Following today's fiscal news from Nintendo, in which the company revealed that it shipped 4.7m units of Switch hardware through June and still expects to ship over 12m units by the end of its fiscal year next March, Wedbush Securities has decided to raise its own forecast from 10m to 12m units. The firm has increased its software forecast for the Switch as well.
Wedbush analyst Michael Pachter commented, "Nintendo is monetizing better than we modeled, primarily from Switch hardware and software margins. It appears that the company has increased production of the Switch, but supply has been slow to make it to market, and we can only surmise that the company is stockpiling 'excess' supply in order to meet anticipated holiday demand. We believe that the company is prudently reiterating its guidance for Switch units until it has a better handle on demand for the device, and the company is reluctant to raise guidance with low visibility.
"Notwithstanding our belief, we are increasing our Switch hardware unit forecast... and are initiating FY:19 estimates that call for 13 million hardware units shipped. Software unit sales have been in-line with historical averages, and we expect that to continue. Given our modest lift in the hardware estimate for the year, we are increasing our Switch software unit estimate to 38 million (above guidance of 35 million) and are initiating our Switch software unit estimate for FY:19 of 46 million."
Nintendo IP like Zelda: Breath of the Wild, Mario Kart 8 Deluxe and the newly launched Arms have all fared well for Nintendo, and needless to say, there are massive expectations for Super Mario Odyssey this holiday season. What's possibly more interesting, however, is how Nintendo's mobile strategy continues to evolve. That, too, is an area that Pachter acknowledged Nintendo has been doing better in than he anticipated.
"Nintendo has been more profitable from its smart device business (primarily mobile games) than we envisioned, as well," he continued. "We are increasing our smart device revenue estimate by roughly 100%, to a quarterly run rate of ¥9 billion (around $80 million quarterly), which is impressive given Nintendo's late entry into the mobile games business. We have been pleasantly surprised by Nintendo's success in the mobile arena, and expect sufficient new releases to keep revenues at this level for the foreseeable future.
"We are raising our 12-month price target to ¥21,500 from ¥18,000, reflecting better execution and our greater confidence that Nintendo can grow its profits on the success of the Switch and on its improving mobile fortunes."
While Pachter has raised forecasts, he's been fairly skeptical of Nintendo's prospects in the past, and he still offers a bit of caution: "The starting price of $300 could eventually become a problem given a light software slate and widespread discounting for the PS4 and the Xbox One. Although the first party slate is promising, third-party support may eventually subside.
"In addition, most of the industry's big second half releases will not be available for the Switch. We will get a better sense of the Switch's long-term prospects when games like Activision Blizzard's Call of Duty: WWII and Destiny 2, EA's Star Wars Battlefront II, and Ubisoft's Assassin's Creed Origins are released, all of which will compete for consumer wallet share and will not be available for Switch."