They got a niche. They know their market and they cater to it, forming almost a sort a cult-like fanbase.
At the end of the day, games just need to be fun to play. People can harp on about being outdated or cutting edge technology or whatever. Does it really matter? Part of me thinks pushing the graphics boundaries for games and setting it as some sorta standard is a mistake. It just bloats costs and development time by ridiculous amounts and generally makes the game more difficult to make.
At the end of the day, a game looking like Valheim still sold millions and its still in early access. Nintendo's still trucking a lot. There's plenty of successful indie titles out there. People still chuck money at stupid mobile lootbox games to get JPGs of their waifus.
Those games didn't need exact 3D replica of a famous actor's mug to be successful.
Though I daresay that Nintendo basically survives off having a lot of first party developers. I'm not sure how successful the Switch would be if you could play Pokemon, Smash, Zelda and Splatoon on Steam lets say. You wanna play Nintendo games? Buy a Nintendo console. Simple and effective.