Nintendo's (NTDOY +0.89%) stock shed more than a quarter of its value this year as investors fretted over a post-pandemic slowdown, competition from newer consoles, and the chip shortage's impact on its shipments. Some investors also expected Nintendo to launch a new Switch console, instead of an upgraded OLED model this October, to stay competitive.
Nintendo's weak first-quarter report on Aug. 5, which featured a 10% year-over-year revenue decline and a 13% drop in net profit, exacerbated that sell-off -- and a rare decision to repurchase up to 100 billion yen ($910 million) in shares (1.5% of its outstanding shares) couldn't stop the bleeding.
Image source: Nintendo.
But despite all that gloominess, Nintendo's stock remains up nearly 130% over the past five years. Most of that growth followed the Switch's launch in early 2017, and that momentum accelerated throughout the pandemic as more people stayed home and played hit games like Animal Crossing: New Horizons. The launch of its cheaper Switch Lite model in late 2019 roped in even more gamers.
Nintendo's stock is cyclical, so is it bottoming out before another multi-year run? Or will it drop the ball again, as it did with its poorly received Wii U from 2012 to 2017? Let's look back at Nintendo's previous five years, and see where its stock might be headed over the next five years.
Nintendo's previous five years
Back in 2012, Nintendo followed up its popular Wii console with the Wii U, a more powerful device that added a second screen to the gamepad. This second screen enabled the Wii U to be played like a handheld when the TV was off, but it couldn't operate as a stand-alone handheld device.
That unusual form factor, along with its odd name, confused customers, who didn't realize the Wii U was a full-generation upgrade from the original Wii. Its launch was also poorly timed, arriving only a year before Sony's (SONY +0.14%) PS4 and Microsoft's (MSFT 1.57%) Xbox One.
As a result, the Wii U experienced a weak initial launch, and Nintendo struggled to secure third-party games for the system. By the beginning of 2015, Nintendo's stock was trading at about $12 -- far below the mid $70s it reached in late 2007 when the original Wii flew off shelves.
Nintendo then developed a new console, the Switch, which addressed the Wii U's failures with a fresh brand and a hybrid design that enabled the device to be used as both a stand-alone handheld and a home console. It's easy to spot the Switch's impact on Nintendo's growth over the past five years:
|
Growth (YOY) |
FY 2016 |
FY 2017 |
FY 2018 |
FY 2019 |
FY 2020 |
|---|---|---|---|---|---|
|
Revenue |
(3%) |
116% |
14% |
9% |
34% |
|
Net Profit |
522% |
36% |
39% |
33% |
86% |
Data source: Nintendo. YOY = Year-over-year.
It's pretty clear how the pandemic, along with the Switch Lite, generated timely tailwinds last year just as Nintendo's revenue growth started to decelerate.
Nintendo's next five years
For fiscal 2021, Nintendo expects its revenue and net profit to decline 9% and 29%, respectively, as it ships fewer Switch consoles. The chip shortage, the saturation of the Switch market, and competition from newer consoles (the PS5, Xbox Series S and X, and Valve's Steam Deck) could also pull away potential buyers.
Nintendo will launch its upgraded Switch OLED this year, but it hasn't revealed any plans for a "Switch 2" or a brand new console. However, Nintendo will likely launch a new console within the next five years.
Image source: Universal Studios Japan.
Many analysts and chipmakers expect the global chip shortage to last until 2023, so Nintendo might wait for those supplies to stabilize before mass-producing a brand new console. If that's the case, investors should brace for at least two more years of stagnant or declining hardware sales before Nintendo reveals a new device.
However, Nintendo can still stabilize its growth by selling more first-party games. Upcoming games like Metroid Dread, Splatoon 3, Bayonetta 3, and a new Zelda game might boost Nintendo's revenue per existing Switch owner and reduce its overall dependence on hardware sales. New theme park attractions at Universal Studios could also reinforce that brand loyalty and attract new consumers.
That growth potential can be measured by Nintendo's software tie ratio, or the average number of games sold to each console owner. To date, Nintendo has shipped 89.04 million Switch consoles and 632.4 million game units, which gives it a software tie ratio of 7.1.
The original Wii achieved a tie ratio of 8.99 before being discontinued, so Nintendo might expect each Switch owner to buy at least two more games before it considers the platform saturated. For now, investors should focus on this oft-overlooked metric to gauge its growth in higher-margin software sales rather than worry about its lower-margin hardware business.
The key takeaways
I expect Nintendo's stock to remain stagnant until it reveals clearer plans for its future. But it's pulled off strong cyclical recoveries before, and I wouldn't be surprised if Nintendo's stock surges to new highs by 2026 as it shakes up the gaming market again with an innovative new device.
