AI computing power "eats up" Nintendo's profits: soaring memory costs push Switch 2 into a revenue-without-profit dilemma

Against the backdrop of the global technology industry's AI boom, Nintendo is becoming an unexpected loser in the power competition. As AI data centers drive exponential demand for high-end memory chips, the consumer electronics giant Nintendo not only faces skyrocketing memory costs, but has also fallen into a “revenue growth without profit growth” dilemma, with profits failing to meet expectations despite robust sales of its Switch 2 console.

Nintendo’s latest quarterly financial report shows that although its flagship Switch 2 sold above market expectations on average, the quarterly operating profit was only 155.21 billion yen (about $998.5 million), well below analysts’ forecast of 180.7 billion yen. Although quarterly sales soared over 80% to 806.32 billion yen, profit growth was limited to 23%, also missing market expectations. This performance gap has triggered investor concerns over the company’s profitability, with a core focus on how surging component costs are eroding the already thin profit margin of this new hardware.

This financial report reveals Nintendo's double squeeze: on one hand, global trade disruptions brought by U.S. tariffs; on the other, deeper structural supply chain challenges. As chip manufacturers allocate more capacity to lucrative AI data center-specific high-end memory, the supply of memory chips needed for regular consumer electronics has tightened and prices have soared. Market analysts note that this cost pressure is weakening Nintendo’s short-term buffer established through long-term supply contracts, directly threatening its profit margin performance for the 2026 fiscal year.

Despite facing cost headwinds, Nintendo has maintained its full-year guidance, expecting annual revenue of 2.25 trillion yen and operating profit of 370 billion yen, and reaffirmed its target of 19 million Switch 2 units sold for the year. This indicates management is still hoping to stabilize its ecosystem by expanding its user base, but under the expectation of continued component price increases, balancing market share expansion and cost control has become the greatest challenge for this long-established Kyoto-based gaming giant.

Profit Squeeze: The Double Blow of Tariffs and Domestic Pricing

During the recent holiday season, Switch 2 sales were decent at 7.01 million units, slightly above analysts' average forecast of 6.5 million units. However, this sales growth didn’t translate into commensurate profit growth. Toyo Securities analyst Hideki Yasuda pointed out that while Switch 2 sales can be considered “decent,” it’s hard to call them “robust.”

Rising costs mainly come from two aspects. First is the ongoing disruption to global trade caused by U.S. tariffs, directly pushing up logistics and operations costs. Second, Nintendo's pricing strategy in the Japanese domestic market has also negatively impacted its profits.

To quickly lock in consumers in Japan, Switch 2’s pricing has been deliberately suppressed, and with Japanese domestic sales accounting for a larger share of overall business during the holidays, this structural shift further lowers overall profit margins. Yasuda warns that looking ahead, concerns over component price increases persist, and whether the company can effectively control costs again will be a key point to watch.

Memory Crisis: The Chain Reaction Triggered by AI’s Grab for Capacity

A more severe long-term challenge comes from upstream in the semiconductor supply chain. Research firm TrendForce notes that chip makers are currently allocating more resources to advanced memory urgently needed by AI data centers, which has far higher margins than regular consumer electronics chips. This allocation shift means Nintendo may not only face rising prices, but could even be at risk of not obtaining enough chips to manufacture consoles.

This “memory crisis” not only affects hardware manufacturing, but could also impact Nintendo’s main profit engine—software sales. Switch 2 has only 256GB of built-in storage, far lower than Sony’s PlayStation 5 or Microsoft’s Xbox. As modern games demand ever more performance—such as Square Enix Holdings’ “Final Fantasy VII Remake,” which exceeds 90GB in size—players are forced to buy MicroSD Express cards to expand storage. However, driven by AI demand for SSDs, the prices of these cards are also rising, and the high extra cost may dampen players’ willingness to buy new games.

Market Outlook: Ecosystem Resilience and the Long-Term Game

Faced with expected component price increases continuing through 2026, Nintendo is seeking countermeasures. The market expects the company may maintain consumer interest through new color variants of the Switch 2, and is trying to improve hardware profitability.

Bernstein analyst Robin Zhu believes that while increased operating expenses have led to profits falling short of expectations, this is much better than having serious problems on the demand side. He notes, “the ecosystem is functioning well,” and though cost control faces challenges, it would be a mistake to ignore the enduring appeal of Mario’s creator’s intellectual property (IP).

This year is critical for Switch 2’s long-term growth. As a key period for the new generation console, the size of its installed base will directly determine the attention third-party developers and players pay to it in the coming years. Though AI-driven cost inflation is hard to dissipate in the short term, investors are now focused on how Nintendo can maintain its hardware adoption rate and healthy software ecosystem amid these pressures.

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