Even Nintendo Is Vulnerable to a Strong Yen

Posted by: Kenji Hall on October 30, 2008

Hardly a day goes by without another Japanese blue-chip revealing the pain inflicted by the yen’s sharp rise. But this time, a surprise: Nintendo, the dynamo of Japan’s tech sector, added its name to the list. The Kyoto-based videogame company said on Oct. 30 that its operating profit in the latest quarter had risen by 35%, but lowered its annual profit forecast by 3% because of an unfavorably strong yen.

In the July-September quarter, Nintendo’s operating profit was 133 billion yen ($1.34 billion), up 35% from 98.2 billion yen a year earlier, while sales rose 17% to 413 billion yen ($4.17 billion). For the full year through next March, the company now expects operating profit of 630 billion yen, instead of the 650 billion yen it predicted back in August, and net profit will likely be 345 billion yen, down 16% from 410 billion previously.

Nintendo’s less optimistic full-year earnings forecast probably shouldn’t come as a huge shock. After all, blue chips like Sony, Sharp, Fujitsu and Honda have been cutting their annual earnings predictions all month. But those companies are far more vulnerable to the ups and downs of the economic cycle. Their problems are partly due to the expected slowdown from what many economists are calling the worst financial crisis in 80 years.

But the videogames industry has typically done well even when the wealthiest economies have hit the skids. That’s held true so far: Nintendo has been one of the few companies to report stronger earnings over the past two quarters. Indeed, the company’s sales of Wii living-room console and DS portable gaming machine continue to grow. More importantly, software sales are way up, thanks to a growing lineup of game titles. In the first half of this year, the company sold 10 million Wii and 13.7 million DS machines. (The cumulative tally for the Wii is now 34.5 million and for the DS 84.3 million.)

That’s one reason the company is ranked sixth among the Japanese companies with the highest valuations (above even Sony, Canon and Panasonic). In Tokyo, Nintendo’s shares finished the day 11% higher, compared with the benchmark Nikkei 225 average’s 10% gain.

But analysts are now divided over whether Nintendo can keep the streak alive.

Some, like KBC Securities’ Hiroshi Kamide, think the company’s management should be cautious. In the past month, the stock has lost more than 35% of its value. Kamide lowered its rating on the company’s stock from Hold to Sell ahead of the announcement, in anticipation that its earnings would disappoint.

Others, such as Goldman Sachs’ Natsuko Higuchi, reiterated her Buy rating on the stock. In a report released this week, Higuchi was even more bullish about Nintendo’s prospects, increasing her unit sales forecasts for the company’s gaming hardware to 26.6 million units for the Wii, from 26.1 million previously, and 32.5 million units of the DS, from 28.8 million. Partly, the change reflects a vote of confidence in Nintendo’s ability to add games and features that keep Wii owners buying software.

Just this month, Nintendo said it plans to begin selling a newly designed version of its handheld console, dubbed DSi, in Japan next month. And with the belt-tightening that’s expected of consumers this yearend holiday, many analysts think the Wii’s $250 price tag will help Nintendo sell more consoles than Sony’s PlayStation 3 or Microsoft’s Xbox 360 (drastically discounted and now a tad cheaper than the Wii but more aimed at the hard-core gamer crowd). More details should emerge tomorrow in Tokyo when Nintendo’s management explains its strategy to financial analysts and journalists.

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Bloomberg Businessweek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies.

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