Nintendo, the one-time market leader video games brand best known for legendary characters like Super Mario, is struggling to keep up with the times as mobile gaming explodes and "next-gen" consoles become cutting-edge.
But interactive toys could be the Japanese company's savior, analysts told CNBC.
Facing stiff competition in an industry that generated $93.3 billion in sales last year, according to Gartner, the Japanese company reported a first quarter loss of 9.92 billion yen ($97 million) compared with a 8.62 billion yen profit in the same period last year.
Read MoreIs it game over for Nintendo?
The company said it sold 510,000 of its flagship Wii U consoles, which was released in late 2012, with an aim to shift 3.6 million by the end of the year. Despite coming out earlier than its rivals at Microsoft and Sony, Nintendo has sold 6.68 million Wii U consoles versus the 8.7 million units of Sony's PlayStation 4.
Wrong product, wrong time
Nintendo is banking on a slew of new game releases after the success of Mario Kart 8 to help pick up the sales of both the handheld 3Ds device and the Wii U, but analysts are not convinced this strategy will work as the PlayStation and Microsoft's Xbox push ahead.
"I think it shows they have come with a poorly placed product at a bad time," Heloise Thomson, gaming analyst at Enders Analysis, told CNBC in a phone interview.
Read MoreGrand Theft Auto V shoots video game sales to recovery
"You can't expect the market to accept what you have and then use Nintendo name to market it. They need to think about what the business strategy is and what the next step is for Nintendo."
Mobile explosion
Increasingly popular and advanced smartphone and mobile games have seen an explosion in recent years, which is eating into the handheld gaming market which Nintendo once dominated.
Revenues from mobile gaming are expected to see 25.6 percent annual growth to 2017 compared with a 22.5 percent year on year fall in handheld video games sales, according to Gartner, which analysts said would hit Nintendo's 3DS device.
"The handheld device market is pretty much shrinking because smartphones have the same screen size and you cannot use the device for anything else other than gaming," Eva Hunyadi, research analyst at Juniper Research, told CNBC in a phone interview.
"Handheld games are shrinking and probably going to get close to exiting the market by 2019."
Read MoreNintendo mobile games could draw in new players
But Nintendo is eyeing up 12 million 3DS sales by March next year and said in its earnings release that it expects to generate "robust profits" from this business.
Toys to save Nintendo?
Nintendo remains bullish on its prospects and confirmed its full-year operating profit guidance of 40 billion yen. The company's stock has dropped 12 percent from the start of the year.
But it could be an unlikely product that will save Nintendo – toys. The Japanese firm is set to release a series of "amiibo"; figures of characters such as Super Mario that can be scanned onto the Wii U control pad and appear in the game.
Read MoreNintendo at the crossroads
This could revitalize the Wii U console, according to Piers Harding-Rolls, head of games at IHS.
"They have a number of interesting products coming to market like products in the toy categories and are doing something innovative there," Harding-Rolls told CNBC in a phone interview.
"The game space is all about momentum and if they can continue to roll out interesting software the momentum can continue."
- By CNBC's Arjun Kharpal