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Nintendo at the crossroads

Tomohiro Ohsumi | Bloomberg | Getty Images

Just seven years ago, Nintendo was the undisputed king of the video game world. The Wii was impossible to find, as people who had never considered themselves gamers couldn't get enough of the company's products. Today, despite the introduction of a high-definition system that blends console and tablet gaming, the company is looking more and more like the industry's pauper.

Sales of the Wii U are stagnant. A slow trickle of releases hasn't helped matters. At the same time, Sony has managed to recapture its golden touch from the PlayStation 2 days, when it could do no wrong in gamers' eyes—and Microsoft is posting healthy Xbox One sales, despite some public relations missteps.

That's got some investors and analysts calling for change at the Kyoto, Japan-based company. Some want it to license its characters to the mobile market and other console companies. Others think it should abandon its latest game system altogether.

"[I] don't think Nintendo should exit the console hardware business, but ... it should consider getting out of the Wii U business, and consider going back to the drawing board on consoles," said Michael Pachter, managing director of equity research at Wedbush Securities. "Nintendo has a console in the marketplace that isn't working, and if it continues to tilt at windmills, its software sales will suffer."

Nintendo's global president, Satoru Iwata, is not currently answering any media questions about the status or direction of the company—and, in fact, is not at E3 at all.

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Days before the show, Cindy Gordon, vice president of corporate affairs at Nintendo of America, informed the media that Iwata had "been instructed by his physician not to travel overseas in the immediate future and so he will not be making the trip to Los Angeles." (He has not taken a medical leave from the company.)

However, in a briefing with analysts at the end of March, he reiterated his support for the Wii U.

"The fate of a video game system is often influenced greatly by the introduction of a single title," he said. "Before the release of the 'Pokemon' game, Game Boy had been showing slow growth, and many people wondered whether it was the end of Game Boy. But the 'Pokemon' game single-handedly changed the landscape of the system, which then started to show the strongest sales in the life cycle of the system."

Nintendo, as those comments imply, isn't content to sit back and accept third place in this console cycle. The company recently released "Mario Kart 8" to glowing reviews—and is counting on the game to boost Wii U sales. (The game sold 1.2 million units in its first weekend.)

And in the pipeline are a "Skylanders"-like take on the company's rich stable of characters, which will span both the video game and traditional toy categories—and many expect the company to unveil a high-definition installment in "The Legend of Zelda" series at this year's show.

"Mario Kart's launch is pretty important in the midterm," said P.J. McNealy, founder of Digital World Research. "That should be a good test on the amount of interest there is in the [Wii U] platform in general. ... Nintendo has to generate momentum—and that means having a slate of great games. They're in wait-and-see mode right now."

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The numbers back that up. The company posted a $228 million net loss for its fiscal 2014 (which ended on March 31), reversing 2013's profit of $71 million. Wii U sold just 2.72 million units last year—and has life-to-date sales of just 6.17 million. (In comparison, the PlayStation 4, which has been out for 12 months less than the Wii U, has already topped 7 million units sold.)

The 3DS hand-held system, meanwhile, which has been a savior for Nintendo in recent years, disappointed as well, selling 12.24 million in fiscal 2014 versus a projected 13.5 million units.

Nintendo is vowing to return to profitability in fiscal 2015—and is setting more reasonable targets as well. The company said it expects revenue of $5.81 billion and profit of just under $197 million.

It's still bullish on the Wii U too, saying it expects to sell 3.6 million more Wii U systems by March 31, 2015—largely on the strength of "Mario Kart 8" and "Super Smash Bros.," releasing this winter.

Analysts, though, wonder if the company is simply treading water with that system as it hurries to prepare a truly next-generation console. However, they add, don't expect to see that in the immediate future.

"They're buying time to come up with the next great console," said McNealy. "I don't think they rush anything."

"In terms of new hardware formats, I think we're going to have to wait another year to see what that's going to look like," adds John Taylor, managing director of Arcadia Investment.

Iwata, of course, isn't talking much about the company's plans for a new console, but did admit on an analyst call in March that planning is already well underway for it at the company's headquarters.

"The most difficult question for us to answer in public in concrete terms is when we are going to launch our new hardware and what kind of hardware we are going to launch, and I am afraid that I cannot talk about this in more detail," he said on the call.

"However, I can certainly assure you that we are not at a dead end of any kind in which we are out of ideas for developing new hardware. ... We are preparing for our next hardware system, and in fact, we already have a clear idea to some extent about the direction our next hardware is going to take."

Of course, the company's next big thing might not even be a game system. In January, Nintendo announced plans to focus on nonwearable health monitors as part of a new 10-year strategy. The company plans to launch the product in the fiscal year that ends in March 2016 (suggesting a possible holiday 2015 debut)—but so far hasn't said much about it.

Analysts, though, say if the company is trying to use this as a way to plug the holes in its gaming division, it's a strategy that's fraught with risk.

"Nintendo is a game company," said Taylor."It's a company that has excelled in bringing some of the most fun games in history to a mass audience. If you're talking about wearable tech or games-meet-fitness or entering into another segment entirely, all of a sudden, the strength of the Nintendo brand has to share the limelight with other entrenched competitors."

—By Chris Morris, Special to CNBC.

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