Nintendo (OTC: NTDOY), maker of the Switch video game console, has recently started to invest in other forms of entertainment for its flagship characters and stories. Like Disney (NYSE: DIS) has done with Marvel and Star Wars, Nintendo is building theme parks, creating mobile games, and partnering on video content for its Mario, Zelda, and Donkey Kong franchises. By branching out into new business lines, the company may be able to flatten out the feast-or-famine fluctuations of its main console business.
Consoles alone can't carry Nintendo's future. Image source: Getty Images.
Relying on the Switch, for now
As of right now, the majority of Nintendo's revenue is related to the Switch console. Last quarter, 96% of its revenue came from the Switch and associated games. The Switch is a massive hit and has been the No. 1 console in the U.S. for 22 months, but it can be risky if a company relies on one product to succeed, especially if it is hardware-based.
Competition is coming, too. The new Xbox and Playstation consoles have launched for this holiday season, which may pull some gamers away from buying a Nintendo product. The company has countered with the new Switch Lite and the rumored Switch Pro (thought to be launching in 2021), so it will be interesting to see whether Nintendo can retain the top position in the console rankings. Xbox and Playstation target adult gamers more than Nintendo's family oriented content, so investors shouldn't be too worried about the new consoles, but it will be interesting to see whether fresh competition pulls sales away from the Switch during the holiday season.
The Switch is important to Nintendo, and investors should be following it closely. But it isn't the only way the company will grow in the future.
Widening its entertainment horizons
Right now, Nintendo gets 5%-10% of revenue from everything that isn't Switch-related, depending on what quarter or year is being looked at. Nintendo management, traditionally secretive about future plans, has hinted that it wants to change its dependency on a single console going forward. Here are a few things we know are coming:
- Theme parks. Nintendo is partnering with Universal to build Super Nintendo World parks in Japan, Florida, California, and Singapore. Like Star Wars: Galaxy's Edge at Disney parks, Super Nintendo World is meant to be a 100% immersive experience where visitors feel like they are in one of Nintendo's games. Construction started on the Japan park in 2017, and it is supposed to be open in 2021, depending on what happens with COVID-19.
- Video entertainment. With the rise of streaming budgets and modern animation technology, Nintendo has started partnering/licensing its IP for movie and TV production. A Super Mario Bros. film from the makers of Despicable Me is supposed to come out in 2022. It will be animated (as opposed to the trainwreck 1993 version) and focused on a family audience. A Legend of Zelda movie has been rumored to be coming to Netflix, although nothing material has been announced so far. Nintendo President Shuntaro Furukawa said in the future visual content may not be limited to just film, and that Nintendo's main goal is to invest in entertainment to attract new fans to its content.
- Hybrid physical and digital games. Movies and theme parks may be the largest opportunity for Nintendo, but investors shouldn't forget physical games and toys. For example, the company just released Mario Kart: Home Circuit, where users not only race cars and characters on a screen, but also with a physical racing track.
One downside for Nintendo has been its struggle to succeed with mobile gaming. The company announced it was retreating from the smartphone market, which likely disappointed many investors. Halting investments in smartphone games should not concern anyone looking to own shares in Nintendo, though, since it's only a small part of the company's business. Not everything can be a home run, and a stumble here shouldn't affect the company's other plans into non-gaming assets going forward.
It should be noted as well that Nintendo has a 20% stake in Niantic, the innovative AR-gaming start-up behind the hit app Pokemon Go, so it isn't totally shut out from the smartphone industry.
Looking 10 years ahead
A decade from now, investors may look at Nintendo in an entirely different light. With its undisruptable, Disney-like IP, it wouldn't be surprising if the company had four different revenue segments generating substantial profits as the investments in non-gaming assets bear fruit. This will separate Nintendo from the console cycle, ensuring that every new product is not life or death for the business. Investors should look for consistent, growing profits as an indicator of this strategy working going forward.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Nintendo and recommends the following options: long January 2021 $60 calls on Walt Disney. The Motley Fool has a disclosure policy.
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