Nintendo shares sink 10% as gaming giant faces memory shortage concerns

TOKYO — Nintendo Co. shares took a sharp dive on Wednesday, plummeting more than 10% in a single session as investor anxiety over a global memory chip shortage overshadowed a quarter of otherwise robust profitability. The sell-off highlights a critical challenge for the Kyoto-based company: navigating soaring component costs while trying to maintain sales momentum for its new flagship console, the Switch 2.

The market's reaction underscores a classic disconnect between past performance and future outlook. While Nintendo celebrated a 24% year-on-year jump in profit, bolstered by the enduring legacy of the original Switch, investors are squarely focused on the significant headwinds that threaten to erode margins and test consumer appetite for its premium-priced hardware.

---

A Forward-Looking Market Damps Strong Results

Despite the stock's plunge, Nintendo's latest earnings report presented a complex picture. The company successfully beat profit estimates, but a miss on quarterly revenue forecasts was the first sign of trouble for a market already on edge.

Investors are looking past the 86% revenue growth and the milestone of the original Switch becoming the company's best-selling console ever. Instead, their attention is fixed on the escalating costs of crucial components and the performance of its new console.

• The Financials: Nintendo posted a 24% year-on-year increase in profit for the quarter, demonstrating strong operational performance. However, it fell short of market revenue expectations, signaling potential softness.
• Investor Sentiment: The subsequent 10% drop in share price, contributing to a more than 15% loss year-to-date, indicates that the market is pricing in future risks over current successes.

The Squeeze on Silicon

At the heart of the market's concern is an unprecedented global shortage of dynamic random-access memory, or DRAM, a component essential for the performance of the Nintendo Switch 2. This shortage is not a typical supply chain hiccup but a structural shift driven by explosive growth in other technology sectors.

According to a note from Andrew Jackson, head of Japanese Equity Strategy at Ortus Advisors, "investors remain concerned about the impact that memory costs will have on the company's margins."

This concern is well-founded, with market data pointing to a severe and prolonged crunch.

• The Component: Nintendo's consoles rely heavily on DRAM for fast data processing, which is critical for running modern, graphics-intensive games.
• The Cause: The insatiable demand for memory from the booming artificial intelligence and data center industries is consuming a massive share of global production, leaving less available for consumer electronics like game consoles.
• The Cost: A recent report from market researcher TrendForce painted a stark picture, projecting that contract prices for conventional DRAM chips will surge by 90% to 95% in the first quarter of 2025 compared to the previous three months.
• The Duration: The problem is not expected to be short-lived. A top semiconductor industry CEO recently told CNBC that the memory chip shortage is likely to persist through 2027, creating a long-term strategic challenge for Nintendo.

Navigating a High-Cost Environment

The surge in memory prices presents Nintendo with a difficult choice: absorb the higher costs and accept lower profit margins, or pass the cost on to consumers through a price hike.

Nintendo President Shuntaro Furukawa addressed the issue on Tuesday, stating that while the price rises were not significantly impacting the current financial year's results, they "could impact profitability if the component costs remain high over the longer term."

This has led to speculation that a price increase for the Switch 2, which launched in June of last year, may be inevitable.

• The Pricing Dilemma: "If the current trend in the memory space continues, I would not be surprised at all to see Nintendo raising prices," Serkan Toto, CEO of game consultancy Kantan Games, told CNBC.
• The Consumer Risk: Toto cautioned that this is a risky move. The Switch 2 is already an expensive device, and further increases would be hard for "Nintendo's rather casual user base" to accept, potentially stifling adoption.

Switch 2 Momentum Under Scrutiny

Compounding the supply-side pressures are concerns about the demand for the Switch 2 itself. While Nintendo maintained its full-year sales forecast for the console, analysts note that investors are worried about its early momentum compared to its legendary predecessor.

The original Switch, released in 2017, had a phenomenal launch year, driven by a revolutionary hybrid concept and a blockbuster launch title in "The Legend of Zelda: Breath of the Wild."

"The main concern seems to be momentum: The first year is absolutely critical for every new console," Toto explained. "In that sense, Nintendo is a victim of its own success, as Switch 1 had a stellar first 12 months after launch - which is hard to replicate today."

Banking on Blockbuster Franchises

Nintendo's strategy to overcome these challenges rests on its most valuable asset: its world-renowned intellectual property. The company is betting that a strong pipeline of exclusive games and a major cinematic release can convince millions of consumers to purchase a Switch 2, regardless of economic headwinds.

• Gaming Pipeline: Nintendo is preparing to launch two major titles from its most popular franchises in the coming weeks. "Mario Tennis Fever" is slated for a February release, followed by "Pokémon Pokopia" in March.
• Cinematic Push: Following the massive box office success of "The Super Mario Bros. Movie" in 2023—which provided a significant boost to hardware sales—the company has "The Super Mario Galaxy Movie" set for release in April. Nintendo is likely hoping for a similar halo effect on Switch 2 sales.

The Road Ahead: A 'Make-or-Break' Period

The confluence of supply chain constraints and high expectations has placed Nintendo at a critical juncture. The company's ability to successfully manage component costs while driving mass-market adoption of the Switch 2 will define its performance for years to come.

James McWhirter, a senior analyst at Omdia, told CNBC that 2026 would be a "make-or-break" year for the console's future, as Nintendo looks to broaden its appeal beyond early adopters.

For now, investors remain cautious. The path forward requires Nintendo to execute flawlessly on its software strategy to justify its premium hardware in an increasingly expensive and competitive market. The coming months, with their major game and movie releases, will be a crucial test of whether Mario and Pokémon still have the magic to move consoles and, ultimately, restore confidence on Wall Street.

— CNBC's Arjun Kharpal contributed to this report.