Nintendo (NTDOY 2.84%) stock has gone on quite a run in the last few months. Even with a recent drop in price due to tariff concerns, the stock is up 30% in the last six months in anticipation of the upcoming release of the Nintendo Switch 2. This hardware upgrade -- which has been in the works for years now -- should lead to massive earnings growth for the video game giant over the next few years.
I still believe the market is underrating the potential earnings bump from the Switch 2. Here's why investors should consider adding Nintendo stock to their portfolios before April 2, when the Switch 2 is slated to be officially unveiled.
Upcoming Switch 2 release
Released in 2017, the original Nintendo Switch is the second-most-popular gaming console by unit sales ever, and the most popular sold by Nintendo. As of the latest update, the company has sold close to 151 million Nintendo Switch units and over 1 billion software sales units, which includes game sales and add-on packages.
At its peak during the COVID-19 pandemic, these record unit sales led to record earnings for the company. In U.S. dollar terms, Nintendo's operating income peaked at $6 billion. It has since fallen to $3 billion, but that is because the company is winding down sales for the the first Switch and hasn't released any flagship games in a few quarters. It is also hurting from the depreciation of the yen vs. the U.S. dollar, which fortunately has halted and reversed course in recent months.
Once the Switch 2 is released, Nintendo's operating income should inflect higher again. It should start to grow its hardware unit sales, but more importantly it will see an increase in sales with games and add-on software, which is where the company earns its profit. Over the next few years, it is likely that Nintendo will surpass its previous record of $6 billion in operating income because of the existing 100 million-plus Nintendo Switch players, its online subscription service, and the fact it is already generating $3 billion a year in earnings right before the Switch 2 is set to release. Before the first Switch was released, Nintendo's operating profit was well below $1 billion.
OTC: NTDOY
Key Data Points
Franchise diversification and higher peak earnings
Nintendo's gaming business is now in a great spot. It went from a highly defensive position 10 years ago to being able to play offense and suck the oxygen away from the competition. In the next few years, the company wants to further its ambitions and expand beyond just video games with theme parks, movies, and mobile games.
This has been expressed through direct investments like the Super Mario movie franchise and indirect investments such as its investment into mobile games developer Niantic. Niantic's gaming division was recently sold for $3.5 billion, of which a good portion should get returned to Nintendo (although we don't have the exact details yet).
The theme parks business has a lot of room to grow as well. There are four Nintendo theme parks being built at Universal Resorts around the world, with some already in operation. Nintendo has a ton of intellectual property (IP) to play with in these parks, which should give them a long runway to expand. It recently announced a new Donkey Kong roller coaster at its Japan location, for example.
I expect the theme parks to generate some direct revenue for Nintendo, but perhaps more important will be the brand building with younger customers who will eventually buy products from the video game division. Tens of millions of people visit Universal theme parks ever year, providing a fantastic opportunity for Nintendo to attract more fans to its franchises.
NTDOY Operating Income (TTM) data by YCharts
Nintendo stock is cheap if you take a forward look
As of this writing, Nintendo stock has a market capitalization of $80 billion. With about $18 billion in net cash on the balance sheet, its enterprise value comes down to $62 billion. Compared to its trailing earnings of $3 billion, this $62 billion valuation doesn't look too cheap.
However, smart investors know that a stock is worth what it will earn in the future, not in the past. If Nintendo can hit or surpass its previous peak of $6 billion in operating income, the stock will reach an earnings multiple of around 10 or below. At the same time, Nintendo will begin to gush cash flow that it can start returning to shareholders through share repurchases and dividends.
Don't think you missed the boat on Nintendo stock. Buy this stock before the April 2 Switch 2 announcement and hold on for the long term.
