Wii U Sales Tanked in January, Should Investors Worry?

Debby Ryan star of Disney XD’s hit series 'Kickin’ It' gets ready to battle in the Wii U Showdown at Westfield Century City Mall in Los Angeles .
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Debby Ryan star of Disney XD’s hit series 'Kickin’ It' gets ready to battle in the Wii U Showdown at Westfield Century City Mall in Los Angeles .

It's much too early to dub Nintendo's next-generation video game system a failure, but it's certainly off to a lousy start.

The Wii U sold just 46,000 hardware units in January at brick and mortar locations — a shockingly low number for a console that was just released in late November. To put it in perspective, the Wii sold 348,000 units during that system's comparable period in 2007.

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The sales were well below analyst expectations. Michael Pachter of Wedbush Securities, who has a neutral rating and a price target of 10,000 yen, had expected the Wii U to sell 125,000 units.

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Nintendo had warned of a sales shortfall in its earnings announcement in January. The company downgraded revenue projections for the fiscal year from $8.883 billion to $7.35 billion and said it would report a $219 million loss. The company attributed the change to "sales performance in the year-end sales season and afterward."

The numbers from The NPD Group further highlight the hurdles the company faces as the industry enters its latest console cycle.

Hardware sales weren't the only weak spot for the company.

"Software sales on the Wii U in January were roughly a quarter of Wii software sales in January 2007, highlighting the recent challenges for the platform," said Edward Williams of BMO Capital Markets.

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The one bright spot was the tie ratio for the system — industry jargon for the number of games sold per hardware unit — was up notably. The Wii U currently has a tie ratio of 4.1, versus the Wii's 2.2 during the same time period, Williams said. Put another way: While fewer people are buying the new system, those who do purchase one are buying more games to go with it.

Officially, according to NPD data, Nintendo has sold 57,000 Wii U units this year. The adjusted figure of 46,000 is a more accurate comparison to the 2007 figures, though, due to reporting calendar irregularities. (January's NPD results are a skewed due to the addition of a "leap week" the group has to add every five or six years to balance its reporting periods. NPD measures the year into 12 reporting periods of four or five weeks. That results in some date discrepancies, which require the leap week to be added occasionally.)

"Nintendo must improve sell-through of its Wii U if it hopes to maintain significant market share in the next generation," Pachter said. "If the Wii U is to thrive, we think that Nintendo must market it more effectively, must speed up the pace of first-party development, and must convince third parties that they must support the Wii U or they will lose market share."

While Nintendo is struggling with its new console, analysts remain cautiously optimistic that the expected introduction of Sony's PlayStation 4 next week and Microsoft's next Xbox later this year will help spark a rebound in the video game sector.

"We think that there are sufficient catalysts in 2013 to drive share prices higher, particularly as sales begin to rebound early in the year," Pachter said.

Consoles aren't the only thing that will drive video game stocks, 2013 is loaded with big titles for several major publishers.

Take-Two Interactive Software will launch "Bioshock: Infinite" next month, a highly anticipated sequel to 2007's game of the year. And in September, the company will release "Grand Theft Auto V," which is widely expected to be among the top selling games of the year — if not the top seller.

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Activision will have a new installment in its "Call of Duty" franchise in November and is also expected to debut the new franchise from "Halo" creator Bungie. (That game, dubbed "Destiny," is expected to be exclusive to the new Xbox.) And Ubisoft will debut "Watch Dogs," a new franchise that piqued a lot of interest during a sneak peak at last year's E3.

Even Nintendo is hoping for a rebound, having announced a slew of new internally developed games for the Wii U, which will be released this holiday season. (These so-called 'first party' games are typically what drive sales of Nintendo platforms.)

The company says it plans to release a new "Mario Kart," a 3D Mario action game (made by the same team responsible for the Wii hit "Super Mario Galaxy"), and a high definition version of the Wii game "The Legend of Zelda: The Wind Waker"— which should keep fans sated until the release of a new Wii U Zelda game (which seems likely for 2014).

"The fun of video games is not only just playing games, but also sharing experiences together with people — even though they live far away, their skill levels are different or their experience does not happen at the same time," said Nintendo president Satoru Iwata in a direct broadcast to the company's fans in January. "We want Wii U to be the system that brings everyone together."

After January's dismal sales, Nintendo investors are hoping the company is able to achieve that goal.