Nintendo's (NTDOY 2.93%) stock price declined 28% in 2021 as investors fretted over the Japanese gaming giant's decelerating growth in a post-lockdown world. But this year, Nintendo's shares have quietly risen 15% and outperformed many other video game stocks as its upcoming games, the strength of its brand, and its low valuation impressed investors again.
So should investors buy Nintendo as a safe-haven play in this stormy market? Let's review the bear and bull cases to decide.
What the bears will tell you about Nintendo
Nintendo expects its revenue for fiscal 2022, which ends on March 31, to decline 6% as it sells fewer Switch consoles and games. It expects its net profit to drop 17%. The bears expect that slowdown to continue until it releases a brand-new console.
Image source: Nintendo.
Nintendo launched the Switch five years ago. It launched the cheaper Switch Lite in 2019 and the pricier Switch OLED model last year, but it hasn't provided any plans for a true next-generation console.
During an investor presentation earlier this year, Nintendo President Shuntaro Furukawa said the Switch was still at the "midpoint of its lifecycle" -- which suggests it could still be about five more years before a new console arrives. That's a confident statement, but Nintendo could also face a lot more competition in the near future. Microsoft and Sony both launched new consoles in late 2020, and new handheld challengers like Valve's Steam Deck could disrupt the market.
New cloud gaming platforms like Microsoft's Xbox Cloud Gaming could also blur the lines between console, PC, and mobile gaming. If cloud gaming takes off, the market for dedicated gaming consoles could gradually disappear.
Lastly, the chip shortage and supply chain challenges -- which have been throttling shipments of Microsoft's Xbox Series consoles and Sony's PS5 -- could also curb Nintendo's near-term shipments of new Switch consoles.
OTC: NTDOY
Key Data Points
What the bulls will tell you about Nintendo
The bulls will point out that the Switch is doing just fine. Nintendo has shipped 105.6 million Switch consoles so far, compared to Sony's 18.9 million PS5 shipments and Microsoft's 13.2 million Xbox Series S and X shipments.
Moreover, Nintendo's greatest strength is its stable of first-party franchises like Mario, Zelda, Metroid, and Animal Crossing. Unlike Microsoft and Sony, Nintendo doesn't need to buy more studios to gain more exclusive games.
The bulls will also argue that 2021 was a slow year for Nintendo for two simple and transitory reasons: It faced tough year-over-year comparisons to the pandemic, which prompted more people to stay home and play video games, and it didn't release any big blockbuster games.
At the end of 2021, the five best-selling Switch games to date were still Mario Kart 8 Deluxe (2017), Animal Crossing: New Horizons (2020), Super Smash Bros. Ultimate (2018), The Legend of Zelda: Breath of the Wild (2017), and Pokémon Sword and Shield (2019) -- in that order.
Therefore, the bulls expect Nintendo's sales growth to accelerate again as it launches new hit games. That could happen this year as Nintendo releases eagerly anticipated games like Pokémon Legends: Arceus, Kirby and the Forgotten Land, Mario + Rabbids Sparks of Hope, Splatoon 3, Sonic Frontiers, Bayonetta 3, Metroid Prime 4, and the new Legend of Zelda.
That all-star lineup could enable Nintendo to offset its slower sales of lower-margin hardware with stronger sales of higher-margin software. It could also reduce its exposure to the supply chain headwinds in the hardware market.
To increase the stickiness of its software ecosystem, Nintendo has been expanding its subscription-based Switch Online service, which provides online multiplayer services, classic games, free access to DLCs, and other perks. The platform already surpassed 32 million subscribers -- or about 30% of all Switch devices -- last September.
Analysts expect all those tailwinds to boost Nintendo's revenue and earnings by about 4% and 11%, respectively, in fiscal 2023. Based on those estimates, Nintendo's stock trades at just 18 times forward earnings and four times this year's sales -- so it should still be considered a value stock.
Which argument makes more sense?
I believe Nintendo remains one of the market's best gaming stocks because it tightly controls its brand and ecosystem; it doesn't directly compete against Microsoft, Sony, or PCs (since its form factor and first-party games target a different audience of gamers); and it's cheap relative to its long-term growth potential. Over the long term, the gradual expansion of its IP licensing business with toys, apparel, theme park attractions, and movies could lock in a new generation of gamers and make it an evergreen brand.
