Nintendo (NTDOY 2.48%) stock got a lift last week after reporting surprisingly strong results in its most recent quarter — sales up 8% year over year, and profits per share up 18%. Further helping matters, Nintendo predicted that its operating profits through the end of fiscal 2024 will rise twice that — 35%, to as much as 510 billion yen.
One week later, on Wednesday, Nintendo shares are on the rise yet again — up 2.4% through 12:12 p.m. ET. The reason this time isn’t earnings, though, but a potential solution to the one sour note Nintendo struck with investors last week.
The trouble with Nintendo Switch
Sales of Nintendo’s once-popular Switch video gaming console continued to slide in the most recent quarter, falling 8% year over year to 13.7 million units, The Fly reported at the time. That’s not surprising for a console in its seventh year of production, which is starting to show its age. It does, however, suggest that now might be a good time for Nintendo to give the product a refresh — or even an entirely new “skin.”
Enter The Wall Street Journal, which in yesterday’s hard copy reported that although Nintendo “has given no official indication of a launch, [it is] is widely believed to be working on a successor to its Switch console.” That seems a safe guess. Nintendo has never before gone seven full years between new console introductions. This suggests that Nintendo’s sales (and earnings) could be due for a boost shortly after the next new console comes out — and Nintendo’s stock could enjoy a boost even sooner.
That’s the good news for investors. The bad news, as the Journal pointed out, is that Nintendo stock is already up 22% over the last three months in anticipation of this announcement.
Is Nintendo stock a buy?
This raises the obvious question: Has this train already left the station? Is it too late to buy Nintendo stock and enjoy the skyrocketing stock price that would presumably follow the announcement of a new console?
I don’t think it is too late.
Valued at $68.5 billion in market capitalization, Nintendo stock, at less than 21 times earnings, doesn’t look too expensive for a growth stock. Furthermore, once you back out Nintendo’s sizable cash reserves, the company’s enterprise value is 20% cheaper than its market cap, yielding an EV/earnings valuation of less than 17x.
Is it conceivable that releasing a new console, selling a lot of new consoles, and selling a lot of Nintendo games for that new console could help to grow Nintendo’s earnings by 17% or so a year over the next few years? Yes, I think that’s entirely conceivable. And if it happens, Nintendo stock would be a buy.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Nintendo. The Motley Fool has a disclosure policy.
