Storage costs are devouring consumer electronics profits! The strong sales of Switch 2 cannot stop the "profit collapse". Nintendo's stock price hits its largest drop in 18 months.

Video game giant Nintendo saw its stock price in the Japanese stock market hit the largest drop in 18 months, following disappointing profit data released by the company. The data showed a significant drop in operating profit margins, and concerns about the continuous rise in storage chip prices affecting profit margins for 2026 were also on the rise. Nintendo, known for its long-term bullish stock trajectory, experienced a sudden drop in its stock price, with the stock falling over 12% at one point on Wednesday in the Tokyo stock market. The Kyoto-based leader in the electronic gaming industry is facing global cost disruptions due to US tariffs, as well as rising storage component costs driven by fervent investment in AI computing infrastructure, which continues to drag down its performance outlook. The latest financial performance data and future outlook released by Nintendo on Tuesday indicated that the fierce competition for storage chip capacity for AI data center construction has led to a significant increase in the cost of core storage components, becoming a core factor in the dilemma of "increasing revenue without increasing profit" for Switch 2. Despite an increase in Switch 2 sales, hardware profits have been severely eroded. In addition, the company's low-price strategy in the Japanese market has further diluted profits, and the company's maintenance of its full-year guidance and hardware sales target (expected to be 19 million units from June release to end of March) has been interpreted by the market as being too conservative. Investors' current concern about "storage devouring consumer electronic profits" is not unfounded, as Nintendo's management explicitly pointed out in its performance statement that if storage component prices continue to rise and exceed expectations for a prolonged period, it could further squeeze profit margins. Market research firm TrendForce stated in a study that game console storage module costs could account for about 21%-23% of total hardware costs in 2026, significantly compressing hardware profit margins and future price reduction space, which also means that the downside risk of consumer electronic brand gross margins in the coming quarters will continue to rise. TrendForce forecasts that due to the skyrocketing prices of storage memory, the overall cost of consumer electronic products will rise significantly, forcing retail prices to increase and potentially impacting the global consumer market. Therefore, the TrendForce research team, after lowering its 2026 global smartphone and laptop production and shipment forecasts in early November, also significantly revised down its 2026 game console shipment forecast, from an expected annual decrease of 3.5% to a decrease of 4.4%. DRAM and NAND costs have surged, putting pressure even on a strong company like Nintendo Nintendo's flagship console Switch 2 saw record-breaking sales in the summer of 2025, but is now shrouded in profit and demand doubts under the high pressure of DRAM/NAND storage costs: concerns have been raised about whether this creator of "Super Mario Bros." can continue to release massively popular software to maximize profit data. In the just-concluded holiday shopping season, domestic sales in Japan (the company reduced prices to attract consumers) increased in proportion to the business, but some consumer electronics market analysts worry that this low-price strategy combined with continued expansion of storage components costs could further impact profits. As storage costs continue to rise, Nintendo's ability to lower prices and the space for future price reductions will decrease, meaning that demand may face more severe tests in the future. During the holiday shopping season, Switch 2's sales performance was decent, with approximately 7.01 million units sold, slightly higher than the analyst's average estimate of 6.5 million units. However, this strong sales growth during the holiday shopping season did not proportional profit growth, and actual profit margins were eroded by price reduction strategies and the significant consumption of storage components. The latest financial report data shows that although the flagship product Switch 2 sold above market expectations, the quarterly operating profit was only about 155.21 billion yen (approximately $9.985 billion), well below the analysts' average estimate of 180.7 billion yen. Despite a sales increase of over 80% to 806.32 billion yen, the operating profit growth was limited to 23%, also lagging behind market expectations, and the operating profit margin was significantly compressed. This performance gap has raised concerns among investors about the company's profit potential, with the core focus being the soaring costs of storage components and the low-price strategy in the Japanese market eroding the already thin profit margins of this new hardware. Furthermore, in order to quickly secure consumers in the domestic market, Nintendo has artificially lowered the pricing of Switch 2 in Japan, and with the proportion of sales in Japan during the holiday season expanding in the overall business, this structural change has further lowered the overall profit margin level. It is understood that in Nintendo's game consoles/handheld devices and other consumer electronics, DRAM (operational memory) and NAND (flash/internal storage) are both "significant" BOM cost items - and in the "storage price hike cycle" of 2026, disruptions from both are magnifying the hardware gross profit. In the history of Nintendo's game consoles/handheld devices and other consumer electronics, DRAM and NAND storage components are "standard" core components. In terms of cost per bit per GB, DRAM is usually much more expensive, with the industry education provided by one of the three major storage chip manufacturers, SK hynix, being quite straightforward: the cost per bit of DRAM is usually at least an order of magnitude higher than NAND (at least "10 times higher"). In terms of unit cost, DRAM is more expensive, but when considering the total machine cost, it