Is Nintendo Stock A Good Buy In 2021

Feb. 18, 2021 3:25 PM ETNintendo Co., Ltd. (NTDOY)9 Comments3 Likes

Summary

  • Investors can invest in Nintendo shares traded on either the OTC market as ADRs with the NTDOY and NTDOF tickers, or the Tokyo Stock Exchange with the 7974:JP ticker.
  • Nintendo's share price declined by -10% from its peak to reach a one-month low of JPY60,850 on January 29, 2021, before recovering to close at JPY66,600 as of February 15, 2021.
  • Market consensus sees Nintendo's earnings surging by +63% YoY in FY 2021 prior to declining by -6% YoY in FY 2022, implying that FY 2021 could have been the peak.
  • Nintendo trades at consensus forward FY 2022 and FY 2023 P/E multiples of 20.4 times and 20.7 times, respectively.
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Elevator Pitch

I have a Neutral rating for Nintendo Co., Ltd. (OTCPK:NTDOY) (OTCPK:NTDOF) [7974:JP].

Investors can invest in Nintendo shares traded on either the OTC market as ADRs with the NTDOY and NTDOF tickers, or the Tokyo Stock Exchange with the 7974:JP ticker.

Nintendo's share price declined by -10% from its 10-year peak (JPY67,600 as of December 17, 2020) to reach a new one-month low of JPY60,850 on January 29, 2021, before recovering by +9% to close at JPY66,600 as of February 15, 2021. The initial sell-down in Nintendo's share price was likely due to concerns about the normalization of gaming demand and weaker-than-expected sales of the Nintendo Switch, but the company's better-than-expected 3Q FY 2021 (YE March) Nintendo Switch sales and FY 2021 full-year guidance boosted the company's share price subsequently.

Market consensus sees Nintendo's earnings surging by +63% YoY in FY 2021 prior to declining by -6% YoY in FY 2022, implying that FY 2021 could have been the peak for the company's Nintendo Switch sales. Nintendo has already sold close to 80 million units of the Nintendo Switch console on a cumulative basis, and this is comparable to the Wii's cumulative sales of slightly more 100 million units.

Nintendo trades at consensus forward FY 2022 and FY 2023 P/E multiples of 20.4 times and 20.7 times, respectively, and this is roughly on par with its closest peer, Sony Corporation (SNE) [6758:JP]. I see the stock's valuations as fair, which is deserving of a Neutral rating.

On one hand, Nintendo's forward P/E valuations are in line with most of its Japan gaming peers, which appears to be undemanding. On the other hand, it remains to be seen if Nintendo can extend the lifecycle of the Nintendo Switch console with new hardware and software product launches.

Can You Invest In Nintendo?

Nintendo Co., Ltd. refers to itself as a company involved in "the development, manufacture and sale of entertainment products", mainly "computer-enhanced 'dedicated video game platforms'" or "hardware and software for the handheld systems and home consoles" such as the Nintendo Switch, in its 2020 annual report.

Nintendo's shares are publicly traded in the US as ADRs on the OTC market with the tickers NTDOY & NTDOF, and also in Japan on the Tokyo Stock Exchange with the ticker 7974:JP. The company's Japan-listed shares with the 7974:JP tickers have very good liquidity boasting a three-month average daily trading value of approximately $800 million. In contrast, the three-month average daily trading values for Nintendo's NTDOY and NTDOF ADRs were relatively lower at $40 million and $0.3 million, respectively.

For investors keen on dealing in Nintendo's more liquid Japan-listed shares, they can use Interactive Brokers, Fidelity or any other US stockbroker which offers access to the Japanese stock market.

Why is Nintendo Stock Dropping

Nintendo's share price reached its 10-year peak of JPY67,600 on December 17, 2020, and the company's share price subsequently declined by -10% to close at JPY60,850 on January 29, 2021 which represented a new one-month low.

I believe that the recent drop in Nintendo's share price was attributable to two key factors.

Firstly, there are fears that gaming demand, which surged during the pandemic, will normalize in time to come when COVID-19 is eventually brought under control. As of February 16, 2021, "more than 176 million doses have been administered across 78 countries", based on Bloomberg's Global Vaccine Tracker.

Secondly, it is uncertain if Nintendo's key product, Nintendo Switch, will continue to deliver strong sales for the company in the future, since it is already a "mature product" now. Nintendo noted at the company's 3Q FY 2021 (YE March) earnings call that the Nintendo Switch's "sales have greatly increased in the fourth year after the 2017 launch", but acknowledged that the "Nintendo Switch has entered the middle of its lifecycle." This implies that the sales for the Nintendo Switch could have already peaked, and future sales could potentially fall below market expectations.

