Where Are the New Blockbuster Games?
Nintendo’s Switch has amazing controllers called Joy-Cons. They detach from the main console and mimic the movements of your hands to great effect in a game like Just Dance or the Ring Fit Adventure, Nintendo’s exercise game.
But there is a major problem, after a certain amount of usage Joy-Cons develop what is called “drift.” What happens is that your character, car or whatever just drifts in one direction. There are certain things that can be done, like trying to reset or clean them. But those solutions are annoying. In many cases you can ignore it and just deal with it. Often you might resort to just buying new ones, but they aren’t cheap. Each Joy-Con costs at least $40. After many complaints, now at least Nintendo will fix your controller if you are within the warranty window.
As a video gamer, drift is an issue to deal with when playing games on the Switch. It’s the downside to having the ability to play with such an innovative controller. It can also lead to a sub-optimal game experience in the short run while you deal with the issue or wait for a new controller.
I thought of the Joy-Con drift, when thinking about Nintendo (Japan: 7974, OTC: NTDOY) the company and its latest downdraft. While analysts obsessively worry about “Peak Switch” (the idea that we have reached the peak of Switch unit sales), I’m more worried about games, specifically new game releases. After all, people buy the Switch, upgrade their existing one or recommend to friends to buy the Switch mostly based on what games they are playing.
And in the last fiscal year (ending March 2021), Nintendo had a plethora of new games that drove Switch sales through the roof led by the blockbuster Animal Crossing and two great Mario games (Super Mario 3D Allstars and Mario 3D World+Bowsers Fury). The lineup also included Mario Kart Live, a truly innovative augmented reality racing game with a real-life car. The company was also catching up on back orders of their fitness game Ring Fit Adventure and more. It was a stellar lineup of games that led to an exceptional year for Nintendo.
That brings us to this year and frankly, it has been disappointing to say the least. There have been no blockbuster games released or announced this year. No major new Mario game was released outside of Mario Golf: Super Rush, which is a rehash of a prior game that had mixed reviews.
The only major new game was Metroid Dread, a 2-dimensional side scroller, which is getting great reviews and will surely sell a lot of units, but in my humble opinion isn’t the kind of innovative or unique game that will drive Switch sales like other Nintendo blockbusters. I’ve found myself in the surprising situation of not feeling compelled to pick up my Switch recently.
The 40th anniversary of Donkey Kong, a beloved video game character and prime IP asset of Nintendo, came and went. And where is the 2021 version of a new kind of innovative game like Mario Kart Live? As if I wasn’t alone in wondering about this, it was hard not to notice the drop-off in attendance for the Nintendo Direct last week. The number of live viewers on YouTube peaked out at a little over 700,000, compared to the Direct they had earlier this year with over 1 million people watching.
Nintendo has suffered from chip shortages just like other electronics companies and this has constrained sales of the Switch and its latest OLED model (which I’m anxiously awaiting). The company cannot control that, but it can control video game production. The lackluster video game release schedule this year is a problem for the company. And if it continues will absolutely lead to peak Switch sales.
Now I know that part of Nintendo’s culture is to not release any video game until it is truly ready. Animal Crossing was famously delayed, and the company benefited greatly, but the company can and should do better. And this is the annoying part of investing in Nintendo, that the company moves at its own speed for better or for worse.
The problem for investors is that in the absence of any blockbuster games or any major new releases, Nintendo the stock could drift just like its controllers. It is for this reason, that I have recently reduced my position and frankly may sell more. I’ve been disappointed with the stock year to date, as it is down almost 28% and is now flat from the Spring of 2020.
While I love the Switch and its potential and recognize the opportunity ahead, I did not expect such a lackluster release of games this year. I was also surprised that when the company had their latest Nintendo Direct (which showcase new games to come), there was nothing really, I wanted to play.
I personally would love to see the following before I buy more Nintendo:
1. A release date for the next Zelda, Breath of the Wild game
2. A new and innovative game that shows off Nintendo’s hardware skills
3. Improvement to the functionality and breadth of available games on Nintendo Switch Online
4. A new Donkey Kong game, or other Tier 1 IP driven game
5. A partnership with a cloud company to help Nintendo continue to migrate consumers to a subscription model.
6. A bigger and more robust investment into Animal Crossing (Note there is an Animal Direct coming next week, October 16)
7. A better look into Nintendo’s Pikmin partnership with Niantic
Nintendo’s stock, just like its Joy-Con controllers may drift lower or may go nowhere in the next 3-6 months. I believe that drift is being driven by a lack of blockbuster new games, which in turn may cause a peak in Switch sales. That said, Nintendo knows how to make great games and next year should be primed for major releases along with its first major movie.
The stock is still very cheap selling for 11 times earnings excluding cash and investments, but cheap alone doesn’t win the day. The company needs great new games, and as an investor and a gamer, I can’t wait to see what the company announces. But the investor in me recognizes underperformance when I see it, and right now Nintendo needs to do better.