Nintendo Ltd/ADR (OTCMKTS:NTDOY) has enjoyed a resurgence over the past three years. Nintendo stock was in the doldrums during the era of the Wii U — the followup to the Wii game console — but it began to recover in 2016 with the release of Pokemon Go for smartphones and the company’s announcement of the forthcoming Switch hybrid console. On Friday, Nintendo stock got its biggest single day boost since 2016 when it was announced the Switch will finally go in sale in China, the world’s biggest video game market.
Nintendo to Launch Switch in China
On April 18, it was confirmed that Chinese gaming giant Tencent Holdings has received approval to sell the Nintendo Switch game console in China. Tencent is expected to bundle the switch with Nintendo’s New Super Mario Bros. U Deluxe game.
This was a huge win for NTDOY and resulted in Nintendo stock closing Friday up 17%, the largest single day gain for the company since July, 2016. That’s much more than the near 5% boost Nintendo stock saw when reports broke last month that it had two new Switch consoles in the pipeline.
Why the excitement and investor enthusiasm? The Switch launched in March 2017 and has been a hit for Nintendo, but the company has been unable to gain approval to sell it in China. And China is the world’s largest market for video games. The country may be focused largely on PC gaming, but mobile is also big and getting bigger. And the portable Nintendo Switch is seen as a mobile gaming powerhouse.
Because the Switch hasn’t been officially available in the Chinese market, that also means there is now a deep catalog of Nintendo game titles that will available to bolster sales — and Nintendo’s earnings.
The Chinese Video Game Market and Nintendo’s Advantage
When it comes to video game revenue, China tops the U.S. as the world’s largest market. It’s estimated that in 2018, the industry generated $34.4 billion in China in 2018.
Microsoft (NASDAQ:MSFT) became the first company to release a video game console in China in 16 years when it launched the Xbox One there in 2014. In 2015, Sony (NYSE:SNE) followed, launching the Playstation 4 in the Chinese market.
Both of Nintendo’s key game console competitors have had several years to establish a presence in China, but have failed to achieve significant sales numbers. That’s because that huge Chinese video game market is utterly dominated by PC and mobile gaming. In 2016 — with both the Xbox One and PS4 available — console sales and games accounted for just 1% of China’s video game revenue.
Why the surge in Nintendo stock then? Besides PC gaming, China’s other video game obsession is mobile. The Xbox One and PS4 are traditional game consoles, but Nintendo’s Switch is a hybrid that is a fully functional mobile gaming system with a bigger display than a smartphone, superior controls, Wi-Fi connectivity and the room to store multiple games.
Mobile gaming is seen as a key advantage that will help Nintendo to sell Switch units in China where the competition has failed. Even better, NTDOY’s Chinese distribution partner Tencent Holdings is expected to release some of its own popular Chinese game titles on the Switch, boosting its appeal.
There are still some hurdles to overcome, though. The date when the console will go on sale in China has net yet been announced. And Reuters points out that games need to undergo a separate government approval process before release, and that could delay them.
Nintendo stock has taken some hits since last fall, with Switch sales beginning to slow. However, 2019 is beginning to look like it could be a big one for NTDOY investors.
The two new Switch models reportedly on track for release later this year should help to re-invigorate sales during the holiday season. And cracking the Chinese video game market — with its growing appetite for mobile gaming and a big player partner in Tencent Holdings — has the potential to boost sales and NTDOY revenue to new levels.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
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