Nintendo's (NTDOY +4.20%) stock price is down roughly 15% over the past 12 months as investors fret over its decelerating growth in a post-lockdown market. The chip shortage exacerbated that pain by throttling its shipments of new Switches.
Nintendo's upgraded Switch OLED, which arrived last October, also disappointed some gamers and investors who were expecting a brand new console to succeed the now five-and-a-half-year-old Switch. Delays for its new games and the upcoming Super Mario movie raised even more red flags.
Image source: Nintendo.
But on Sept. 13, Nintendo's stock popped on two positive developments. First, its sales of Splatoon 3 topped 3.45 million units within its first three days in Japan, a new domestic record for a Switch game. Second, the company held its latest Nintendo Direct presentation online.
During that livestream, Nintendo revealed the eagerly anticipated sequel to its 2017 hit The Legend of Zelda: Breath of the Wild. That new game, The Legend of Zelda: Tears of the Kingdom, will be released next May. It also highlighted new entries in hit franchises, like Bayonetta 3, Octopath Traveler 2, and Pikmin 4, along with remastered versions of older games like Kirby's Return to Dream Land Deluxe and Crisis Core Final Fantasy VII: Reunion.
Many of those games won't arrive until next year, but that clearer roadmap generated some much-needed buzz for Nintendo's sluggish stock. Should investors buy some shares of the Japanese gaming giant before those games arrive?
OTC: NTDOY
Key Data Points
How bad was Nintendo's post-pandemic slowdown?
Nintendo launched the original Switch in early 2017, more than three years after Sony (SONY +0.35%) and Microsoft (MSFT 0.95%) launched the PS4 and Xbox One, respectively. The Switch wasn't as powerful as either console, but it carved out a niche with a hybrid form factor that blurred the lines between a handheld and a home console. Nintendo's first-party franchises -- including Mario, Zelda, Animal Crossing, and Metroid -- also kept gamers tethered to its consoles.
In fiscal 2020 (which ended in March of that year), Nintendo's revenue and net profit rose 9% and 33%, respectively. But in fiscal 2021, its revenue and net profit soared 34% and 86%, respectively, as stay-at-home trends throughout the pandemic lifted its hardware and software sales. One major catalyst was Animal Crossing: New Horizons, a casual multiplayer game that evolved into a major social platform during the pandemic. Nintendo has shipped 39.4 million units of New Horizons since its launch in March 2020, which makes it the Switch's best-selling game so far.
Nintendo's growth decelerated along with the broader gaming market as the lockdowns ended. In fiscal 2022, its revenue and net profit fell 4% and 1%, respectively. Its Switch shipments tumbled 20%, even after it rolled out the new OLED model, while its software shipments rose only 2%. For fiscal 2023, Nintendo expects its revenue and net profit to decline 6% and 29%, respectively, as that slowdown continues.
Will Nintendo start to grow again in fiscal 2024?
Nintendo's upcoming software slate looks promising, but it still faces some major challenges. First, its hardware shipments could remain soft as gamers shun the pricier OLED model -- which failed to stir up the same interest as the cheaper Lite model in late 2019. Even if that demand stabilizes, the chip shortages and supply chain disruptions could prevent it from maintaining stable shipments of new Switch consoles. Its overseas production costs could also increase significantly if the yen continues to wither against other currencies.
Second, Nintendo still faces a lot of stiff competition from newer consoles like the PS5, the Xbox Series S and X, and Valve's Steam Deck. Nintendo's evergreen first-party franchises should insulate it from that competition, but those newer consoles could still lure away some gamers who aren't die-hard fans of its exclusive games. Nintendo also doesn't plan to launch a "Switch 2" in fiscal 2023, but its new console might finally arrive in fiscal 2024.
Lastly, the gaming market remains heavily exposed to inflation and other macroeconomic headwinds. If consumers have less money to spend on discretionary purchases, Nintendo will inevitably sell fewer consoles and games.
Nintendo will likely face unpredictable headwinds throughout the rest of fiscal 2023 and fiscal 2024, but it should also benefit from easier year-over-year comparisons. Therefore, Nintendo's business should gradually stabilize -- but it won't experience another major growth spurt until it formally launches a brand new console.
Is Nintendo's stock worth buying?
Nintendo's stock trades at just 15 times forward earnings and pays a forward dividend yield of 3.3%. That low valuation and high yield should limit its downside potential, but there also aren't any near-term catalysts for its business. Nintendo stock might be worth nibbling on right now -- especially if it regains its mojo with big new games like Tears of the Kingdom -- but it still doesn't stand out against other blue chip tech stocks that also provide value, safety, and income in this challenging market.
