If you're going to invest for the long term, your time horizon for any stock purchase should be no less than five years. Day-to-day or even month-to-month stock price fluctuations should not be your concern. Instead, you should focus on whether the stock you are researching has a durable competitive advantage, a long runway to grow, and trades at a reasonable price.
Nintendo (NTDOY 0.59%) is one of the largest gaming companies in the world, and I think it fits all three of these criteria. Here's what the business could look like five years from now, in 2027.
1. A successful -- or not -- next-generation gaming device
The key to Nintendo's success in video games has been its combination of unique hardware devices and fantastic, in-house games from franchises like Mario, Zelda, and Animal Crossing. Its most recent hardware device, launched in 2017, is the Nintendo Switch. The Switch is a hybrid mobile/console system and has essentially been the leader in unit sales since its release.
According to Nintendo's Investor Relations page, the company has sold around 108 million Switch units around the world. This huge installed base leads to tons of software/game sales, which drives the majority of Nintendo's profit. For example, Nintendo did 235 million in software unit sales last fiscal year, translating to $4.67 billion in operating profit.
But the big question is when Nintendo will release its next-generation device. The Switch is almost six years old now and needs a true upgrade with better graphics and processing power. Investors should look for this new device to be announced in the next year or two, given Nintendo's historical device upgrade cycle.
A successful, new hardware device is imperative for Nintendo's business because it is the engine that keeps people buying games. If Nintendo can build on the original Switch's success and continue selling hundreds of millions of games a year, its business will likely be in great shape in 2027. If not, we could be headed for some dark days, like those experienced with the disappointing Wii U console, which tanked Nintendo's stock price in the 2012-to-2014 period.
2. More robust subscription services
To get more consistent earnings, Nintendo has recently built an online subscription service similar to Xbox and Playstation. Subscribers to Nintendo Switch Online (NSO) can play games like Mario Kart with their friends or other people online while also getting access to some legacy games from old Nintendo devices. The standard service costs $20 a year for individuals and $35 a year for families, so it is very accessible for gamers to buy.
On top of the flagship service, Nintendo released the NSO + Expansion Pack last fall, which costs $50 a year for individuals and $80 a year for families. With the upgraded service, players get access to Nintendo 64 games, downloadable packs for popular franchises, and access to SEGA Genesis games. It is too early to tell, but hopefully, this service can drive more revenue from subscription services with higher price points.
As of its latest update back in September, Nintendo had 32 million subscribers across its various NSO tiers. Since then, management hasn't given out a specific number but said NSO subscribers continue to grow, especially by attaching downloadable packs for popular franchises like Mario Kart and Animal Crossing. By 2027, investors should expect Nintendo to have built out more robust subscription services. This means more legacy games, better connectivity for online play, and more downloadable packs within the Expansion Pack.
If Nintendo can get to 50 million global NSO subscribers who pay, on average, $30 a year (which seems very conservative, given how many subscribers it already has), that will equate to $1.5 billion in annual subscription revenue. Likely with high-profit margins, NSO can be very lucrative for Nintendo if it continues to grow over the next five years.
3. Expansion into non-gaming entertainment
The biggest change-up with Nintendo from now until 2027 will be moving outside of just being a gaming company. With its hugely successful franchises, the company has decided to become more Disney-like, expanding into theme parks and video entertainment.
Four Super Nintendo Worlds are set to open around the world within the next five years, built by Universal Studios in a licensing agreement with Nintendo. One is already open in Japan and has gotten rave reviews, highlighting how much families and kids love Nintendo characters. These parks will not only generate licensing revenue for Nintendo but also help strengthen the relationship it has with its fanbases.
Nintendo has also partnered with Illumination Studios to make an animated Super Mario movie, coming in the spring of 2023. We don't know what other content is planned for the future (Nintendo is very secretive), but if this movie is successful, you can bet more will be released over the next five years.
By 2027, Nintendo should have multiple theme parks open around the world, along with a growing library of movies. Combined with its subscription services and the eventual new hardware device, the company could double its annual operating profit to $9 billion by 2027. At a current enterprise value of only $36.8 billion, the stock looks rather cheap for anyone focused on the long term.