Nintendo's (NTDOY 0.88%) stock has lost a quarter of its value over the past 12 months as investors fretted over the Japanese gaming giant's decelerating growth, competitive challenges, and supply chain headwinds.
Nintendo's growth accelerated throughout the pandemic in fiscal 2020 as people bought more Switch gaming consoles and played more games, but it faces much tougher year-over-year comparisons in fiscal 2021, which ends this March. Sony (SONY +0.49%) and Microsoft's (MSFT 0.43%) latest consoles are also ramping up the pressure on Nintendo's aging Switch, while the ongoing supply chain challenges are throttling its production of new devices.
Image source: Nintendo.
Nintendo expects all those challenges to reduce its revenue and net profit per share by 9% and 26%, respectively, for the full year. As a result, many investors dumped Nintendo and rotated toward more promising stocks.
However, Nintendo's stock might fare a lot better this year as it finally laps those difficult comparisons to 2020. Let's look at four green flags that might bring the bulls back to the gaming juggernaut over the next few quarters.
1. "Metroid Dread" revives a dormant franchise
Last October, Nintendo launched Metroid Dread, the first original 2D Metroid game since Metroid Fusion in 2002. It was a commercial and critical success that awakened a long-dormant franchise.
In the U.S., Metroid Dread debuted as the best-selling Switch game in October as well as the third best-selling game across all consoles, according to NPD. Its launch month sales also doubled those of Metroid Prime, which previously set the franchise record back in 2002.
Nintendo shipped about 854,000 copies of the game in the first month, which equals roughly $51.2 million in revenue. That's less than 1% of Nintendo's projected sales this year, but it sets the foundation for new Metroid games which will complement Nintendo's other core franchises.
2. A strong start for the Switch OLED
When Nintendo introduced the OLED version of the Switch last July, some investors were disappointed that it was merely a refreshed model of the original Switch with a new screen instead of a brand new console.
The bears claimed the Switch OLED wouldn't significantly strengthen its defenses against the new PS5 and Xbox Series consoles, and Valve's Steam Deck during the holiday shopping season. But when Nintendo launched the OLED version alongside Metroid Dread last October, its sales surged.
Nintendo says it sold 711,000 Switch consoles in the U.S. in October, and that the OLED version accounted for 314,000 of those units. NPD says that boost enabled the Switch to reclaim its crown as the best-selling console in the U.S. from the PS5, which briefly eclipsed the Switch's monthly sales in September.
The Switch also remains the world's best-selling gaming console with 101.9 million devices shipped since early 2017, according to VGChartz. Sony and Microsoft have shipped 17.3 million and 11.5 million PS5s and Xbox Series consoles, respectively, since late 2020.
The Switch's longevity, which has been prolonged by the cheaper Switch Lite and the higher-end Switch OLED, suggests it can easily withstand the competitive pressure from the PS5, Xbox, and other platforms this year.
3. Big upcoming games
Nintendo's growth spurt in 2020 was largely attributed to Animal Crossing: New Horizons, an online multiplayer game that evolved into a social platform during the pandemic. Nintendo has shipped nearly 35 million copies of the game to date, and it recently expanded the game with new downloadable content.
2021 was a much slower year for the Switch, with Super Mario 3D World + Bowser's Fury, Monster Hunter Rise, and Metroid Dread being its biggest releases, but its release schedule is packed with potential hits this year.
Nintendo's upcoming games in 2022 include Pokémon Legends: Arceus, Kirby and the Forgotten Land, Persona 4 Arena Ultimax, Teenage Mutant Ninja Turtles: Shredder's Revenge, Mario + Rabbids Sparks of Hope, Splatoon 3, Sonic Frontiers, Bayonetta 3, Metroid Prime 4, and the eagerly anticipated sequel to The Legend of Zelda: Breath of the Wild.
That blockbuster lineup could breathe fresh life into the 5-year-old Switch and boost sales of the Switch OLED. It could also enable Nintendo to easily beat analysts' conservative forecasts for a 1% drop in revenue next year.
4. Expanding its intellectual properties beyond video game consoles
Nintendo only generates a tiny percentage of its revenue from licensing agreements with movie studios, theme parks, and retailers, but that business could grow significantly in 2022 and beyond.
Comcast's NBCUniversal Illumination film studio, which created the Minions, will launch an animated Super Mario movie this December. Comcast's Universal Studios also continues to work with Nintendo to build new Super Nintendo World areas in its theme parks across the world.
Nintendo has also secured licensing agreements with Levi Strauss, Puma, and other lifestyle brands to create new products that feature its characters. That ongoing expansion of its IPs could unlock new revenue streams for Nintendo and boost the visibility of its top franchises.
Still underappreciated and undervalued
Nintendo faces some near-term challenges, but its core business remains strong and its stock looks cheap at 16 times forward earnings. Investors should look past its tough post-lockdown comparisons and focus on these four green flags to understand just how underappreciated this gaming stock is.
