Stock Deconstruction

Nintendo’s share price could be one to play

Throughout August, Nintendo’s [7974] share price accelerated as the stock gunned for levels last seen when it hit highs back in 2007. However, as September hit and tech stocks around the globe suffered, Nintendo’s share price entered a period of volatility, which resulted in a more disappointing October. However, some bulls predict that Nintendo’s flagship Switch gaming platform could bring about be the industry’s next iPhone moment. What would this mean for Nintendo’s share price?

Despite the recent downtrend, Nintendo’s share price is up 27.2% year-to-date and a further 72.6% from its 52-week low of JPY31,880, which it recorded during the market sell-off on 13 March (as of 23 October,). 

 

 

Blockbuster earnings

Nintendo’s share price has surged 16.3% since the start of August. The reason for the stock’s breakout rally is its blockbuster first quarter 2020 earnings report, which it released on 6 August. 

The Japanese console giant reported net sales of JPY358bn, up 108% on the JPY172.1bn posted in the year ago quarter. Its operating profit soared a staggering 427% year-over-year from JPY27.4bn to JPY144.7bn. 

Propelling Nintendo’s surge in revenue was its Switch segment. The company sold 5.68 million of its consoles worldwide in the three months ending June, a year-over-year increase of 167%. 

The company has now sold over 65 million Switch consoles worldwide since its launch in 2017, according to Statista — a success which saw Nintendo’s share price soar. 

 

65million

Nintendo Switch consoles sold worldwide since 2017 launch

 

 

At the start of the coronavirus pandemic, Switch consoles sold out almost everywhere as customers rushed to get their hands on the console to keep them occupied during lockdowns. At the same time, Nintendo experienced a global Switch shortage, as the pandemic slowed output at the factory of the company’s assembly partner. 

The gaming company’s best-selling title in the most recent quarter was Animal Crossing: New Horizons, with 10.6 million copies sold in the three months to the end of June. Total sales of the game now stand at over 22 million. 

More than half of consoles used for the first time during the quarter were used to play Animal Crossing. To many who became involved, the in-game social interaction proved something of a temporary panacea to the lack of physical contact amid global lockdowns.

 

Nintendo tops the charts

Sales are likely to be strong when Nintendo reports its second quarter 2020 earnings on 5 November. The company achieved the best August sales of a console in the US by any company on record, according to industry-tracking firm the NPD Group. 

Mat Piscatella, an industry analyst and executive director at NPD Games, tweeted on 14 September that dollar revenue from the Switch beat the previous record — also set by Nintendo — of sales of the Wii console in August 2008. 

Despite robust sales, Nintendo lags behind both Sony [6758] and Microsoft [MSFT] in the console cycle. The soon-to-be-launched PS5 and Xbox Series X have been dominating gaming news and will continue to do so for the next few months. 

The Switch, meanwhile, is expected to have a next-generation upgrade in 2021 in a bid to stay relevant, but an entirely new console is unlikely before 2022 or 2023. There have been five or six years between each of the major Nintendo console releases dating back to the nineties. 

While the hardware Nintendo develops is innovative, its approach is conservative, just like its approach to its business and financials in general. The company achieved half of its full-year net profit target in the first three months of the fiscal year but maintained the guidance previously issued, according to the Financial Times.

“Their guidance is not even a joke any more. It just cannot be taken seriously,” Serkan Toto, CEO of game industry consultancy Kantan Games, told the publication. 

 

"Their guidance is not even a joke any more. It just cannot be taken seriously" - Serkan Toto, Kantan Games CEO

 

 

It’s this conservative approach that has led a number of analysts and experts to take up the opinion that Nintendo would be better placed investing more in building a cloud platform and extending the life of the Switch.

 

The Apple of gaming 

Aaron Edelheit, CEO of Mindset Capital, argues that the company could become the Apple of gaming. “Its valuation continues to be inexplicably low,” Edelheit said, according to BusinessLive. “The company is innovating at a level that no one is giving them credit for.”

Another reason to focus less on hardware is that it makes more financial sense. Toan Tran, investment manager at 10 West Advisors, believes that a new console is not a guaranteed money-maker and could even struggle to match the sales achieved by the Switch. He argues that by building a cloud platform and upgrading the Switch, Nintendo can maintain its user base. 

“With every console generation, the install base resets to zero and their earnings power essentially resets to zero. Nintendo can continuously have an install base of say 100 million consoles out there, that just moves along over time,” Tran told Bloomberg

There are currently 22 ratings for Nintendo, according to MarketWatch data, 17 of which are Buys while five suggest to hold the stock. The average price target is JPY65,305, which implies a 16.93% upside from its closing price on 22 October. 

 

Market CapJPY6.6trn
PE Ratio (TTM)18.81
EPS (TTM)2,925.7
Quarterly Revenue Growth (YoY)108.1%

Nintendo share price vitals, Yahoo Finance, 23 October 2020

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