Analysts predict tough times ahead for Nintendo

Nintendo's decision to slash the price of the 3DS and drastically lower its profits forecast has prompted a surprisingly mixed reaction from industry analysts.

Nobody sees either decision as good news, of course, but with the large reserves of cash generated by the success of the Wii and DS at the company's disposal, Nintendo is in a position to carefully plan its strategy for a highly competitive next few years.

DFC Intelligence analyst David Cole told IndustryGamers that the low 3DS price-point, in particular, is a more aggressive move than it first appears.

"It is very unlike Nintendo to be willing to take such a loss," he said. "I think what it says is that they really feel the heat from the Sony Vita. I see it as a move to protect their market share and position in handhelds. I would not call it desperation but more a very aggressive defensive action by the market leader to hold on to market position."

With Super Mario 3D Land and Mario Kart 7 confirmed for the end of the year, the Vita now faces stiff competition. The 3DS will be half the price, widely available, and very likely bundled with new installments from the franchises upon which Nintendo's business is built.

"This price cut does put the Vita in a tough position," said EEDAR's Jesse Divnich. "It all comes down to the content and if the Vita can deliver a library of high quality entertainment products, it should be able to thrive at the $249 price point."

Divnich believes that this holiday season will be "one of the most important in portable gaming," and that Nintendo's track record in the market should be enough to convince people to reserve their judgement on its longer term future. More importantly, the past also indicates that the poor performance of the 3DS will have no bearing on the success of the Wii U.

"These two markets really do operate independently from each other, despite both sharing similar brands/titles," he added. "We've seen in the past where Nintendo's home consoles failed to become successful, while their portable market thrived."

With the Wii U launch price still to be confirmed, it has been suggested that the situation with the 3DS will push Nintendo to be conservative. According to M2 Research analyst Billy Pigeon, however, if the Wii U does launch at Michael Pachter's "sweet spot" of $249 it will be because of larger trends in the games industry and wider economy.

"[The economy] will effect upcoming dedicated gaming device cycles, including Wii U," he said. "Launch prices aren't too high, but we are seeing a trend in quicker price cuts that is driven by harsher market realities, including less spending on entertainment and the availability of cheap or free high quality entertainment on convergent mobile devices."

Given the severity of the price-cut and guidance correction, a significant drop in share price was to be expected. However, Asif Khan of Virtue Ventures LLC believes that it could be a real boon for any investor brave enough to bet on Nintendo bouncing back.

In an article for IndustryGamers, Khan posited that most successful tech companies would have seen stocks plummet 50 percent from such a drastic change in earnings guidance, but Nintendo's have declined by less than half of that figure.

"In my opinion, Nintendo has priced in a large part of this bad news and we are at the trough for their earnings... One would be hard pressed to find anyone in the gaming community that has a good thing to say about the company's future and that is why I think it remains a great contrarian buy."

Khan points out that Nintendo's stock was trading at $8.55 a share in May 2003, but by October 2007 that price had climbed to $78.50 – a return of 818 percent in under 5 years.

"I see a potential gain of 100 to 200 percent in a 3 to 5 year time horizon from the current levels at which the stock is trading," adds Khan. "It comes down to Wii U. If it is a failure, and doesn't sell well at all, this company could just be at the beginning of its troubles. If this stock rebounds, as I expect it will, investors could do worse than buying up a great franchise like Nintendo."

Wedbush analyst Michael Pachter sees it differently, advising investors to avoid buying any stock, "until Nintendo can demonstrate that its sales can again grow." Ultimately, the lowered 3DS price will only halt the decline of handheld sales rather than stimulate growth.

"Until the Wii U comes out, we think that Nintendo investors must resign themselves to modest earnings from the company."