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Is Wall Street Underestimating Nintendo's Earnings Power?

By Brett Schafer - Updated Feb 19, 2021 at 10:51AM

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The company has a few growth levers up its sleeve.

Nintendo (NTDOY 1.81%) has been a leader in the video game industry for decades, building unique gaming hardware and software with a focus on kids and family content. Its newest console iteration, the Switch, is a roaring success, with 80 million units sold since its launch in 2017, helping substantially boost the company's earnings over the past few years. However, Nintendo still only trades at around 18.5 times its trailing earnings per share, indicating investors don't believe the company can sustain, much less grow, its profits over time. Here's why that thinking is misguided.

Father and son playing video games.

Image source: Getty Images.

The Switch's staying power

Unlike the Wii and especially the Wii U (which was a total flop as a product), Nintendo has structured the Switch ecosystem to make it longer-lasting. Instead of having users make an account specifically for their device (as was done with the Wii), customers are required to make a Nintendo account that works across platforms. As of September of last year, Nintendo had over 200 million registered accounts, which should hopefully make it easier for customers to switch from one device to another and bring their user history to the next iteration of the Switch (whenever that occurs).

Building this franchise structure makes Nintendo's consoles much more like the PlayStation or Xbox ecosystems, where each console generation builds on the last. Before, all of Nintendo's devices were separate, meaning that every time the company released a new device it had to start at zero users. Now, with over 200 million registered accounts that are growing each year, it can hopefully smooth out the historical boom-and-bust lifecycle of its devices.

The Switch is also seeing more sustained software sales (i.e., games), and more support from third-party publishers. Fortnite is available to play through the Switch, and Electronic Arts just announced that Apex Legends will be available on the Switch in March. Having third-party support is important, not only to increase Nintendo's profits, but to keep users engaged with the console on a regular basis. To date, over 530 million software units have been sold for the Switch in less than four years, putting it on a higher pace than the Wii, which sold 920 million units over its eight-year life as an active console. 

Nintendo Switch Online

Another new revenue stream for Nintendo that has room to grow substantially over time is the Nintendo Switch Online service. The subscription service launched in late 2018, making it just over two years old, but it already has 26 million paying users. The product offers Switch owners access to old games, exclusive content, and the ability to save gaming data to the cloud. Family memberships cost $34.99 a year, or around $3 a month, and can have up to eight users.

Nintendo continues to increase the catalog of games available on the service, which theoretically should increase the value proposition for users. If competitors like Xbox and Playstation can charge $10 a month for live services and game streaming, there's no reason Nintendo couldn't eventually charge the same for its comparable offering. This ability to raise prices for many years is another lever Nintendo can pull to increase its profitability over time.

The Nintendo theme park

Outside of gaming and home entertainment, Nintendo is flexing its IP muscle with a new theme park ecosystem called Super Nintendo World. The first park is slated to fully open in Japan sometime this year (if the pandemic allows), with the other three in Singapore, California, and Florida opening sometime over the next few years. The parks are made in a partnership with NBC Universal, so Nintendo will only get a small portion of overall park revenue. However, it doesn't have to spend hundreds of millions to build or operate the parks, meaning whatever money it does get from Super Nintendo World will likely be high margin.

Right now, investors are looking critically at Nintendo, thinking the Switch is a one-hit wonder that will go the way of the Wii console. However, Nintendo has made all the right moves to ensure the console is around for more than just a few years. With the staying power of the Switch plus new revenue streams coming from theme parks and other non-gaming segments, it looks like Wall Street is underestimating Nintendo's long-term earnings power.

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