What's behind Nintendo's falling stock price?

Since Nintendo has just had its best 12 months in around a decade - both in commercial and creative terms - you just knew the other shoe was bound to drop sooner or later. Nintendo's fans and well-wishers never get this kind of a run of luck without interruption, and right enough, over the past few weeks the company's stock has taken a nose-dive, repeatedly levelling off only to plummet again as investors seemingly lose confidence in the platform holder's plans and its ability to meet its sales targets.

This is no small wobble; the company has now lost almost a quarter of its value on the Tokyo Stock Exchange in a series of price drops that began in late May. The curious thing about this drop, however, is that it's not really the kind of Nintendo rough patch anyone might have been anticipating.

"There are a few ways in which Nintendo might have been predicted to mess up its recent run of success"

There are a fair few ways in which Nintendo might have been predicted to mess up its recent run of success: a huge dry patch in its software release schedule, a failure to supply the market with enough hardware, doing something jaw-droppingly dense with its online service, or simply clamping up and failing to reassure consumers and investors of a solid release slate for the coming year. It's done all of those and more in the past, and had any of those things been followed by a massive share price slump, you'd shrug your shoulders and say, oh well, it was a good run.

The thing is that, in this instance, despite the billions wiped off Nintendo's valuation, it's actually really hard to pin down a specific reason for it beyond a general loss of investor confidence. None of the things mentioned above has happened, at least not in as dramatic a fashion as might explain such a pronounced drop in share price.

Some are pointing fingers at the lack of game announcements at E3, which definitely precipitated a further drop, but the decline started almost a month before. Moreover, the decline has continued long after any influence from E3's supposedly underwhelming showing ought to have been priced in. While the downward movement is slower now, it's still apparent week to week. Moreover, the market itself - the Tokyo Stock Exchange - is in fairly solid health all things considered, so the issue here is Nintendo-specific, and not an amplification of underlying market problems or uncertainty.

"Third-party publishers are a major part of the console business, but Switch is in a different market position to PlayStation or Xbox"

There are probably a number of factors in play here. There's no doubt that some investors are feeling uncertain about the performance of the Switch over the next few months, especially as it relates to Nintendo's very ambitious 20 million sales target for the year. I suspect that much of that concern comes from foreign investors - who are traditionally more flighty than Japan's institutional investors - and is heavily based in the ongoing lack of support from Western publishers. This, of course, is a problem that has dogged Nintendo since the 90s, and this is a perfect example of it in play; Nintendo's own line-up is as good as it realistically could be (and the firm is adamant that it has as-yet unannounced titles on the 2018 slate as well), but many investors appear to be nervous about the lack of major third-party games.

It's hard to say how justifiable that concern is. Third-party publishers are a major part of the console business, of course, but Switch is in quite a different market position to PlayStation or Xbox; it's doing a solid job of filling the 'second console' slot that Nintendo has so successfully targeted in the past, and while its portable form factor has made it surprisingly popular for some multi-platform games, those titles are arguably far less relevant to its success than they would be for a 'first console' battling for primacy under the TV.

"Until there's stronger evidence to the contrary, Nintendo's strategy seems to still be firmly on track"

For many investors in the industry, though, third-party support has been a key indicator for a very long time; though it may seem absurd to those within the industry and aware of software development lead times, many investors may take the fact that major third-party titles like Red Dead Redemption 2 won't be launching on Switch this year as being evidence that the console's sales and projected success don't match up to earlier projections.

The other major factor in play is perhaps more reasonable. I suspect that many investors are feeling a degree of unease about Nintendo's valuation, which was riding at a very high level (though still far from its ridiculous Wii-era numbers) after seeing dramatic boosts in 2016 (after the success of Pokemon Go) and again in 2017 (after the success of Switch). If an investor were to argue that the stock was overheated back in May, they might well have been pretty justified; and moreover, they might well have seen the current quarter as a good time for a strategic exit.

Nintendo's quarterly results report on July 31 is almost certainly going to be a little underwhelming - it'll be stacking the launch period sales of Switch (including Mario Odyssey and Breath of the Wild) against an ordinary spring quarter's sales, and that may not end up looking too great. Even if it doesn't undermine the company's ambitious 2018 sales target, the optics of a weak quarter could drive the stock price even lower, at least in the short term; some shareholders may be bailing out in anticipation of that further dip in valuation.

At the core of both of these possible explanations (both of which are likely functioning in tandem to drive the recent declines) is the core point that both of them are about shareholder strategizing based on existing information; they're not indicative of any new information and they don't actually suggest anything too seriously amiss in the fundamentals of the company's strategy and performance. The rest of Nintendo's 2018 is looking very strong; the company has Smash Bros. and Pokemon games launching on the Switch in the back end of the year, possibly alongside other as-yet unrevealed titles, which is about as strong a year-end as any Nintendo platform has ever enjoyed.

Moreover, while the past quarter's sales may not fare well in the year-on-year comparisons, all evidence suggests hardware sales ticking along at a solid, if no longer dramatic pace, as the company builds towards those big releases and the likely Q4 sales frenzy - exactly what you would expect for the Switch at this point, and far from cause for concern. These share price movements may have wiped billions off Nintendo's valuation, but thus far they are a reaction to changing sentiment, not to any changing baseline reality. Until there's stronger evidence to the contrary, Nintendo's strategy seems to still be firmly on track.