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.

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.