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Is the Market Undervaluing This Gaming Stock?

By Toby Bordelon and Brian Feroldi – Jan 14, 2022 at 9:30AM

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Nintendo is well-positioned for the future.

In this segment of "3 Minute Stocks Updates" on Motley Fool Live, recorded on Jan. 5, Fool contributors Toby Bordelon and Brian Feroldi chat about Nintendo's (NTDOY 1.45%) successful 2021 and its healthy outlook for this year.

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Toby Bordelon: Talking about Nintendo. I just want to go through this really quickly. We haven't touched on this company in a while. Just a quick update here, 2021 was a good year for Nintendo fans. We got a new Switch, the Switch OLED. I don't know if any of you guys picked one of those up or not, but many people did. It was the best-selling console in the U.S. for 2021, outselling the Xbox, and the PS5, and the new Xbox.

Part of that is availability. You can actually buy a Switch. You can find one fairly easily. You cannot so easily find a new PlayStation or a new Xbox. That's part of what's feeding into this, I think. But it's also a cheaper price point. It's more portable. It's just a more casual device.

Microsoft (MSFT 1.97%) and Sony (SONY 0.95%) I think get all the attention because they're the high-end stuff there, the exciting console with the latest technology, but the Switch is super popular. It was a must-have device in the pandemic. I don't know if you guys tried to get one in 2020. It was very difficult to do. People were scalping these things on eBay (EBAY -0.96%) for double or triple the price at some point.

Availability is much easier now so that's not an issue. But the market doesn't seem to like the stock, down about 20 percent in the past year. That's weird to me given the popularity of the Switch. The more it sells, the bigger the audience is for them to produce games. They produce their own games. This is an internal network effect if you will.

The company is, I think, well-positioned to take advantage of some aspects of the metaverse with that built-in audience, very popular casual games, well-known IP, doing well licensing their stuff out. They could do well here. They could do well in the metaverse as this continues to evolve.

You talked about some of that licensing that's out there now. Nintendo World opened I believe late last year in Japan at Universal Studios. They're opening up areas in Universal Studio Parks in Florida, California, and Singapore soon. That's happening. They've got LEGO and Nintendo sets now. They're taking their IP, they're expanding off this popular IP. There's some nostalgia effect I think for people of our generation going on there.

But this is a company that is a little bit different from others. They control both the games, they make their games, their own IP, and the hardware. That makes it different than something like Sony or Microsoft, which is more focused on the hardware, though they do make their own games as well, or someone like Activision (ATVI 1.32%) or Take-Two (TTWO 3.45%), which is solid on the game side.

I don't know that the market fully appreciates the flexibility and the uniqueness of this little business model and the differentiation in terms of the model there and the market position. It is a little bit different than what's out there.

There's not really a lot of major news here, but I just wanted to update people on this. I like this business. It has been more of the same in the last few quarters. I think honestly that's a good thing. Solid business, one you should take a look at.

Brian Feroldi: I had no idea that Nintendo Switch was doing that well. We're an Xbox family, so I didn't think it was going to be outselling Xbox. But do you think this is a stock that video game investors should put at the top of their list?

Bordelon: I think so. I think it's one you certainly should consider because they have both pieces here. They have the content and the hardware while being a pure-play video game company. Look at the other big hardware makers, Microsoft and Sonys, those are not pure plays.

I think if you're someone who says, "I want to start investing in the video game industry," this is a great place to get started. I don't think you stop here. It's certainly not the only company you want to have in your portfolio, but I think it's hard to think of a better company as a good starting point for investing in this space and learning more about it.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Brian Feroldi owns Activision Blizzard and Microsoft. Toby Bordelon owns Activision Blizzard, Microsoft, and eBay and has the following options: long January 2023 $45 calls on eBay, short January 2022 $60 calls on eBay, short January 2023 $45 puts on eBay, and short March 2022 $165 puts on Take-Two Interactive. The Motley Fool owns and recommends Activision Blizzard, Microsoft, and Take-Two Interactive. The Motley Fool recommends Nintendo and eBay and recommends the following options: long January 2023 $115 calls on Take-Two Interactive and short January 2022 $82.50 calls on eBay. The Motley Fool has a disclosure policy.

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