The center of the entertainment world has been in Kyoto, Japan, for the past few months. After releasing what could end up being the highest-grossing animated film ever, Nintendo (OTC: NTDOY) just followed up the Super Mario Movie with a record-breaking new Zelda game. Called Zelda: Tears of the Kingdom, the latest iteration in the long-running franchise is officially one of the top-rated games ever, and is all but guaranteed to be one of the top-selling Nintendo titles ever.
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Here's the scoop on Nintendo's blockbuster title and how it could impact the business financially.
After game-reviewer Metacritic gave it an aggregated rating of 95, expectations were extremely high for Tears of the Kingdom. But I don't think even the most bullish analyst expected the results we saw over the past few weeks. According to Nintendo, the game sold over 10 million units within three days after its launch, even with a premium price point of $70.
We won't get an official update until Nintendo's earnings report in August, but analysts over at GamesIndustry.biz estimate boxed sales for Tears of the Kingdom were 54% higher than Warner Bros. Discovery's recent blockbuster Hogwarts Legacy at launch. Hogwarts Legacy has sold 15 million units since its release in February and was previously the highest-grossing game of 2023.
Tears of the Kingdom -- if it keeps up its trajectory -- could easily clear 20 million unit sales this year. With over 125 million Switch devices sold to customers (the exclusive Nintendo hardware you can play a Zelda game on), this was the optimal time for Nintendo to release a new hit game. Now the company is reaping the rewards.
But what does it mean for the company financially? And for investors?
Typically, analyzing the profitability of a game is difficult. There are a ton of stakeholders like developers, publishers, hardware makers, and retailers that all take shares of game sales.
But Nintendo does things differently with its integrated software-hardware business model. Tears of the Kingdom is only sold on its Switch hardware, meaning it keeps much more of every game sale in profits compared to other game publishers. It still has to pay a fee to retailers such as Amazon for physical game sales, but with more games bought directly by customers as digital downloads, Nintendo is slowly eliminating this cost as well.
With this in mind, let's try and estimate how much Tears of the Kingdom could bring in for Nintendo in profits. With its predecessor Breath of the Wild game, Nintendo executives estimated it would break even at 2 million unit sales. This means that every sale above 2 million should be close to pure profit for Nintendo after taking out any fees paid to retailers. To be conservative, let's estimate that with rising development costs, Tears of the Kingdom is break-even at 3 million unit sales.
So if the company sells 20 million units of Tears of the Kingdom this year, 17 million unit sales will come in with extremely high profit margins (close to 100% on digital sales). Multiply 17 million by its $70 selling price and Nintendo could rake in close to $1.2 billion in earnings just from this one game. That is 37% of its entire operating profit guidance for this fiscal year. So, yeah, Tears of the Kingdom is going to have a huge financial impact for Nintendo.
Combine the profits from Tears of the Kingdom, the hundreds of millions the company will generate from the Super Mario movie, and its existing game sales to its 100 million+ customers around the world, and I think Nintendo will easily clear its $3.24 billion operating profit guidance for this fiscal year. With the stock still down from all-time highs at a market capitalization of around $48 billion, there is a lot of value in this entertainment giant.
If you think Nintendo can keep producing popular games that consumers love, now could be a perfect time to buy some shares after its latest hit Zelda title.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brett Schafer has positions in Amazon.com and Nintendo. The Motley Fool has positions in and recommends Amazon.com and Warner Bros. Discovery. The Motley Fool recommends Nintendo. The Motley Fool has a disclosure policy.