Nintendo's (NTDOY 3.61%) stock price dipped 3% on Feb. 8 after the Japanese gaming giant posted its latest earnings report. In the first nine months of fiscal 2023 (which ended on Dec. 31), its net sales declined 2% year over year, its operating profit fell 13%, and its net profit dropped 6%.
For the full year, Nintendo expects its net sales to decline 6%, its operating profit to drop 19%, and for its net profit to slide nearly 23%. All three estimates were slightly reduced from its previous forecast last November.
That guidance cut, which it blamed on softer Switch sales and currency headwinds, was disappointing because many investors had expected Nintendo to raise its guidance after Pokémon Scarlet and Pokémon Violet made history as its two fastest-selling games ever last November. So is it time to give up on Nintendo, or will its prospects brighten by the end of 2023?
Image source: Nintendo.
The one question Nintendo needs to answer
Nintendo, like many other gaming companies, experienced accelerating growth during the pandemic as people stayed at home and played more video games. Animal Crossing: New Horizons, which was launched in March 2020, also became a hit game throughout the crisis and amplified its growth.
Unfortunately, that growth spurt set it up for tough year-over-year comparisons in a post-pandemic world. Its shipments of the Switch, which launched back in March 2017, were also cooling off. Nintendo tried to attract new players with the cheaper Switch Lite in 2019 and the pricier Switch OLED in 2021, but neither device represented a full upgrade for the aging Switch.
Nintendo has shipped 122.6 million Switch consoles from its launch through the end of 2022. That's significantly more than the 30.5 million PS5s and 20.4 million Xbox Series S and X consoles Sony (SONY 2.82%) and Microsoft (MSFT +1.40%) have shipped since their launches in November 2020, but the Switch has clearly lost its momentum over the past five years:
|
Metric |
FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
Q1-Q3 of FY 2023 |
|---|---|---|---|---|---|
|
Switch consoles* shipped since launch |
34.74 million |
55.77 million |
84.59 million |
107.65 million |
122.55 million |
|
Growth (YOY) |
95% |
61% |
52% |
27% |
18% |
Data source: Nintendo. YOY = Year over year. *All models.
That slowdown indicates that Nintendo needs to answer one burning question: When will it finally launch a proper successor for the aging Switch? But Nintendo remains mum on the subject, and the latest industry rumors peg a potential release date in late 2023 or 2024.
OTC: NTDOY
Key Data Points
What will Nintendo do until it launches a new console?
For now, Nintendo will need to focus on selling more games to its existing Switch owners. With the exception of Pokémon Scarlet, Pokémon Violet, and Splatoon 3, it was a relatively sluggish year for Switch games.
The five best-selling Switch games in the world at the end of 2022 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). The lack of newer games in those top rankings suggests that Nintendo will need to launch some big blockbuster games to get gamers excited about the Switch again.
That game might just be The Legend of Zelda: Tears of the Kingdom, which will finally arrive on May 12 after being delayed last year. The eagerly anticipated sequel to Breath of the Wild (which has sold more than 29 million copies thus far) could potentially boost Nintendo's software revenue in fiscal 2024 even as its hardware business stalls out.
Nintendo should also continue to expand its oft-overlooked "mobile, IP-related income, and others" segment, which licenses its properties to other companies for movies (like the upcoming Super Mario Bros. movie), theme parks (including Super Nintendo World at Universal Studios), toys, clothes, and other products. That segment only accounted for 3% of its sales in the first nine months of fiscal 2023, but it could grow much larger as Nintendo monetizes more of its evergreen franchises.
So where will Nintendo's stock be in a year?
For now, analysts expect Nintendo's sales and net profit to rise 5% and 14%, respectively, in fiscal 2024, as its stronger software sales offset its slower hardware sales. Based on those estimates, Nintendo trades at just 14 times forward earnings.
Nintendo's low valuation and high forward dividend yield of 3.6% should limit its downside potential, but the lack of news about a new gaming console could also cap its near-term gains. So unless Nintendo pulls a rabbit out of the hat later this year, I'd expect its stock to trade sideways and remain a safe haven for value-oriented investors instead of growth-oriented ones.
