Nintendo's been embarrassed before. See the GCN. See the Virtual Boy (Gunpei Yokoi, possibly the smartest person at Nintendo back then, literally resigned over it).
The worst possible thing at this point would be if they pulled a Sega and dropped out of the hardware market, significantly reducing competition, but that doesn't seem likely--they've proven in the past that they're good at rolling with the punches, and staying profitable in adverse conditions.
The big concern now, though, is from new competitors that have since stepped into the market; iPhone, iPad, Android--these potentially could crowd out dedicated gaming devices.
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Cats land on their feet. Toast lands peanut butter side down. A cat with toast strapped to its back will hover above the ground in a state of quantum indecision