In early 2017, global video game giant Nintendo (OTCMKTS:NTDOY) launched the Switch, an innovative video game console which fully integrated mobile gaming with at-home gaming into one device. The product was an instant success from both a hardware and software standpoint. This huge success powered Nintendo stock from $25 at the beginning of 2017, to nearly $60 highs by early 2018.
But, Nintendo since has lost momentum. A global economic slowdown coupled with Switch hype normalizing has caused Nintendo stock to cool off over the past several months. Today, the stock trades below $40, and is more than 35% off recent highs.
This weakness in Nintendo stock won’t last forever. This company has solid long term growth drivers through an evergreen gaming portfolio with timeless appeal. The company has also proven itself formidable on the hardware front. They continually come up with an unparalleled hardware innovation every few years. As such, the current long term outlook for this stock is favorable. Big dips are buying opportunities.
Meanwhile, the time to buy the dip in Nintendo stock could be right now. The holiday 2018 season is shaping up to be a record one for Nintendo. Considering the stock is more than 35% off recent highs and trading at a rather pedestrian 20 forward earnings, record holiday numbers could be the exact catalyst Nintendo stock needs to reverse course and head higher.
All together, Nintendo stock looks interesting on this dip, especially here with strong holiday numbers on the horizon.
The Long Term Growth Narrative Is Promising
In the big picture, Nintendo is a solid long term investment due to the company’s enduring relevance and appeal in both the hardware and software segments of the video game world.
On the hardware side, everything at Nintendo right now is about the Switch. While that may make this company seem like a one hit wonder, a deeper look at this company’s hardware history paints a different picture.
Nintendo has a promising track record of sustained albeit slow innovation. This company doesn’t innovate often on the hardware side. But, when they do, they do it right. The Switch is just the latest example of this.
Before that, there was the Wii and Nintendo DS, both of which have sold over 100 million units. Before that, there was the Game Boy, which was the world’s leading mobile gaming console, and the Nintendo 64, which was a record-breaker in its own right.
Overall, Nintendo has a promising track record of sustained hardware innovation. While that innovation doesn’t happen all that often, there are murmurs out there that a Switch 2.0 is coming to market in 2019. If true, that would rebuke this company’s slow innovation reputation, and set the hardware business on a new course of sustained growth.
On the software side, Nintendo is behind an evergreen portfolio of games with enduring appeal. We are talking about titles like Super Mario, Mario Kart, Zelda, Pokemon, Donkey Kong, and Super Smash Bros. While these titles may seem like yesterday’s favorite games, they actually have enduring appeal.
This is due to simplicity (these games are much easier to understand and play than Call of Duty, and thereby attract a broader audience of non-gamers) and nostalgia (these are the games many gamers grew up on, and they don’t want to forget them anytime soon).
Thus, Nintendo’s software business has a favorable long term outlook. When put together with a favorable long term outlook in the hardware business, it becomes clear that Nintendo stock is more than just a one hit wonder.
Strong Holiday Numbers Could Spark A Reversal
The bull thesis for Nintendo stock is that this recent sell-off could reverse course with strong holiday numbers.
First off, it’s important to understand that the entire NTDOY growth story is about the Switch right now. Last quarter, Nintendo 3DS hardware and software sales fell back by a whole bunch. Also, it is important to note that the Switch growth narrative is being powered mostly by software sales. Hardware sales are trending up about 4%. Software sales are trending up by more than 90%.
Thus, at this point in time, as go Switch software sales, so goes Nintendo stock.
The outlook for Switch software sales this holiday season is quite favorable. Nintendo released a flurry of new Switch titles this holiday season. Notably, for the first time ever, Nintendo brought Pokemon to the Switch. These new Pokemon Switch games are best-sellers at both Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN).
Also, Nintendo launched Super Smash Bros. Ultimate, the largest ever-game in the Smash Bros. series. This game topped the best selling video game chart on Amazon.
On the hardware side, the Switch gaming console and controller were top sellers on Amazon, while global search interest related to the Switch spiked to all time highs this Black Friday weekend. According to Adobe Analytics, the Switch was the top-selling video game product during Black Friday weekend, and one of the most purchased items on Thanksgiving Day.
Overall, this holiday season is shaping to be a record one of Nintendo thanks to sustained robust Switch demand. Considering the stock is well off its highs and trading at a reasonable 20 forward multiple, record holiday sales should be the sort of catalyst which cause this stock to reverse course and head sharply higher.
Bottom Line on NTDOY Stock
The long term growth prospects underlying Nintendo stock are healthy, while the company’s near term growth prospects are being supercharged by record holiday demand. Meanwhile, the stock is sitting nearly 40% off all time highs.
This discrepancy between strong fundamentals and a depressed stock price creates an attractive opportunity for investors to buy the dip.
As of this writing, Luke Lango was long WMT and AMZN.