4 Victims From Weak Nintendo Wii U Sales

When Nintendo (NTDOY) cut its sales forecast in late-January, it should be no surprise to investors that January sales would be weak. Since trading above $17.50 in the months of April and October in 2012, shares closed recently at around $11.40. It is estimated that Wii U sold well-below 100,000 units last month. In December, Nintendo said it sold 460,000 units. If the estimates are true, and Wii U sold up to 59,000 consoles, this would mean Nintendo did worse than any monthly sales total of Microsoft’s Xbox 360 or Sony’s PlayStation 3 in their lifetime.

Analysis

Nintendo has a fundamental challenge to overcome in the gaming market place. Mobile games are growing every month, while console game sales are declining as a whole. Console games now rely on hit titles for profits. This makes it hard to keep up profits, and costly game developments for titles that are not hits will hurt game makers.

Consumers have not yet realized that free mobile games are unsustainable for game developers. Most of the money budgeted for the smartphone will be for the device itself, and the monthly data fees. Nintendo will no-doubt figure a way to mix its revenue sources through game titles, console sales of the original Wii and sales for the new Wii U.

Companies whose share price could suffer in the short term are: ( List Average 1-Year Return: -17%)

1. Nintendo Co., Ltd ( NTDOY): Mainly engaged in the development, manufacture and sale of entertainment products in home entertainment field. Market cap at $12.91B, most recent open price at $11.53.

Nintendo shares have yet to bottom. Shares peaked in 2007/8. Weak demand for the Wii U could limit upside, but ongoing sales of the original Wii could support shares.
 

2. Microsoft Corporation ( MSFT): Develops, licenses, and supports a range of software products and services for various computing devices worldwide. Market cap at $234.62B, most recent closing price at $28.01.

Xbox 360 sales could be steady for the year, while consumers wait for a refresh. Windows Phone sales and Windows 8 for the computer will matter more for shares.

 

3. Sony Corporation ( SNE): Designs, develops, manufactures, and sells electronic equipment, instruments, and devices for consumer, professional, and industrial markets worldwide. Market cap at $14.51B, most recent closing price at $14.34.

Sony Playstation sales could be weak in January. Share rallied in the last 2 months, and investors could look for more reasons to take profits.
 

4. GameStop Corp. ( GME): Operates as a retailer of video game products and personal computer (PC) entertainment software. Market cap at $3.07B, most recent closing price at $25.37.

GameStop shares are trading well-above lows of $16 reached in August 2012. Console sales support the used game market. GameStop is adjusting its cost base by closing unprofitable stores at a higher pace worldwide. 80% of the closures will be in the U.S. To support its shareholders, the company is returning 100% of free cash flow through share buybacks and dividends.
 

Game makers unaffected by weak overall game sales include Activision (ATVI) and Take-Two (TTWO). Activision reported solid earnings, while Take-Two’s NBA 2K13 was the #4 bestselling title in January. Call of Duty: Black Ops II, made by Activision, took the top-selling title.

( List compiled by Chris Lau. Disclosure: Author is long ATVI)

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