With the broad market sell-off to start 2022, it's tough to find stocks that are not down so far this year. This is especially true for high-growth technology stocks, with many of their share prices down 30% in less than two months.
By posting great earnings and coming out with a hit new game, entertainment giant Nintendo (NTDOY -1.62%) has avoided any major sell-off so far in 2022. In fact, as of this writing, the stock is up 8.4% year to date.
However, don't think you've missed the boat when it comes to owning shares of the Japanese video game company. Here's why Nintendo is still a screaming buy right now.
Nintendo posted solid Q3 earnings
On Feb. 3, Nintendo reported its earnings results for the three and nine months ending in December 2021. Revenue was down 6% year over year to $11.4 billion, and operating profit was down 9% to $4.08 billion through the first nine months of Nintendo's fiscal year.
This might seem worrying for investors to see Nintendo's financials moving in the wrong direction, but these year-over-year comparisons are going against the first nine months of the pandemic, when many people increased their video game consumption. It is also compared to when one of Nintendo's top hit games, Animal Crossing: New Horizons, came out. The game has sold 37 million copies since its release in 2020, making it the second most popular title ever on the Nintendo Switch. Over the last nine months, Nintendo has not had any big game releases, which is why revenue and profits are down slightly.
Still, Nintendo has been able to sell many units of its popular Nintendo Switch gaming hardware so far in fiscal year 2022. At the end of December, the company sold just shy of 19 million hardware units, bringing lifetime sales to over 100 million for the device since its launch in 2017.
Hardware sales are important because they lead to demand for Nintendo's biggest profit driver: software/game sales. Over the last nine months, Nintendo has sold 179 million software units, including full games, downloadable content, and its online subscription service. This number is actually up 1.8% year over year and likely a big reason why the stock is positive while the broad market has faltered.
Nintendo raised its full-year operating profit guidance (its fiscal year ends in March) to $4.84 billion and for software unit sales to be 220 million units. Its original software unit sales guidance was 200 million. Remember, software sales are the most important indicator for the health of Nintendo's business. With Pokémon Legends: Arceus selling 6.5 million copies in its first week after launch in late January and big games like Breath of the Wild 2, Switch Sports, and Splatoon 3 coming out over the next year or two, investors should be confident that software sales will stay strong.
Expansion into movies and theme parks
Nintendo is known for almost exclusively sticking to its bread and butter of making gaming hardware and software. However, over the last few years, the company has forged many partnerships to bring its popular franchises like Mario, Zelda, and Animal Crossing to other entertainment mediums.
In a partnership with Comcast's Universal Studios, Nintendo opened up Super Nintendo World in Japan in 2021. The park is small right now, with a focus mainly on Mario characters, but there are plans to expand the theme park over the next decade. For example, in 2024 Nintendo is planning to open a Donkey Kong-themed section.
Outside of Japan, Nintendo and Universal are opening up Super Nintendo Worlds in Singapore, California, and Florida, hopefully by 2025. Theme parks take a long time to develop, but with Nintendo's treasure trove of IP and characters, these parks can be a great way for fans to interact with characters in a real-life setting.
Nintendo also has a Super Mario animated movie coming out this year, produced by Illumination Studios, which has produced many animated hits, including Despicable Me. Given the popularity of the Mario franchise, I wouldn't be surprised if the movie can be as big as a Disney blockbuster from Marvel, Star Wars, or Pixar, especially since it is being released during the holiday season.
One of the perks of a Nintendo investment is its dirt-cheap valuation. If we exclude the company's huge cash pile of $13 billion, Nintendo's enterprise value is approximately $46 billion as of this writing. With $4.84 billion in operating profit this year, the stock trades at a forward price-to-operating profit (P/OP) of 9.5. In this market environment, it's rare to find a company of Nintendo's quality at an earnings multiple below 10. And this is before Nintendo has fully embraced its entertainment expansion strategy.
If you are confident Nintendo's games and hardware devices will stay relevant over the coming decade-plus, now could be a fantastic time to take a position in this durable entertainment giant.