot at selling anywhere close to a respectable number of Wii Us, a sizable price drop is in order. Not so fast. The preferred version of the Wii U currently sells at a loss for Nintendo with an MSRP of $349. This is primarily due to the screen and streaming technologies in the system’s Gamepad controller. The financial hit that Nintendo would need to take to stimulate Wii U sales would surely cripple any chance the company has of nearing the ballpark of its profit forecast. Still, even a price drop in conjunction with a stronger software lineup than is currently available for the system might not entice consumers to jump on the Wii U.

The Other Games In Town

Nintendo faces strong competition from its hardware rivals this fall. Microsoft Corporation (NASDAQ:MSFT) is set to release its Xbox One console and seems to be finding moderate success in its concerted efforts to salvage the system after a disastrous reveal.

Microsoft Corporation (NASDAQ:MSFT) has recently announced a hardware upgrade for the system as well as initiatives to aid and garner support from indie developers. The Xbox One will launch with an MSRP of $499 and offer more advanced graphics technology, the industry’s premier online gaming service, and better third party support than the Wii U is likely to ever see.

Sony Corporation (ADR) (NYSE:SNE) is also slated to launch its PlayStation 4 during the holiday period. The system has enjoyed highly favorable responses from journalists and online communities and presently enjoys the best buzz out of the “next-gen” consoles. The PlayStation 4 is set to launch with an MSRP of $399 and hardware that can achieve better performance than the Xbox One.

With Microsoft Corporation (NASDAQ:MSFT and Sony Corporation (ADR) (NYSE:SNE) launching more technologically advanced consoles with superior network integration at $499 and $399 respectively, the Wii U’s value proposition becomes increasingly shaky.

The system’s greatest strength is that Nintendo is developing games for it, but, at this stage, it is obvious that even big titles like Super Mario 3D Land are not enough to make the Wii U relevant.

With that in mind, I expect Nintendo to take a very middle of the road course of action. Look for the company to scrap production of the Basic Wii U SKU while reducing the MSRP of the Premium bundle to $299. The company has to create a greater price distinction between its console and the Xbox One and PlayStation 4. If Nintendo chooses not to cut the Wii U price this holiday season, take it as an admission that, roughly a year after release, the company is not interested in the future of the device. Either way, heads could be rolling when it comes time for annual reports.

Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Keith is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Wii U Numbers a Catch-22 for Nintendo originally appeared on Fool.com is written by Keith Noonan.

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