Nintendo (OTC:NTDOY) stock has more than doubled in value since the Switch game system launched in March 2017. Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) just launched powerful new gaming consoles, but Nintendo is poised to maintain its momentum as major retailers are reported to be having a difficult time keeping Switch on store shelves. 

Here's why Nintendo stock is still a top pick in the gaming industry.

Switch will be a top gift-giving item

On the eve of the highly anticipated launch of Sony's PlayStation 5 and Microsoft's Xbox Series X, NPD Group's sales data for October showed that Nintendo Switch had one of the biggest sales months in video game console history. Nintendo sold 735,000 units last month, a stellar increase of 136% year over year. That performance came in second to one of the most popular consoles of all time, the Nintendo Wii, which sold 805,000 units in October 2008.

In a statement, Nintendo of America President Doug Bowser said, "Seeing encouraging sales growth like this in the fourth October of Nintendo Switch proves to us that the system has many more years and great games yet to come." 

A father and daughter sitting on the floor playing a video game.

Image source: Getty Images.

It's a big advantage for Nintendo that it doesn't have to rely on fancy technology to sell consoles the way Sony and Microsoft do. Instead, Nintendo relies on its rich library of exclusive franchises, such as Mario Bros. and Animal Crossing, and its leading market position as a family-friendly gaming brand. It also helps that the Switch is unique, serving as both a dedicated console and handheld gaming device. 

Altogether, Nintendo has released 20 titles this year that have sold at least 1 million copies, including 15 titles that are exclusive to Nintendo. Animal Crossing: New Horizons has been the second-best-selling title on consoles (year to date, excluding digital sales), according to NPD. Nintendo reported recently that New Horizons has sold more than 14 million copies so far. 

The momentum Nintendo has gained this year leads management to believe that the Switch game system will have a longer life cycle than Nintendo's previous hardware platforms. This is the fourth year that Switch has been on the market, so there could be a few more years of strong sales performance, at a minimum.

Game sales are boosting profits

While selling more hardware is important to build a large installed base of Switch owners, Nintendo wants to see more purchases of games, because strong sales of software are what drives profits and ultimately, a higher stock price.

It's encouraging that not only were people dropping $300 on a new Switch just so they could play Animal Crossing: New Horizons, but those players have gone on to buy additional games. One of those has been Super Mario 3D, which has sold more than 5 million copies through the fiscal second quarter. 

Nintendo has sold 68 million Switch units life to date and 456 million games. That's an average of nearly seven games sold per Switch unit. Management expects to sell 24 million Switch units for fiscal 2021 (which ends in March) and 170 million software units.

Many of these games are being sold digitally, which bodes well for expanding margins. With stores closed during the pandemic, digital sales comprised nearly half of total sales in the first half of fiscal 2021. That represented growth of 139% year over year, which includes downloadable versions of packaged software for Nintendo Switch, add-on content for games, and Nintendo Switch Online subscriptions. 

Investors will want to keep their eyes on this trend. The video game industry continues to shift to digital distribution, which serves as a catalyst for profit growth at Nintendo. The higher margins of digital sales contributed to a massive 244% spike in net profit through the first half of the fiscal year. 

Because of the better-than-expected earnings results, management now expects to report an increase in sales and profits of 7% and 16%, respectively, for fiscal 2021. Full-year growth will be more modest due to a tough year-over-year comparison with last year's strong sales of Pokemon Sword and Pokemon Shield during the holiday quarter.

The stock has room to run

Nintendo can still squeeze more growth out of Switch. Even though the console has been out for three years, the strong sales of Animal Crossing: New Horizons shows that there are still many people who might be compelled to buy a Switch if there's a new title that appeals to buyers. 

Moreover, Nintendo may find surprise success at the box office to pad its growth. Although video game adaptations are not a sure thing by any means, Nintendo is partnering with animation studio Illumination, of Despicable Me and Minions fame, to produce a Mario movie scheduled for release in 2022. Nintendo will own the rights to the film, providing additional monetization opportunities. 

While Nintendo's mobile efforts haven't paid off like investors would have hoped, continued momentum for Switch and digital sales should be plenty enough to drive further gains in the stock over the next few years. The shares fetch a forward price-to-earnings ratio of 22, based on management's guidance. That leaves room for more gains, even with the stock sitting close to new highs.