Nintendo: Price Target Of $35

| About: Nintendo Co., (NTDOY)
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Summary

Nintendo's Switch is so successful that the console is in short supply.

Game releases will drive Switch sales and profits for Nintendo.

Price target of $35 using 5Y DCF Growth Exit model.

Nintendo (OTCPK:NTDOY) is picking up its pace of game announcements. On its Twitter page, the Nintendo of America posted many game releases set for summer. Not only are Nintendo Switch devices in short supply, but sales are already exceeding the most conservative estimates. These developments suggest that Nintendo shareholders should continue expending more upside for the stock.

Game Releases

Nintendo will release MarioKart 8 Deluxe in just two weeks. Fans of MarioKart already previewed its playability, on the Wii U.

Source: Nintendo's Twitter page

Investors will remember that the game failed to drive demand for the Wii U. Fortunately, the company is steadily releasing its best titles in the months ahead. On July 21, Switch owners may buy Splatoon 2. The summer, Nintendo will make NM (Namco Museum) available at its eShop. The pack has 10 games, which includes Pac-Man, Splatterhouse, and Galaga.

The Switch's unique form factor and its convenience as a console or on-the-go device are driving sales. To Nintendo's surprise, the supply of the Switch is limited due to strong demand. The company already sold more than 500,000 Switch consoles in Japan and over 2 million units globally. Sales are outpacing the initial launch figures for Sony's (NYSE:SNE) PS4. Nintendo's stock is up around 12 percent this year but on par with Sony's performance on the stock market:

NTDOY Chart

NTDOY data by YCharts

Still, Nintendo is outperforming other mobile game developers, such as Zynga (NASDAQ:ZNGA) and Glu Mobile (NASDAQ:GLUU). NTDOY Chart

NTDOY data by YCharts

Though I am bearish on the prospect of profit growth in the mobile space, the market is betting that both Zynga and Glu Mobile will report better results. Glu Mobile, which reports in May, launched MLB Tap Sports Baseball 2017. By featuring MVP star Kris Bryant, it hopes to attract sports fans, grow its daily active users, and grow in-app sales.

When Zynga reports first quarter results on May 4 after the market closes, management may give some details on the success of its Zynga Poker launch on Snapchat (NYSE:SNAP). Zynga will need to show that its investment in Dawn of Titans is paying off. The multi-player game has been available on the market since last year in November. That followed a 20-month soft launch. While the move allowed for Zynga to improve game performance and fix glitches, it delayed game monetization.

Nintendo's foray into mobile games should still bring in some revenue. Pokémon Go celebrated Easter by adding an Easter-theme to the game. Downloads of Super Mario Run are thought to be at the 100 million level. After 40 million people downloaded the game on iOS, uptake of the game jumped after it was released on the Android platform.

Valuation

Source: finbox.io

Investors should expect revenue growth picking up in future quarters. The 5Y DCF Growth Exit model may give the best estimate of the company's fair value. Assume the following revenue growth rates for the next five years:

Input Projections

Fiscal Years Ending

16-Mar

17-Mar

18-Mar

19-Mar

20-Mar

21-Mar

Revenue

4,187

3,950

4,937

6,369

8,089

8,898

% Growth

-16.30%

-5.70%

25.00%

29.00%

27.00%

10.00%

By applying a discount rate of between 8.5 percent and 9.5 percent, Nintendo's stock is worth around $35 a share:

Low

Mid

High

Selected Discount Rate

9.5%

9.0%

8.5%

Implied Fair Value

$31.08

$35.23

$41.44

Takeaway

Investors may want to take advantage of the stock's recent dip below the $30 level. The combination of a successful Switch release and its exposure in the mobile game market makes Nintendo a compelling investing idea for this year.

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