Excitement is building for The Super Mario Bros. Movie, but investors haven't been so enthused about Nintendo (NTDOY +1.32%) stock. Shares of the video game veteran are down over 40% from its all-time highs, squashed along with many other video game stocks during the bear market of the last year.
There are current issues Nintendo is working through right now, but this top digital-entertainment company looks like a fantastic long-term value right now. Here's why I recently started buying.
OTC: NTDOY
Key Data Points
More than just an "old console" problem?
The Switch video game console has been another hit, adding to Nintendo's long string of electronic hardware successes, spanning some 40 years. Nintendo has sold nearly 123 million units of the Switch since it made its debut in 2016, making it one of the most successful video game consoles ever.
Nevertheless, gaming enthusiasts and investors alike are quick to note that the Switch's age is starting to show. Microsoft's Xbox Series X and Sony's Playstation 5 are far newer and more advanced, and selling like hotcakes. Switch sales have been sliding as of late. Nintendo said hardware units sold fell over 21% year over year to 14.9 million through the nine-month period that ended in December 2022.
But Nintendo isn't ready to throw in the towel on the Switch just yet. Management is still saying declines are largely related to semiconductor shortages.
With key chip-design companies like Nvidia (which supplies the graphics chips for the Switch) indicating that the chip shortage is largely over in recent quarters, I'm not so sure Nintendo can entirely blame the semiconductor industry for recent Switch declines. At any rate, supply chains are still trippier than a Mario adventure right now, so perhaps certain components are limiting what Nintendo can ultimately supply to its retail partners.
The good news, though, is that despite hardware issues, Nintendo has had a lot of success in using cloud computing to pivot to a software-driven business. Software sales (i.e., video games, including those purchased and downloaded over the internet) only fell 4% year over year during the last reported nine-month period -- but still weighed in at a whopping 172 million games sold.
In total, revenue fell just 2% year over year to 1.295 trillion Japanese yen ($9.5 billion, using exchange rates on Feb. 7, 2023, on Nintendo's last earnings update) during the nine months ended December 2022. A strong U.S. dollar in the last year has lowered the effective value of that revenue for shareholders in the U.S., but Nintendo is nonetheless more than holding its own as the next-gen gaming console upgrade cycle has heated up.
A profit power-up ready to yield some serious coin
As Nintendo's revenue has fallen, profitability has taken a bit of a hit, as well. Net profit fell nearly 6% to 346 billion yen ($2.5 billion) over the last reported nine months.
Again, though, the merits of Nintendo's emphasis on efficient video game sales, rather than sole reliance on hardware sales, is paying off. Operating margins have remained near multiyear highs, in keeping with other top software-based business models.
Data by YCharts.
This has allowed Nintendo to continue investing in research and development plus experiment with some other revenue generators, like the aforementioned Mario movie and Super Nintendo World theme-park attractions at Comcast's Universal Studios. In the meantime, Nintendo has plenty of cash to reward shareholders with a dividend and share repurchases. A balance sheet with $2.71 billion worth of cash and short-term investments (and minimal debt) at the end of 2022 certainly doesn't hurt.
But why buy now? While we await a new console from Nintendo (perhaps a refreshed Switch in 2024?), the company continues to chug along. Shares trade for less than 13 times trailing-12-month earnings per share, about the "cheapest" it's ever been.
Of course, this valuation could get worse before it gets better if sales of the Switch continue to deteriorate. I've started with a small position, considering this likely outcome. But I plan on adding to my collection throughout 2023 as Nintendo continues to leverage its top digital-entertainment content in new ways.
