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Here's why investors shouldn't worry about Nintendo's earnings miss

Visitors play Nintendo's new video game console Switch during its presentation in Tokyo.
Kazuhiro Nogi | AFP | Getty Images
Visitors play Nintendo's new video game console Switch during its presentation in Tokyo.

Nintendo's earnings have slumped, its shares are sliding and investors doubt if the company's mobile strategy will reap rewards.

But where others see turmoil, Kazunori Ito has spotted opportunities.

Ito, senior equity analyst at Tokyo-based Ibbotson Associates Japan, told CNBC's "Squawk Box" that Nintendo is undergoing a transition and the combination of a strong intellectual property (IP) library and a recovery in the console business should bolster earnings.

"As Nintendo's profits recover from solid sales of the Nintendo Switch, I think the market would notice that this fiscal year is just a transition period as Nintendo's strength - its IP - hasn't changed," said Ito.

But investors on the Tokyo stock market were not convinced on Wednesday as Nintendo shares dropped 3.68 percent to 22,270 yen ($197.02) in late-morning trade after the company reported earnings. Ito estimates the Nintendo shares' fair price value at 30,000 yen.

Operating income for the nine months through December 2016 fell 38.1 percent to 26.3 billion yen ($232.2 million), and the game maker reduced its operating income forecast from 30 billion yen to 20 billion for the full fiscal year; commentators said the market was expecting a figure between 40 billion yen and 45 billion yen.

This calendar year looks set to be a busy one for Nintendo: The company is about a month away from launching their next-generation gaming console, Switch, which offers both conventional and mobile gameplays. At a January presentation event in Tokyo, Nintendo announced it was partnering with over 50 companies to develop as many as 80 games for the console, including third party hits such as Bethesda's Skyrim and EA Sports' FIFA.

"Nintendo is learning from their failure from the Wii U and is trying to attract third party developers ... so that more software makers are going to come onto Nintendo's ecosystem," said Ito, alluding to Nintendo's relatively unsuccessful Wii U console.

Already Nintendo's nine-month earnings report pointed to some encouraging signs for Nintendo's console business. The handheld 3DS, an aging console, saw sales of 6.45 million units, which was a 10 percent on-year increase.

Ito pointed out the recovery of the console business through Switch was crucial for Nintendo and said early news suggested pre-order numbers were pretty strong. "We believe that they're going to try to ship more than their company's plans this fiscal year," he said. Nintendo hasn't publicly disclosed sales forecasts for the console.

Nintendo has also ramped up publicity around the Switch - from swanky movie-like advertisements to elaborate video demonstrations of the console's full potential at the January event. Indeed, Nintendo projects its full fiscal year advertising expenses to have increased by 10 percent from an earlier forecast to 55 billion yen.

It is also set to monetize further its massive IP library by releasing new mobile games of famed titles - including the Android launch of Super Mario Run, following the notable success of the game on the iOS platform, and an upcoming Fire Emblem title.

Analysts pointed to execution issues having an impact on Nintendo's financial performance.

Atul Goyal, an equity analyst at Jeffries, said in a note the performance was affected by Nintendo's failure to re-stock products such as the sold-out Pokemon Go accessory Go Plus, the 60 NES Classic Mini console and the low-in-supply 3DS console.

"For the remaining fiscal year, it has now delayed (the) launch of Animal Crossing to next fiscal year," said Goyal, adding it served a grim reminder of management execution issues.

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