Nintendo, first established in 1946 as a manufacturer and distributor of playing cards, has grown into one of the biggest video games businesses in the world. In the past eight years it has also turned the norms of the $200 billion gaming industry on its head.

The Tokyo-listed business, home to the likes of Super Mario Bros, Donkey Kong and Animal Crossing, launched its Switch console in 2017. Typically the life of a gaming console is about five years, and most analysts expected that sales would fizzle out by 2022. Last year it sold 16 million of them, taking the cumulative total to more than 140 million and making it the third best-selling console ever, behind only Sony’s PlayStation 2 and its own Nintendo DS.

Key to Nintendo’s success has been its focus on light-hearted, family-friendly games, which appeal to people who may not ordinarily be gamers.

It is certainly impressive that the Switch is making significant sales in the eighth year after its launch, but the well of its success is not infinite — the company expects its operating profit will fall by about a quarter to ¥400 billion ($2.6 billion) in the year ended next March, on roughly ¥1.35 trillion in net sales, with a 14 per cent drop in Switch sales. Software sales are also expected to decline from 200 million to 165 million units.

Profits are already headed in the wrong direction. For the quarter ended in June, Nintendo reported an operating profit of ¥185.4 billion on net sales of ¥461.2 billion. This marked a drop of 71 per cent and 47 per cent respectively compared with the same period last year.

But the decline is not so worrying given it marks the end of the exceptionally long life span of the Switch, and management has finally confirmed that it will announce a successor to the console.

Nintendo makes about 45 per cent of its sales from the Americas, followed by 26 per cent in Japan, and 21 per cent in Europe. Its huge user base has helped it to build out other higher margin businesses such as its subscription service, Nintendo Switch Online, which allows its users to play live online with friends. Digital sales now account for roughly half of the total.

Meanwhile, the longer life cycle of the Switch has allowed video game developers the time to create high-quality, closely followed titles such as the Legend of Zelda: Tears of the Kingdom, which launched in May last year. Analysts had expected the game would sell 30 million units over an estimated lifetime of six years — but it sold 10 million within the first three days of the launch, and 18.5 million in the first quarter alone.

Since the launch of the Switch in the spring of 2017, Nintendo sales have more than tripled and the shares have risen by more than 300 per cent. The stock hit a record high of ¥8,556 in June, before a wide sell-off in Japanese shares wiped out some of its gains for the year. It now trades at about ¥8,253, or 28 times forward earnings, compared with its Tokyo-listed rival Sony at 16.

Much rests on the success of Nintendo’s next console — after its strong performance with the Wii in the 2000s, its successor, the Wii U, sold fewer than 14 million units. Nintendo then faced consecutive operating losses in 2013 and 2014.

But the group’s renewed focus on quality over speed appears to have worked in its favour so far. Industry pundits expect Nintendo will launch its new console some time next year, which should help to drive up appetite for the shares, alongside widely anticipated sequels to some of its most popular titles, Super Mario Odyssey, Pokémon, Animal Crossing and Zelda. With one of the most powerful intellectual property portfolios in the industry and an upcoming upgrade cycle, the recent pullback in the shares seems a compelling buying opportunity. Advice BuyWhy New console launch should bolster shares next year