Nintendo: Earnings Show Switch 2 Demand Surging As Margin Recovery Becomes The Next Test
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Excerpt
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Summary
Nintendo's Switch 2 cycle is off to a record start, selling 10.36 million units in five months.
Operating margins fell as hardware mix and spending on R&D and advertising increased.
Management raised full-year guidance to 19 million Switch 2 units and ¥2,250 billion in sales.
Recently released and upcoming titles, such as Pokémon Legends: Z-A and Kirby Air Riders, could lift margins.
Nintendo remains well positioned for long-term earnings growth, despite near-term margin pressure.
Investment Thesis
I maintain my strong buy rating for Nintendo (OTCPK:NTDOY) (OTCPK:NTDOF) (NTDO:CA). The early Switch 2 cycle has surpassed expectations, selling 10.36 million units in just five months, and hardware sales have also surpassed analysts' sales estimates—enough to get company management to increase guidance from 15 million to 19 million units. Margins do remain compressed due to the Switch 2's lower profitability, as well as increased R&D and advertising expenses, which should be expected to ramp up further to boost sales in what is Nintendo's historically best quarter: the Q3 holiday season, but these should be seen as strategic decisions to invest in the console's expansion early in the Switch 2's lifecycle. Nintendo's valuation at 44.6× EV/EBITDA is still in line with my previous analysis on Nintendo, where I projected 61.40% upside assuming EBITDA reaches its 2021 Switch peak. And with upcoming catalysts that include Pokémon Legends: Z-A, Kirby Air Riders, and Metroid Prime 4: Beyond, Nintendo seems to be in a solid position to increase its margins in the long term and to continue its earnings growth…
