September Wii Sales Drop 30% in Japan: Is Nintendo Still a Buy?

On October 25, Nintendo (NTDOY.PK) reported very favorable mid-term results for the six months ended September 30. Operating income rocketed 180% to ¥188.7 billion yen, and net profit jumped 140% to ¥132.4 billion. The share price has climbed steadily for the past 18 months, with the Company's market cap surpassing even Sony's (SNE); only in recent days has the stock retreated a bit as U.S. and Japan markets turned downward.

The Company's results are driven by the popular handheld game machine Nintendo DS, with a significant contribution also coming from the much-ballyhooed stand-alone console Wii. Released last year, initially Wii's sales didn't meet plan only because of insufficient manufacturing capability. With additional capacity now in place, through September Wii has sold 4.5 million units in the US, far surpassing 1.9 million for Sony's PlayStation 3 and approaching the 6.8 million units for Microsoft's Xbox 360.

However, there are signs of slowing Wii sales in Japan. According to Toyo Keizai, sales started to turn down late in August, with fewer than 200,000 units sold in September compared with volumes in previous months of around 300,000 units. Retailers report some Wii inventory build-up. In a recent survey conducted by a Japanese game magazine, a notable number of users said that Wii's simplicity also leads to boredom, and many owners said they don't play with Wii often anymore.

Although some analysts are beginning to express caution, most still seem positive on the stock. On October 30, Goldman Sachs reaffirmed its buy rating and raised its target price from ¥71,000 to ¥84,000. Lehman Brothers made a more drastic revision on October 16, upping its rating two notches from underperform to overperform with a target price of ¥77,000. We think Nintendo, which really has just two products, is overbought at levels where its market cap is the second largest in Japan, exceeding Honda's (HMC) and Sony's and only subordinate to Toyota's (TM).

Note: Bob Schneider co-wrote this article

Comments

[aad:]

This analyst really is clueless to say Nintendo only has 2 products; Nintendo makes most of their revenue on software; in fact, they are currently out pacing all other publishers (EA, Activision, THQ, TakeTwo, Microsoft...) in game sales. I invite you to check the bestsellers list at Amazon.com (www.amazon.com/gp/best...); you will notice that Nintendo has more games in the top 25/50 than any other game publisher. And this is not only a U.S. phenomena; it is also the same in UK, Germany, France, Japan, China... Basically, Nintendo not only has the hottest gaming consoles (Wii & DS), but they also have the hottest selling game software which is why their stock carries a justifiable premium to their peers.

2007 Nov 19 11:18 AM