Why Are Investors Cold on Nintendo’s New Console?

On Thursday morning Nintendo finally revealed its next console, Switch. The device, previously codenamed "NX," was what many suspected it was going to be based on Nintendo's patent filings. It's a home console and mobile device hybrid, a screen you can either insert into a dock at home to play on a TV, or attach input devices to and play with on the go.

The stock market reacted capriciously. Nintendo's stock climbed 3.3 percent in the hours of buzz leading up to the announcement (adding more than a billion in market value), then dropped by 6 percent following the actual news, losing more than two billion in market value.

Why?

There are a few factors at work here, but the gist is that Nintendo is in a tough spot and it needs a hell of a hit to get out of it. While the video reveal of Switch on Thursday might have been exciting to Nintendo fans, it didn't show anything that made investors feel confident that it was the hit the company needs. Also, the stock market is weird.

Let's break this down.

As much as we learned about the Switch on Thursday, Nintendo still left a lot of unanswered questions. The most important of these—as we mentioned at the time—is the price point. The Xbox One and PlayStation 4 both currently have models at the $300 price point, and they're already millions of units ahead of Nintendo. PS4 has more than 40 million units out in the wild. We don't have exact figures for Xbox One units sold, but it's well above 20 million.

Players who want the latest Call of Duty or FIFA either already have one of these machines or will buy them this holiday season.

Nintendo hasn't been directly competing with Sony and Microsoft in this sense for many years. Instead, it offers more casual experiences, Nintendo's beloved and exclusive game series, and at a cheaper price. Nintendo's mega hit Wii, for example, launched at $250, while the Xbox 360 and PlayStation 3 launched at $400 and $500 respectively.

At this point, it's not going to be enough for Nintendo to match Microsoft and Sony at $300. It needs to come in lower, at around $250.

"The main issue is that we know right now that Switch cannot compete with the PS4 and Xbox One when it comes to high end graphics and third party games," analyst at Niko Partners Daniel Ahmad told me over Twitter. "As soon as it's over the price of a PS4 and Xbox One in a big way then it no longer becomes an option for [gamers.]"

Price is the biggest question, but there are other important things we don't know about Switch. How long is the battery life? Is the screen also a touch screen? Will Switch only play Switch games, or will it also play the new mobile games Nintendo is publishing on the smartphone app stores? Can it play Pokémon Go? Can it access the Google Play Store?

The right answers to these question could make investors bullish on Nintendo, but since we don't have them, it's safer not to take the bet.

Before Nintendo stock took a dive yesterday it actually saw a big bump of 3.3 percent.

This is just one of those things that investors do: invest in the rumors leading up to an announcement, then sell when the actual news hits. Buy the dream, sell the reality.

It doesn't necessarily reflect the value of the actual product or the company. It's just what investors do to make money.

"I like to think (hope) it's novice traders," Ahmad said. "But it's seen time and time again across multiple companies and industries… It's almost a running joke with Apple products to the point where everyone does it. Rumor comes out > stock price goes up > news comes our > sell at higher price = profit."

The reality is nobody knows enough about the Switch to evaluate how it will shape Nintendo's business, and recent history has shown that the average gaming forum dweller is just as informed if not more informed than the investors who pour and siphon millions of dollars in and out of Nintendo.

Let's recall a little game called Pokémon Go, which took the world by storm in July. It was an unprecedented success that seized the number one spot in the app stores in every region it was released in record time, and is estimated to earn $1.6 million a day in revenue. The phenomenon sent Nintendo's stock soaring…even though Pokémon is not strictly a Nintendo property. In fact, Nintendo only makes a small cut from Pokémon Go after its developer Niantic (previously owned by Google), the app stores, and ThePokémon Company, which actually owns Pokémon and in which Nintendo is a major (32 percent) stakeholder, take their cut.

The frantic investment in Nintendo following Pokémon Go's success was so disproportionate, Nintendo had to issue a statement to investors saying that the company wouldn't adjust its earnings forecast since profits from Pokémon Go would be minimal. When investors realized this, Nintendo shares plummeted.

All this in order to say that investors can be not so great at their job, and that this could also help explain the current lack of faith in Nintendo.

Like I said, Nintendo is indeed in a tough spot following the miserable failure that was the Wii U, and the Switch is far from a guaranteed hit, but there is a lot of potential here. Just because the stock market doesn't show it right now, doesn't mean Switch is a failure before it was born.