Nintendo, once a highflier, is at risk of being zapped

April 23, 1993|By New York Times News Service

TOKYO -- The game may finally be over for Nintendo, which reignited the video game boom in the 1980s and used it to become one of the most profitable companies in Japan.

That, at least, is the view of a growing number of analysts, including some longtime supporters of Nintendo Co. who are suddenly switching their recommendations on the company's stock from "buy" to "sell."

There is little prospect that Nintendo will have more years of hyper-growth, they say, explaining that the Kyoto-based company is facing a saturated market, tougher competition from its archrival, Sega Enterprises, and a seeming inability to define its future technological direction.

"I recommended people get out of Nintendo two weeks ago," said Chuck Goto, senior analyst at S.G. Warburg in Tokyo, who until then had been bullish on the company for three years. "I really think the long-term fundamental trend is changing for the company."

David Benda of Barclays de Zoete Wedd Securities has shifted his recommendation to "sell," from "buy," on both Nintendo and Sega. He expects Nintendo to post revenue and profit growth of only 2 percent in the fiscal year that began this month.

Nintendo, once a manufacturer of playing cards, has been virtually immune to the recession that has sharply cut the profits of most other Japanese electronics companies.

Revenue for the fiscal year that ended in March is expected to climb 10 percent, to 560 billion yen, or about $5 billion at yesterday's exchange rates. Net income is expected to reach 86 billion yen, or $774 million, up about 1 percent from the previous year.

Nintendo's stock, too, has done relatively well. But since the beginning of this year, as the Tokyo stock market has risen nearly 20 percent, Nintendo shares have fallen more than 9 percent, from 10,600 yen on Dec. 30 to 9,620 yen yesterday.

Analysts see the market growing slowly and facing more competition.

The biggest competitor is Sega, based in Tokyo, well-known for its Sonic the Hedgehog game. Although Nintendo is still the market leader by far in Japan, Sega's Genesis machine has drawn even with Nintendo's Super NES in the United States and Europe, analysts say. New competition looms as well, including 3DO, a Silicon Valley start-up.

The competition threatens the core of Nintendo's business -- software. Outside software firms that develop games for Nintendo machines must allow Nintendo to manufacture the game cartridges. The software companies then buy the cartridges from Nintendo and resell them. This gives Nintendo a profit on each software package and accounts for the company's high profit margins.

But with Sega providing an alternative, some software companies may desert Nintendo or demand more favorable terms.

Another concern is that Sega seems to be beating Nintendo technologically. Sega scored its big gains in market share because it was first to market a 16-bit game machine, which offered better images than the 8-bit machine Nintendo was selling.

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