I am impressed that the Nintendo (OTCPK:NTDOY) Switch is selling well; 4.7 million cumulative sales since its debut. However, its console rivals Microsoft (MSFT) and Sony (SNE) might benefit from the reported overheating issues of some Nintendo Switch units. Going forward, an overheating Nvidia (NVDA) Tegra-powered Nintendo console might not seriously affect sales of Xbox and PlayStation consoles.
Console gaming is still a $33.5 billion/year industry. It is favorable to Microsoft and Sony if Nintendo’s new Switch gaming console doesn’t get too successful. Gaming hardware, software, and services is under the business segment that contributes the most to Sony’s top line.
A resurgent Nintendo challenging the Sony/Microsoft duopoly on console gaming is exciting. However, MSFT and SNE shareholders obviously will still prefer if the Switch only gets limited success. Otherwise, they will have to go long NTDOY too.
Consistent sales of the Xbox and PlayStation gaming consoles are why Microsoft and Sony are among the top video games companies. Nintendo was only number 10 last year. The Switch could boost Nintendo’s ranking by end of 2017. This, of course, will only happen if no lingering overheating issue hounds the Switch.
MSFT and SNE were outperformed by NTDOY this year because of the hype over the Tegra-powered Switch. If you are a shareholder in Microsoft or Sony, you will have to give a damn about the Nintendo Switch.
(Source: Google Finance)
Why Microsoft And Sony Should Celebrate
The long-term revenue potential from Xbox and PlayStation is quite safe. The Switch is only a compelling buy right now because of its unique form factor. It offers mobile + TV dock console gaming. Going forward, the Nvidia Tegra-powered Switch will probably enjoy strong sales in its first six months.
But once the gaming community learns about its overheating issues and Nvidia/Nintendo cannot correct it, the Switch is not going to become as popular as the Wii, Xbox One, and PlayStation 4.
The Switch dominated U.S. console sales in March and April, but Sony’s PlayStation 4 is again back on top since May. Any serious gamer will never remain loyal to a gaming console that has overheating issues. Hardcore gamers typically play for more than two hours. The Tegra SoC (System-on-Chip) from Nvidia that Nintendo used inside the Switch is the Tegra X1. The Tegra X1 is the more powerful version of the overheating Tegra K1. The Tegra K1 is the more powerful version of the overheating Tegra 4 mobile application processor.
In other words, Nvidia kept making more powerful mobile SoCs that also became more heat-inducing monsters. Nintendo’s engineers will have a hard time designing a cooling system for the Switch if a player will spend four hours straight playing Legends of Zelda: Breath of the Wild.
The small confined form-factor of the Switch makes it very difficult to cool down the 256-core Maxwell GPU (Graphics Processing Unit) of a Tegra X1 SoC.
Nvidia and/or Nintendo can implement automatic throttling to reduce the compute power of a Tegra X, but performance will suffer. Console gamers are not going to be happy when there’s performance throttling during their playing sessions. I read some articles, and those who complained about Switch overheating reported that it shut downs automatically. Nintendo has apparently implemented an accurate high temperature kill switch before the Tegra X1 gets fried inside the Switch.
An auto-shutdown feature is still not going to solve the overheating issue. The next iteration of the Switch will need better cooling and throttling system. There’s a long list of 3D, graphics-intensive games for the Switch. Some of them will be more demanding the Legend of Zelda: Breath of the Wild.
Microsoft And Sony Aren’t Going To Use Tegra Processors
I made a long case for NVDA because of the strong sales of Nintendo Switch. I am still invested in Nvidia, but I cannot be a cheerleader for it 24/7. I previously expected that Nintendo’s decision to use an Nvidia Tegra processor instead of an SoC from Advanced Micro Devices (AMD) would eventually inspire other console manufacturers to dual-source their SoC needs.
However, the reported overheating issues of the Switch convinced me that Microsoft and Sony will continue to exclusively source out their console processors from AMD. Nvidia’s Tegra line of processors has always been beset with overheating issues. It’s the main reason why smartphone and tablet manufacturers never embraced the Tegra as mobile application processor.
Nvidia itself perhaps could not solve the overheating side-effect of its very powerful Tegra chips. It gave up and quit selling Tegra as a viable smartphone application processor. Tegra is now being marketed for automotive applications. Due to the much larger form factor of a car, Tegra will never have overheating issues while serving as an in-vehicle infotainment processor.
The potential risk to Nintendo is that the Switch could become its overheating Galaxy Note 7 problem. Like the Samsung (OTC:SSNLF) Galaxy Note 7, the Switch is enjoying massive early sales success. I hate to see Nintendo issuing recall for Switch like Nvidia did when it issued a recall for its Tegra K1-equipped Shield tablets. The Shield tablet recall was due to an overheating battery. Skeptics would likely say it might be the same overheating Tegra problem that convinced Xiaomi never to use Tegra mobile processors again.
Microsoft and Sony will continue to dominate hardware console sales for many years to come. The Switch is a nice portable console to have around. Unfortunately, the reported overheating issues means it cannot be considered as a long-term device for core and hardcore gamers. People who like to play three hours or more will always go back to a PC, an Xbox, or a PlayStation machine.
Nintendo might have made a mistake by trusting the overheating-prone Nvidia Tegra processor. Nintendo’s comeback story on console gaming could be derailed by a future lawsuit over an overheated Switch. A gamer who accidentally fries his Switch by playing too long is not going to blame himself. There will come a time that the software which automatically shuts down the Switch when it is near-deadly operating temperature will eventually fail.
Wear and tear and dirt getting inside could debilitate the temperature sensor of the Nintendo Switch.
MSFT is a buy. SNE is a buy.
Disclosure: I am/we are long MSFT, SNE, NVDA, AMD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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