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COMMENTARY

There's more to Nintendo's game than gadget sales

GADGETS have rarely mattered less to Nintendo Co.

Investors are all in a tizzy after debut sales of the Japanese company's latest gaming device, the Switch Lite, missed a forecast. Just 114,192 units of the Lite were sold between Sept 20 and 22, Bloomberg News reported, citing industry researcher Media Create.

Citigroup Inc had estimated 300,000. The stock dropped as much as 4.6 per cent in early Tokyo trading on Wednesday.

That wiped out US$2.4 billion of market cap, which is quite a sum for one report based on three days of sales data - for a device that isn't even Nintendo's flagship product. The US$200 game-player is a scaled-down version of the Switch console. Unlike its namesake, the Switch Lite won't connect to a TV, meaning it functions only as a handheld. It also hit the market at the same time as Apple Inc's latest iPhone. I've written before that Nintendo investors tend to overreact, but this takes the cake.

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In November, traders took fright after overthinking a comment from Nvidia Corp CFO Colette Kress that sales for chips used in consoles would be minimal due to the normal seasonal cycle. I suggested then that investors should just chill. The stock climbed 37 per cent after that, and 54 per cent from a December low, prior to this week's dip.

Exaggerated reaction

The common thread is an exaggerated reaction to perceptions of weakness in Nintendo gadget demand. In reality, hardware's contribution to the company's games revenue is at its lowest in three years, since before the Switch was even introduced.

Only 50.5per cent of sales in the games division - which accounts for 94 per cent of Nintendo's total revenue - came from selling devices in the June quarter. The rest is software. The last time this figure was so low was in December 2016, the quarter before Nintendo brought in the Switch and just as its predecessor, the 3DS (launched in 2011), was getting stale. At two-thirds the price of the full version, Nintendo was never likely to ship a lot of Switch Lite units. Still, each buyer is another customer to whom the company can sell software and services.

The main reason to fear weakening hardware sales is the potential impact on software demand - fewer devices could mean a smaller market for future game titles. Yet within two years of the Switch's release, it had already topped the performance of the 3DS in a key metric: software shipments per device.

The 3DS peaked at 5.05 software titles sold per gadget shipped. By December last year, the ratio for the Switch was 5.07, climbing to 5.7 by the end of June, according to my calculations. And let's not forget the Nintendo titles that don't even require the company's hardware. Pokemon Go and Mario Kart, for example, have enjoyed great success on smartphones.

After such a big rally in Nintendo's stock, a little altitude sickness is understandable. There's nothing wrong with taking profits. But investors following the stock for the long term need to make sure they're looking at reality and not jumping at shadows. BLOOMBERG