In the midst of the global AI boom sweeping through the technology supply chain, Nintendo is emerging as an unexpected casualty in this computing power arms race. As demand for high-end memory chips from AI data centers grows exponentially, the consumer electronics giant is not only grappling with the pressure of skyrocketing memory costs but is also mired in a "revenue growth without profit gains" predicament, despite strong sales growth for its Switch 2 console. Nintendo's latest quarterly earnings report revealed that while sales of its flagship Switch 2 product exceeded average market expectations, quarterly operating profit reached only 155.21 billion yen (approximately $998.5 million), falling far short of analyst estimates of 180.7 billion yen. Although quarterly sales surged over 80% to 806.32 billion yen, profit growth was limited to 23%, also missing market forecasts. This performance gap has sparked investor concerns over the company's profitability, with the core issue being that soaring component costs are eroding the already thin margins of the new hardware. The financial report exposed the dual pressures facing Nintendo: on one hand, disruptions in global trade caused by US tariffs, and on the other, more profound structural challenges within the supply chain. As chip manufacturers allocate more production capacity to high-end memory specialized for the lucrative AI data center market, the supply of memory chips required for general consumer electronics is tightening, causing prices to soar. Market analysis indicates that this cost pressure is weakening the short-term buffer Nintendo established through long-term supply contracts, directly threatening its profit margin performance for the 2026 fiscal year. Despite facing these cost headwinds, Nintendo maintained its full-year performance guidance, forecasting annual revenue of 2.25 trillion yen and an operating profit of 370 billion yen, while reiterating its sales target of 19 million Switch 2 units for the full fiscal year. This indicates that management continues to pin its hopes on expanding its user base to solidify its ecosystem. However, with expectations of continued component price increases, balancing market share expansion with cost control has become the most significant challenge currently facing this veteran Kyoto-based gaming giant. Profit Squeeze: The Dual Impact of Tariffs and Domestic Pricing During the recent holiday season, Switch 2 sales performance was acceptable, recording 7.01 million units, slightly above the analyst average estimate of 6.5 million units. However, this sales growth did not translate proportionally into profits. Toyo Securities analyst Hideki Yasuda pointed out that while the Switch 2 sales figures could be described as "acceptable," it is difficult to call them "robust." The factors driving cost increases stem primarily from two areas. First, the ongoing disruption to global trade caused by US tariffs has directly pushed up logistics and operational costs. Second, Nintendo's pricing strategy in its domestic Japanese market has also backfired on its profits. To quickly lock in consumers domestically, the Switch 2 was priced artificially low in Japan. With the proportion of domestic Japanese sales expanding during the holiday season, this structural change further dragged down the overall profit margin level. Yasuda warned that looking ahead, concerns such as rising component prices persist, and the company's ability to effectively control costs again will be a key point to observe. Memory Crisis: The Chain Reaction Triggered by AI Diverting Production Capacity A more severe long-term challenge originates upstream in the semiconductor supply chain. Research firm TrendForce notes that chip manufacturers are currently allocating more resources to advanced memory urgently needed by AI data centers, products whose profit margins far exceed those of ordinary consumer electronics chips. This shift in production capacity means Nintendo may face not only price increases but even the risk of being unable to secure enough chips to manufacture its consoles. This "memory crisis" not only affects hardware manufacturing but could also impact Nintendo's primary profit engine—software sales. The Switch 2's built-in storage is only 256GB, significantly lower than the configurations of Sony's PlayStation 5 or Microsoft's Xbox. As modern games demand higher performance, with major titles like Square Enix Holdings' "Final Fantasy VII Remake" exceeding 90GB in size, players are forced to purchase MicroSD Express cards to expand storage. However, driven by AI-fueled demand for Solid State Drives (SSDs), the prices of these storage cards are also climbing. This high additional cost could potentially dampen players' willingness to purchase new games. Market Outlook: Ecosystem Resilience and the Long Game Facing expectations of component price increases persisting until 2026, Nintendo is seeking countermeasures. The market anticipates the company may release Switch 2 models in different colors to maintain consumer interest and attempt to improve hardware profitability. Bernstein analyst Robin Zhu believes that while increased operating expenses led to the profit miss, this is far better than encountering severe problems on the demand side. He noted that the "ecosystem is functioning well," and despite the challenges in cost control, it would be a mistake to overlook the enduring appeal of the intellectual property (IP) from the creator of Mario. This year is crucial for the long-term growth of the Switch 2. As a key period for the new generation console, the size of its installed base will directly determine the attention from third-party developers and players in the coming years. Although the cost inflation driven by AI computing power is unlikely to subside in the short term, investors' focus has now shifted to how Nintendo can maintain a virtuous cycle between its hardware adoption rate and software ecosystem under various pressures.
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