Nintendo Drops 9% After Weak Earnings and Buyback Announcement

(Bloomberg) -- Nintendo Co. fell as much as 8.8% Friday after its quarterly profit missed estimates, underscoring concern that gaming demand may be peaking as parts of the world emerge from the pandemic and go back to work.

The games company fell by its most on an intraday basis since Feb. 2019, despite announcing Thursday it plans to buy back up to 1.51% of its shares for 100 billion yen, which it plans to cancel. The buyback reflects its cash position from strong sales, Nintendo said.

The Kyoto-based company reported operating income of 119.75 billion yen ($1.1 billion) for the June quarter, compared with the average projection for 130.9 billion yen. It maintained its forecast for a 22% drop in operating profit to 500 billion yen this fiscal year alongside 25.5 million Switch console sales.

Nintendo, whose Animal Crossing: New Horizons was the breakout title of the Covid era, is grappling with aging hardware as normality returns to some parts of the globe and people spend less time immersed in games. It saw a mixed picture with Switch hardware sales, which fell by 22% overall to 4.45 million units, but rose for the more expensive standard edition.

Semiconductor shortages and logistics continued to impact production of the gadget, Nintendo said. It attributed the drop in Switch Lite sales to lower inventories in Europe and the U.S. than a year ago.

“Games this quarter were not enough to patch the hole left by Animal Crossing,” said Hideki Yasuda, analyst at Ace Research Institute. “July market data shows Switch and Switch Lite sales are falling. Nintendo will have another tough time ahead in the July-September quarter, which could be worse than the April-June period.”

The highly anticipated next game in the Zelda franchise, a sequel to Breath of the Wild, won’t be out until 2022. Nintendo is now counting on the Oct. 8 launch of a new Switch model with a bigger, OLED screen to reinvigorate the four-year-old platform in time for the crucial holiday season.

Read more: Nintendo Switch’s Big Price Hike Takes Gamers Into New Territory

The games maker reported record earnings during the pandemic-fueled gaming boom and aims to outdo rivals Sony Group Corp. and Microsoft Corp., which rolled out new consoles last year. But some investors have taken a negative view of the upcoming Switch and its higher $350 price tag, pushing Nintendo’s shares down 15% between its announcement and the Thursday earnings report.

The gadget could still outperform rivals as the latest generations of both the PlayStation and Xbox remain in limited supply owing to global chip shortages. Long-running franchises such as Capcom Co.’s Monster Hunter could also prop up sales while Pokemon Unite, released in July, could galvanize business as well.

​Microsoft said last week that revenue growth in its Xbox business’ content and services slowed, signaling headwinds for future demand as vaccine rollouts continue in key markets. Sony reported lower PlayStation Plus subscribers and monthly active users on Wednesday, though its Chief Financial Officer Hiroki Totoki said he didn’t expect that trend to continue.

What Bloomberg Intelligence Says

Nintendo needs to drive software sales and live services to support long-term earnings growth as the Switch platform enters the mature phase of its cycle. Switch hardware sales may have peaked in fiscal 2021 ended March, absent a reported but as yet unconfirmed Pro version, putting a greater onus on software to drive profit.

-- Matthew Kanterman and Nathan Naidu, analysts

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(Updates with market reaction and BI analysis)

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