I have been more quiet about Nintendo since the Nintendo Switch passed its first year installed base build-up. However, I was triggered by discussion on a Bloomberg article, Nintendo Switch Loses Shine With Shipments Seen Missing Target, on twitter.
“The Switch story has been exhausted.” Analysts now estimate Nintendo will miss its hardware target of 37.8 million units by end of March. Some see need for price cut to $200 or introduction of new models next yearhttps://t.co/YGlpNDVTuH pic.twitter.com/7lzSDcXb64
— Yuji Nakamura (@ynakamura56) 2018年11月28日
I resume following Nintendo by posting two charts about the most important issue in the second year of Nintendo Switch – The Release Schedule of System Sellers.
The sell-side consensus of Nintendo Switch shipment is relatively pessimistic. Due to the cluster of two major system sellers release date (both in Calendar Year 4Q 2018), the seasonality will exacerbate this year making sales distribution stray away from historical data. The effect of lacking system seller in 1Q-3Q 2018 can be easily observed by charting tie-ratio which is defined as software shipment during a specific fiscal period divided by installed base by the end of that fiscal period. Nintendo’s tie-ratio dropped from around 1.69x in 4Q 2017 to around 0.91-1.06x during during 1Q-3Q 2018.
If an analyst relies on historical seasonality, she/he might find it’s hard for Nintendo achieve the company guidance of 20M Nintendo Switch shipment target in fiscal year ending March 2019. It might be difficult for an analyst to estimate the impact from seasonality outlier. That said, the choice for analyst might be relatively easy, to follow the guidance or to be conservative. (if the analyst takes reputation risk or even occupation risk into consideration, obviously there’s no reason to be aggressive or optimistic)
As the company has been sticking with its target and probably managed the supply chain accordingly which is reflected in it’s CY3Q18 balance sheet with ballooned inventory level (less likely to have supply constraint issue), whether it can reach or exceed the target purely depends on the market reception of two strongest Nintendo franchises, Pokemon and Super Smash Bros.
It might be hard for investors who are less familiar with Nintendo’s IPs to stomach that skyrocketing inventory level which might make them avoid the execution risk.
It will be interesting to know how much of the inventory level will be reduced during the holiday season in the next earnings release.