depends on the NAND capacity configuration - when the internal storage of a Switch device reaches large capacities like 256GB, NAND is likely to have a larger absolute amount. In this "AI training/inference computing power rush crowding out storage supply and with DRAM prices rising even more sharply" phase in 2026, DRAM costs are more of a short-term dominant risk factor for hardware gross margins. Statistics show that the cost of the 12GB DRAM module used in Switch 2 jumped by approximately 41% in the fourth quarter, while the 256GB NAND increased by about 8% - this kind of "differential increase" means that even though the absolute cost of NAND storage is significant, the exaggerated increase in DRAM costs is often more likely to erode hardware gross margins. Industry data shows that since September 2025, the overall price increase of flagship storage products based on DRAM technology - DDR5 series memory modules - has exceeded 370%, while DDR4 memory modules have seen an increase of over 150%. The DDR5 DRAM chip (such as the 16Gb DDR5 spot price), which is the highest upstream DDR5 DRAM chip price since September 2025, has seen an even higher increase of up to 455%. Industry research by institutions such as Counterpoint Research shows that the demand for AI server systems for data center-level memory modules is at least 8-10 times that of ordinary server systems, with such massive demand squeezing out 53% of global memory monthly capacity, severely constraining the allocation of high-end memory capacity and pressing on consumer-grade memory production of DDR series products. Leading cloud computing service providers such as Google and Microsoft have placed huge purchase orders, even taking over a portion of the idle capacity of the three major storage chip manufacturers for the next 2-3 years. Nintendo's proud software ecosystem also faces challenges in boosting profits in the short term Amir Anvarzadeh, a senior analyst at Asymmetric Advisors, stated, "With mobile games like 'Brainrot' on the Roblox platform attracting more and more teenagers, Roblox has become a major threat to Nintendo's share of the younger player market." He emphasized that in the long run, the pressure of storage prices on hardware profit margins may not be the main issue. "For Nintendo's fundamental growth, it is now crucial to sell more hardware-related software with more consoles." As shown in the figure above, Nintendo's operating costs are soaring with the launch of Switch 2, and the Kyoto-based company is maintaining higher spending to promote its new software-hardware ecosystem platform. The electronic gaming giant based in Kyoto has long adopted a patient strategy, spending more time refining and perfecting new game products to win over loyal fans worldwide. However, as user attention becomes increasingly fragmented and the much-anticipated "Grand Theft Auto 6" is scheduled for release this year, Anvarzadeh warns that the gaming company will face increasing pressure, as a strong software ecosystem may also struggle to salvage profits in the face of soaring storage costs and continually shrinking profit margins. Nintendo executives responded to widespread concerns in the market about storage prices on Tuesday. Previously, due to the impact of storage component prices, several consumer electronics brands have already raised sales prices or adjusted specific storage space plans for their products. According to a recorded conference call, Nintendo President Shuntaro Furukawa stated during a phone conference with analysts, "The market environment is indeed challenging. But we are engaged in long-term discussions with suppliers to ensure a stable supply of storage chips. We do not expect any major negative impact in the fourth quarter of this fiscal year. However, starting from the next fiscal year, if this wave of price hikes for storage chips lasts longer than expected, it may further pressure our profit potential." Furukawa acknowledged the possibility of a price increase for the Switch series of game consoles, but he stated that the company would carefully weigh various options. Nintendo is maintaining its full-year revenue and operating profit performance guidance unchanged, and adhering to its sales forecast for Switch 2: to sell 19 million units from its release in June to the end of March. Bloomberg Intelligence senior analyst Nathan Naidu stated that considering the 17.37 million units sold as of December for Switch 2, this forecast is significantly conservative and is not enough to boost market sentiment. Citi senior analyst Tokiya Baba wrote in a report that weak software sales for Switch 2 have led to profits falling short of expectations. "We see investors refocusing on the risk of a significant deterioration in the profitability of Switch 2 starting from the next fiscal year." The current pessimistic trend of "storage chip costs devouring profits in the consumer electronics supply chain" may continue in the short to medium term. TrendForce assesses that the upward trend in storage component prices driven by AI/data center demand crowding out storage chip production capacity and exacerbating supply-demand imbalances could lead to further price increases for DRAM/NAND storage products; in addition, terminal brands have been forced to offset costs by raising prices or reducing specifications, and TrendForce expects more significant fluctuations in the consumer electronics market, including PCs, smartphones, and game consoles, by 2Q26 (essentially a rebalancing process of "demand disruption + supply adjustment"). Therefore, for Nintendo, the main means of buffering the impact of storage costs are long-term purchasing agreements and necessary adjustments in hardware prices/regional pricing when needed. However, what really can transcend the inflationary cycle of storage chips and bring profits and valuation models "back from hardware consumption to software/subscription end" is the density of explosive software ecosystems and software attachment rates - which is currently the main concern in the market, as concerns grow that even a strong software ecosystem may struggle to compensate for the significant profit squeeze caused by storage chips and price reduction strategies.