Nintendo Co., Ltd’s (ADR) (OTCMKTS:NTDOY) Switch has been a smashing success. The company has continually had to bump its sales forecast for the red-hot console. With little surprise, NTDOY stock has been absolute fire as a result. Nintendo stock is already up more than 21% this year and a staggering 112% over the past 12 months.
It’s even been good news for Nvidia Corporation (NASDAQ:NVDA), which supplies the chips for the Switch.
Despite this monstrous outperformance though, there’s a big reason why we should take a pass on NTDOY stock: discipline.
We’ll get to the chart — which illustrates why waiting for a pullback is the most prudent move — in a minute.
Nintendo’s Latest Catalyst
But what’s got Nintendo stock soaring now? — Since Thursday, NTDOY is up more than 6%.
The recent Labo announcement didn’t hurt. The new video game data that came out on Thursday evening is giving a spark to Nintendo stock — and deservedly so.
Major economies around the world have come roaring back to life, be it in Europe, the U.S. or China. And when consumers are feeling good and confident, what products do you think were in high demand over the holiday season?
We’ve talked constantly about this catalyst, which has been a driving in everything from Activision Blizzard, Inc. (NASDAQ:ATVI) to Home Depot Inc (NYSE:HD) and most recently Citigroup Inc (NYSE:C).
Expansion on top of a multi-year recovery is like gasoline on the fire and it continues to be underestimated. For video game companies, it’s a boon. Overall video game sales rose 10% in December 2017 vs. December 2016. That was led by a 27% advance in hardware sales vs. a 1.1% increase in software sales. Overall, 2017 sales rose 11% vs. the prior year.
However, the key here is the out-performance of hardware vs. software, particularly as Nintendo Switch sales were a big driver in that growth. While the Sony Corp (ADR) (NYSE:SNE) PlayStation 4 was the top-selling system in total dollar terms, the growth in the hardware segment came from the Switch.
On another positive note, Nintendo nabbed plenty of top spots in software sales too. Super Mario Odyssey, Mario Kart 8 and The Legend of Zelda: Breath of the Wild came in at No. 3, 5 and 9 in terms of top 10 game sales for the month, respectively.
Trading NTDOY Stock
So why exactly aren’t we buyers of NTDOY given all of this overwhelmingly positive news? Because the stock price doesn’t warrant it. At least not any more.
Click to Enlarge
Down in the mid-$40s just a few weeks ago, NTDOY was a screaming buy. It had a strong secular story as the video game industry remained robust. Now trading just below $55 and it’s a reach to buy NTDOY stock. Based on the current range (black lines), resistance could come into play in the upper-$50s. Perhaps even as high as $60.
And while that would be good for nearly 10% more upside, consider the downside risk too. NTDOY stock sports a lofty RSI reading (as noted by the blue rectangle up top). In the past, a reading of 70 or higher coincided with quick pullbacks in Nintendo stock. While it’s not a guarantee it will happen this time, the odds point to it being likely.
A pullback down to the mid-$40s seems unlikely at this point. But perhaps a drop down to the 50-day moving average would be a good spot to initiate a starter position.
For now — and despite the good story — I’m waiting on Nintendo stock.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