However, Nintendo's share price has staged a strong recovery in the past two weeks, increasing by +9% from JPY60,850 as of January 29, 2021 to JPY66,600 as of February 15, 2021. Nintendo Co., Ltd. released the company's 3Q FY 2021 financial results on February 1, 2021, and its Nintendo Switch hardware sales were above expectations which drove the company's share price recovery.

The company's Nintendo Switch unit sales (including Nintendo Switch Lite) were 11.56 million in 3Q FY 2021, which was equivalent to growth rates of +69% QoQ and +7% YoY. Nintendo's top line and bottom line expanded by +10% and +22% YoY to JPY635 billion and JPY164 billion, respectively in the most recent quarter.

More importantly, Nintendo revised its guidance for full-year FY 2021 Nintendo Switch unit sales from 24.0 million previously to 26.5 million. If the company achieves this guidance, Nintendo Switch hardware sales would have grown by +26% YoY in FY 2021 as compared to FY 2020's hardware unit sales of 21.03 million.

Nintendo Stock Forecast

Sell-side analysts see Nintendo's revenue and net profit increasing by +27% and +63% YoY, to JPY1,665 billion and JPY423 billion, respectively in FY 2021 (April 1, 2020 to March 31, 2021). This is slightly higher than management guidance of JPY1,600 billion in sales and JPY400 billion in net income for the company in the current fiscal year.

However, market consensus expects Nintendo's top line and bottom line to decrease by -8% and -6% YoY, to JPY1,538 billion and JPY399 billion respectively in FY 2022. In other words, FY 2021 is expected to be the year of peak revenue and earnings for Nintendo Co., Ltd.

The sales performance of Nintendo Switch hardware is the key factor influencing the company's future revenue and earnings. As highlighted earlier, Nintendo Switch is already a four-year old game console, and its unit sales are likely to peak in FY 2021. As a comparison, Nintendo's cumulative sales for the Nintendo Switch were 79.87 million units as of December 31, 2020, while the company's prior big hit, the Wii has sold about 101.63 million units since its launch.

The outlook for Nintendo Switch hardware sales is mixed, but the pace of sales growth is likely to be much slower going forward.

On the negative side of things, the initial success of the Nintendo Switch was driven by a very popular game, and there is no guarantee that there will be such a major hit again. At its 3Q FY 2021 results briefing on February 1, 2021, Nintendo highlighted that "because Animal Crossing: New Horizons was a hit, many consumers became interested in Nintendo Switch, and that was one of the major reasons for the sales increase of the systems."

Nintendo also acknowledged at the recent earnings call that one-off factors like the coronavirus pandemic and promotions relating to the Super Mario Bros 35th Anniversary campaign helped Nintendo Switch's sales as well.

On the positive side of things, Nintendo will try to expand the sales of its Nintendo Switch console in the coming months by introducing new hardware and software products. Apart from new games as highlighted in the infographic below, the company will also be launching special editions of the Nintendo Switch console such as Mario Red & Blue Edition and the Monster Hunt Rise Edition.

Nintendo Switch's New Hardware And Software Product Launches For The First Quarter Of 2021

Source: Nintendo's 3Q FY 2021 Results Presentation Slides

Is Nintendo A Buy Or Sell

The market values Nintendo at 20.4 times consensus forward FY 2022 P/E and 20.7 times consensus forward FY 2023 P/E.

Nintendo stock also boasts consensus forward FY 2022 and FY 2023 dividend yields of 2.42% and 2.38%, respectively.

Market consensus expects Nintendo to achieve consensus forward FY 2022 and FY 2023 ROEs of 22.0% and 19.2%, respectively.

Nintendo's forward P/E valuations are on par with that of Sony Corporation. But Sony Corporation has just started a new product cycle in late-2020 with the launch of the company's new PlayStation 5 console, while sales for the Nintendo Switch console are likely to have peaked already.

Peer Valuation Comparison For Nintendo

Stock Consensus Forward One-Year P/E Multiple Consensus Forward Two-Year P/E Multiple Consensus Forward One-Year Dividend Yield Consensus Forward Two-Year Dividend Yield Consensus Forward One-Year ROE Consensus Forward Two-Year ROE
Bandai Namco Holdings Inc. [7832:JP] 25.0 22.6 2.0% 2.2% 15.3% 15.3%
Capcom Co., Ltd. (OTCPK:CCOEY) (OTCPK:CCOEF) [9697:JP] 27.4 24.9 1.0% 1.1% 22.0% 21.1%
Konami Holdings Corporation (OTCPK:KNMCY) (OTCPK:KNAMF) (OTCPK:KONMY) [9766:JP] 25.1 23.3 1.2% 1.3% 12.8% 12.6%
Sony Corporation (SNE) [6758:JP] 21.9 19.2 0.5% 0.6% 12.6% 12.9%

Source: Author

Risk Factors

NTDOY's key risk factors are future Nintendo Switch hardware sales falling short of market expectations, and new game launches not being well-received by consumers.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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