Nintendo appears to be making a second comeback in video game consoles

Key Points
  • A month after release, Nintendo's Switch has system sold 2.74 million hardware units worldwide
  • The company expects to sell 10 million by year-end

Fans play 'Super Mario Odyssey' with Nintendo Switch gaming console at the Los Angeles Convention Center during E3 2017, on June 13, 2017.
Frederic J. Brown | AFP | Getty Images

Two years ago, people wondered if Nintendo might get out of the video game hardware business after the poor showing of the Wii U.

It wasn't the first time. The same chatter happened after the company released the Gamecube, a console system that failed to find many loyalists (even within Nintendo).

But just as Nintendo turned itself around from that system with the Wii, it seems poised to do so again with Switch.

"We want to raise the installed base of Nintendo Switch up to the same level as Wii," said Nintendo president Tatsumi Kimishima in an investor Q&A session last month. "And if our sales go according to our plan this fiscal year, we will be able to see Nintendo Switch gaining the momentum in which it can approach relative parity with Wii afterwards."

That's a tall order, seeing as the Wii sold roughly 100 million hardware units and 900 million games. But Switch is off to a decent start. In its first month, the system sold 2.74 million hardware units worldwide — and it expects to sell 10 million by the end of this fiscal year.

Nintendo says it is working hard to ensure that anyone who wants to buy a Switch this holiday season can find one in stores – but it can't say with certainty that's going to be the case.

"We want to have consumers able to buy Nintendo Switch when they walk into stores for the holiday season," says Reggie Fils-Aime, president of Nintendo of America. "It's a dual-edged sword. The more you launch great content, the more demand increases, which puts pressure on the supply chain. … We recognize the challenge and we're working hard to ramp up the supply as fast as we can."

One of the other challenges the company faces is keeping a steady stream of games coming. Historically that has been something of a challenge for Nintendo — as top titles have been delayed several times to ensure they meet the company's high quality standards.

Those standards haven't changed, but Fils-Aime says the company has taken steps to ensure it has a regular cadence of titles coming out.

"In Kyoto, we have a new research and development center that is full of software developers and hardware developers and, essentially, Mr. [Shinya] Takahashi [general manager of entertainment planning] and his team managing those resources to make sure that, should we have a situation with one game lagging, there's another game that can be pushed forward," he says.

Analysts say moves like this seem to indicate Nintendo is once again on the right path.

"I hate to ever paint Nintendo as a 'comeback story'," says P.J. McNealy of Digital World Research. "I think every hardware and software manufacturer has peaks and valleys. But it's clear that they're ascending again in the console space, which is a good thing for everyone."

Ascending might be an understatement. A year ago, Nintendo shares were below $20 per share in the U.S. Today, they're near $40.

A strong start for Switch is good, but analysts and investors are more interested in how the system performs during the crucial holiday period, when the gaming industry makes most of its money.

"It's early, but they have a lot of momentum," says Ben Schachter of Macquarie Securities. "All eyes are on them to see if they can make this momentum continue through the holiday."

To do that, the company is relying strongly on some of its greatest hits. "The Legend of Zelda: Breath of the Wild" launched with Switch. And "Mario Kart 8 Deluxe" (an update of a Wii U game) came out in April. At E3, Nintendo is showcasing "Super Mario Odyssey," a new Mario game that's set to release on Oct. 27.

Ultimately, though, Nintendo will need the support of third party publishers like Activision and Take-Two Interactive Software to help supplement its own releases. But some are waiting to see if Switch sales continue at the same pace.

"They're not rushing in because they still want to see an installed base," says McNealy. "It took developers two holidays before they jumped onboard the Wii. I think it will be sooner in this cycle with the Switch."