Nintendo levels up

The Japanese company is back in the game with a new hit console and mobile games. What comes next? Alice Gråhns reports.

“Nintendo has switched on the growth engine,” says Jacky Wong in The Wall Street Journal, “now it has to keep it running.” The Japanese company behind hit video game franchises such as Super Mario Bros. and The Legend of Zelda reported “blowout results” for the quarter ending on 30 September as revenue almost tripled on a year ago. Driving the beat was Switch, its new game console. Nintendo has already sold 7.6 million units since its launch in March, and now expects to sell 14 million in the year ending 31 March (40% higher than its previous prediction).

The company is “starting to believe in itself”, says Tim Culpan on Bloomberg Gadfly. Its shares had risen by 75% this year on speculation that Switch would be a hit. In July, investors put that rally on hold as Nintendo didn’t upgrade its full-year shipment forecast (it had struggled to meet demand as it battles for parts with tech giants such as Apple). But then, this week, Nintendo beat analysts’ revenue predictions by the largest amount in a decade, and posted the strongest operating income turnaround in ten quarters. “While analysts had been bullish, they hadn’t been that bullish.” It is clear, adds Keith Noonan on Motley Fool, that the success of Switch “has changed the game”. Around ten years ago, Nintendo had “the two hottest video-game platforms on the planet” – its Wii console and DS handheld game sold a combined 255 million units worldwide, and “the company appeared unstoppable”.

But the follow-up Wii U console sold fewer units over five years than this year’s forecast for Switch. It was 2015 before Nintendo broke free from its console-only strategy to pursue mobile gaming too. This “quickly proved successful with the release of titles such as Pokémon Go”. Nintendo has now also signed up with third-party producers to make games for Switch, including China’s Tencent, the world’s biggest game firm, and Rockstar, which developed Grand Theft Auto V, the best-selling game ever.

Now, on a market value of around $45bn, Nintendo trades on nearly 61 times this year’s earnings. The firm’s huge cash pile helps, but the lofty price reflects optimism that it can make a success of mobile, that Switch will thrive, and that it can turn Mario and other characters into offline money-spinners, says Quentin Webb on Breakingviews. That’s a lot of expectation. Yet “the clearer it becomes that Nintendo can deliver on its potential, the less cartoonish the share price gets”.

Britain’s ten most-hated shares

These are the ten least popular firms in the UK, based on the percentage of stock being shorted (the “short interest”). Short sellers aim to profit from falling prices, so it is useful to see what they’re betting against. The list may also indicate stocks that might rebound on unexpectedly good news if short sellers are forced out (a “short squeeze”). Provident Financial, Anglo American and Aggreko are new entries this month. The sub-prime lender recently announced it is rehiring debt-collection agents in an attempt to revive its door-to-door lending operation, which is on course to lose £120m in 2017.

Company Sector Short interest on 1 Nov Short interest on 1 Oct
Carillion Construction 17.6% 24.5%
Ocado Supermarkets 16.9% 17.5%
Debenhams General reailer 13.1% 12.9%
Wm Morrision Supermarkets 12.5% 14.7%
Telit Communicationss Telecoms 12.4% 13.4%
J Sainsbury Supermarkets 11.3% 12.0%
Provident Financial Financial service 10.9% NEW ENTRY
Marks & Spencer General retailer 10.7% 10.0%
Anglo American Mining 9.7% NEW ENTRY
Aggreko Power supplies 9.3% NEW ENTRY