Nintendo's Got 99 Problems, and a Switch Is One

This should be a great time for Nintendo (OTC: NTDOY) and its investors. The Super Mario Galaxy Movie is this year's biggest film, with more than $750 million in worldwide ticket sales. The sequel to 2023's blockbuster, made in partnership with Comcast (NASDAQ: CMCSA), opens in Nintendo's home turf of Japan this weekend. It's on track to become the first film to top $1 billion in 2026 by the time it's done with its theatrical run. https://www.boxofficemojo.com/year/world/?ref_=bo_nb_hm_tab

Next month, Comcast's Epic Universe in Florida will celebrate its first year of operation. A top draw at the first major theme park to open in the U.S. in 24 years is Super Nintendo World. It's the third interactive theme-park land to open between the two partners.

Two months from now, Nintendo will celebrate the first year of availability for the Switch 2, the gaming giant's first new console since 2017.

But even with these three spectacular events over the past 12 months, the shares have gone backwards. Nintendo stock has fallen 26% over the past year, plummeting 47% since last summer's high.

Image source: Getty Images.

Memory lame

How did a potent trio of bullish catalysts end with a bearish twist? The biggest culprit is memory. The Switch 2 console components include DRAM (Dynamic Random Access Memory) and NAND (Flash) storage solutions. Game cartridges require NAND to save gameplay data. And the surge in demand for AI chips has sent the memory market skyward in the past nine months. Retail prices for some products have risen as much as fivefold.

That puts Nintendo between a Joy-Con and a hard place. When it priced its new console at $450 in the spring of last year, it had already delayed U.S. preorders to assess the impact of new tariffs. The company held firm on its initial pricing, concluding that it could offset inflationary pressures on core commodities by raising game and accessory prices. Many expected memory costs to rise, but few figured it would get this bad.

It gets worse for video game stocks, now that spending more money to fuel up our cars leaves less money to fork over for entertainment. Rising geopolitical tensions are also making consumers jittery. The result is that Switch 2 system sales, initially brisk, have slowed. In its first holiday season on the market, the Switch 2 undersold its 2017 predecessor by more than a third in the U.S. market.

Things have softened to the point that Nintendo is paring back Switch 2 production for the current quarter from 6 million units to 4 million. With component costs surging, the obvious response would be to pass the increase on to gamers, but that would destroy the already softening demand for the Switch 2. Nintendo is going to have to eat the margin squeeze.

Making matters worse, despite the recent success of last month's Pokémon Pokopia game, the more anticipated titles aren't expected until next year. Nintendo doesn't have a clear window to pass along its rising costs until 2027.

Instead of a strong sophomore season for the new platform, analysts see a mere 6% increase in earnings and a 9% improvement in revenue for Nintendo's fiscal 2027, which kicked off at the start of this month. Even if memory prices cool down, they're unlikely to get back to where they were a year ago. The AI revolution isn't going away.

However, neither is Nintendo. It has a cash-rich balance sheet, so it can ride out the lull, with revenue and earnings still growing against serious headwinds. Nintendo is losing now, but it's playing to win the long game.

Rick Munarriz has positions in Nintendo. The Motley Fool has positions in and recommends Nintendo. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.