Will the Nintendo Switch Supply Chain be an Issue for 2021?

nintendo switch supply chain logo

On Monday, Nintendo released its 2020 annual investor report and proudly revealed many impressive metrics. Not only did net profit increase by 33 percent but other key factors, such as cash flow and year-over-year sales, also indicated strong growth. While the statistics are impressive, the staff at GamingROI uncovered a key cause for concern. Problems with the Nintendo Switch supply chain might result in decreased profitability in 2021. Let’s dive in.

Lost in the Data

Nintendo clearly enjoyed a successful fiscal year 2020, which ended on March 31, 2020. Although net profit increased by 33 percent, the company’s method for achieving its 2020 financial results could be short-lived. Nintendo’s dependence upon a distributed supply chain coupled with the global pandemic could result in financial challenges for 2021.

A company’s ability to generate cash from selling core products and services alleviates its dependence upon borrowing from banks or issuing new stocks. These activities increase a company’s interest payments as well as dilute investor stock prices. Therefore, cash flows from operating activities is one of the most important indicators of financial well-being. While increases to operating cash flows are generally favorable, the method by which companies generate positive cash is critical.

During its 2020 fiscal year, Nintendo generated over $3.2 billion in positive cash flows from operating activities. The additional cash-on-hand allowed the company to provide significant dividends to shareholders. However, the success came with a price: a potential shortage in hardware. According to Nintendo’s financial statements, overall inventories decreased by 34 percent while cash increased by just 5.4 percent. To make up the difference, Nintendo allowed retails to buy Nintendo Switch hardware on credit as evidenced by a 70 percent increase to accounts receivable.

Reading Between the Lines (Numbers)

While a company’s ability to sell products and services is a fundamental component of success, inventory management is equally important. Nintendo has notoriously reported shortages of Nintendo Switch hardware; however, the impact to the company’s profitability in 2020 was minimal. Yet Nintendo remains positive:

In particular, there are many uncertainties concerning COVID-19, however, the impact on the consolidated financial statements is negligible, based on the assumption that on a full-year basis, Nintendo will be able to carry out production and sales according to demand and release software under development as planned.

Nintendo Annual Investor Report

While the company remains positive, the numbers do not lie. Nintendo has a supply chain issue. While Nintendo of America continues to promise that supply of Nintendo Switch hardware is available, retailers, such as Amazon, Best Buy, Walmart, Target, and others, state otherwise. Unless the company is able to replenish hardware and software, global inventories will continue to decrease. At some point, Nintendo’s inability to replenish stock in key markets will result in lost sales opportunity. The company likely cannot experience another 70 percent sales decline in 2021 and remain profitable.

Nintendo also continues to sell its hardware on credit, which compounds the issue. Although a standard business practice, Nintendo’s “allowance for doubtful accounts” increased by more than 525 percent. The result is that Nintendo might be selling its precious inventory stockpiles to companies that might not be able to pay for Nintendo Switch hardware and software.

As the global pandemic rages onward, companies must adapt to remain profitable. In the short-term, Nintendo continues to take advantage of the popularity of its hybrid console. But as the supply chain issues become more pronounced, Nintendo must explore alternatives to maintain profitability. Otherwise, investors might not be pleased with the company’s 2021 annual report.

Conclusion

But we want to know what you think. Do you believe that the global pandemic will disrupt the Nintendo Switch supply chain in 2021? How do you think Nintendo will perform in the next 12 months? Let us know in the comments below or the social media links on the right. Also, be sure to check out our other news items on PokemonModern WarfareCapcomBlizzard and more.

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