Nintendo’s Demand Remains Strong Despite Supply Chain Issues

With the stock down more than 30%, now is an opportunity for fringe investors to buy nintendo (NTDOY 3.52%)? In this clip from “3 Minute Stocks Updates” on Motley Fool live, recorded on June 22Motley Fool contributor Toby Bordelon discusses Nintendo’s challenges and quarterly results.

Toby Bordelon: Here’s just a preview of that, a preview of their earnings report. Also, looking back at fiscal year 2018 in terms of sales growth and earnings growth and that profit ratio there. What we see now, remember, their fiscal year ends in March. Fiscal 2020, which ended in March 2020, was pre-pandemic. We had just started with everyone who stayed at home buying their video games at the end of their fiscal year. You see this big leap into 2021. It was pandemic stuff. Oh, I need a Switch to play except I can’t get any because they’re all sold out. It’s still a problem actually. This is what we see. You see this little drop in the last fiscal year. They predict a further decline for the next financial year. The problem, guys, is Switch sales. Swing sales by 20% year over year. They sold 23 million units. They expect to sell 21 million units for the coming fiscal year. You see this revenue drop that they are projecting there. The problem is the storage of parts. They can’t build them fast enough. Everyone wants one and can’t have one. Nintendo said on its earnings call that there was no end in sight for them to semiconductor storage. It is a problem. Why is this a bigger problem for Nintendo? They are much more dependent on hardware sales than other game companies because they are just a closed ecosystem.

They almost put Apple (AAPL 1.15%) to shame in terms of their closed and controlled ecosystem. You want to play Nintendo games, you need to get Nintendo hardware. That’s how it works and Switch is where it is right now. If they can’t build them, it’s a problem for them. They can’t grow their user base very much. They can’t sell software. That’s what it’s about. Now I want to be clear here. It doesn’t look like a pandemic stock and demand is falling like with some other companies. The problem is supply. This is the problem. They reduced their demand in November. They have reduced the Switch sales forecast as demand is not improving. This is a good thing. You have a supply problem rather than a demand problem. But it’s still a problem for them and it’s something they have to solve. Two big problems. Will the supply chain resolve quickly enough when it sells more switches before demand starts to dry up or calm down? What does the next generation of hardware look like? If we don’t have the parts to build the current generation, what does it mean to iterate in the future? These are things I’m thinking about right now.

Toby Bordelon holds positions at Apple. The Motley Fool holds positions and recommends Apple. The Motley Fool recommends Nintendo and recommends the following options: $120 long calls in March 2023 on Apple and $130 short calls in March 2023 on Apple. The Motley Fool has a disclosure policy.

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