They absolutely should have. I'm not saying they should have kept their focus on it, but done like Enix: released a game or two, just to test the waters and keep a solid working relationship with Nintendo. It came back to bite them right in the ass when the GBA came out and they realized what an opportunity they'd wasted.
EDIT: That said, the fact that Square Enix is throwing this kind of support behind the DS is indicative that they see a money-making opportunity, that the numbers work out for them.