Nintendo's Shares Skyrocket: Should Investors Buy, Sell, or Maintain Their Position?
Nintendo's share price, represented by NTDOY and NTDO.F, has skyrocketed a whopping 25% this year, standing close to all-time highs. The surge is quite evident; investors are excited about Nintendo's upcoming Switch 2 release. The original Switch, launched in 2017, became one of Nintendo's top-selling game systems, selling over 150 million units!
Recent gains in Nintendo's stock price largely stem from rosy expectations for Switch 2 sales. The stock is currently trading at a multiple typically reserved for the swiftest-growing video game stocks. But will Switch 2 propel Nintendo back into growth territory?
Switch 2: The Next Big Thing?
Nintendo hasn't revealed much about the new console beyond indicating it will support games from the original Switch. No firm release date is available yet, either. Reports, however, suggest that Nvidia, the original Switch's custom processor supplier, will furnish Nintendo with an updated Tegra processor. This could potentially allow Switch 2 to run more advanced games, like Take-Two's future title, Grand Theft Auto VI.
But, you ask, has Take-Two officially confirmed this? Alas, no word from the gaming giant yet. If Switch 2 can run Grand Theft Auto VI, though, its chances of success skyrocket since the Grand Theft Auto franchise has become a chart-topper. The upcoming console faces substantial pressure to deliver, particularly given that Switch sales have been dwindling lately. Nintendo expects March-ending fiscal 2025 sales to decrease by a hefty 29% compared to the previous year.
Valuation Concerns
Nintendo's stock is currently trading at a high multiple of sales, which positions it among the fastest-growing video game stocks. But is this valuation justified? Let's compare Nintendo to other gaming stocks, such as Roblox, which registered revenue growth of 32% year on year and currently boasts a 12x price-to-sales multiple.
Nintendo, on the other hand, boasts a forward price-to-earnings ratio (P/E) of 34, which might seem high for a company reliant on cyclical console markets. To maintain revenue growth, Nintendo should sell an ample number of hardware units, which often carry lower profit margins. This can be quite challenging given the highly-competitive market.
Video game publishers like Electronic Arts, for instance, trade at a much lower forward P/E ratio of 18. Getting optimal profits from this demanding environment seems like an uphill challenge. Thus, with so many uncertainties surrounding Switch 2 sales, should you invest in Nintendo stock, perhaps even now that it has hit new highs?
Some analysts believe that the Switch 2 could sell a whopping 16 million units in its first year, a clear indication of investor confidence. But, with all the challenges that Nintendo faces, the question remains: is the value proposition strong enough to justify the stock's current valuation? Perhaps not.
So, if Switch 2 sales fall short of expectations, stock prices might plummet, given the little room for error due to the stock's elevated valuation. Better to possibly take profits and seek better value from other video game stocks, it might seem.
Investors are keen on reinvesting in Nintendo due to the promising prospects of Switch 2, with some analysts predicting it could sell 16 million units in its first year. However, the company's reliance on hardware sales and the highly competitive market could make it challenging to maintain revenue growth with lower profit margins.
Nintendo's stock, currently trading at a high multiple, is among the fastest-growing video game stocks, but its forward price-to-earnings ratio is higher than competitors like Electronic Arts. To maintain growth, Nintendo needs to sell a significant number of hardware units, which could be challenging in the competitive video game market.
The success of Switch 2 is crucial for Nintendo, especially given that Switch sales have been decreasing lately. If Switch 2 can run advanced games like Take-Two's Grand Theft Auto VI, it could significantly boost the console's chances of success, considering the franchise's popularity.
Nintendo's current financial situation makes it essential to consider the ratio of sales to stock price. Although recent gains in Nintendo's stock largely come from investors' expectations for Switch 2 sales, the valuation might not be justified at such high multiples, especially considering the challenges faced by the company in the competitive video game market.
