NTDOY - Nintendo: The Return Of Zelda Could Catalyze Revenues

2023-04-27 13:29:59 ET

Summary

• Nintendo’s sales have slowed, dropping 12% from FY 2021 to FY 2022 following its pandemic hype.
• Simultaneously releasing The Legend of Zelda: Breath of the Wild and The Nintendo Switch caused Nintendo's revenues to more than double in 2017.
• Nintendo could replicate this success by releasing the hotly anticipated The Legend of Zelda: Tears of the Kingdom and potentially releasing a new Nintendo Switch this year.
• Nintendo is venturing into other forms of entertainment, diversifying its revenues and solidifying its place in the entertainment industry.

Nintendo Co., Ltd. (NTDOY) is a Japanese multinational juggernaut in the video game industry that develops video games and video game consoles. The company is considered to be one of the three biggest video game and video game console developers alongside Microsoft Corporation (MSFT) and Sony Group Corporation (SONY). While the company saw massive success in 2020 during the pandemic, demand for its products is decreasing and revenues dropped 12% YoY as a result.

I believe NTDOY stock is a buy ahead of the company’s release of The Legend of Zelda: Tears of the Kingdom, the sequel to its smash hit video game The Legend of Zelda: Breath of the Wild. I believe this catalyst in May will drive revenue growth in 2023, and growing rumors that Nintendo may release a new Nintendo Switch means NTDOY could be on track to replicate 2017’s success.

Looking back at 2017, NTDOY reported one of its most successful years to date after releasing the Nintendo Switch and Breath of the Wild in the same year. As a result of its revenue growth, NTDOY stock increased 130% from March until January of the next year. Therefore, I expect a similar performance for NTDOY stock in 2023 as these catalysts play out.

Overview

NTDOY is one of the most beloved video game companies in the world due to its esteemed video games and consoles. The company developed 3 of the top 10 best-selling games of all time: Wii Sports, Mario Kart 8, and most notably Super Mario Bros. Moreover, Nintendo developed 5 of the 10 best-selling video game consoles of all time: the Nintendo DS, Nintendo Switch, Gameboy and Gameboy color, Wii, and Gameboy Advance.

Now NTDOY is venturing outside of the video game industry in collaboration with Comcast Corporation (CMCSA)’s Universal Pictures to open two Super Nintendo World theme parks in the US and Japan. Together they have also produced a recent box office success, “The Super Mario Bros. Movie”. By broadening its market outside of the video game industry, NTDOY is evolving and diversifying its revenue sources which I believe strengthens its long-term forecast.

Pandemic Fueled Demand

During the 2020 pandemic, demand for different forms of media increased significantly as people were stuck at home. At the time, NTDOY witnessed increasing demand for its video games and Nintendo Switch console - causing its revenues to increase YoY from $12.7 billion in FY 2020 to $15.8 billion in FY 2021. As a result, NTDOY stock ran 115% from the start of the pandemic until the end of 2020.

However, as pandemic regulations eased, its revenues decreased 12% YoY from FY 2021 to FY 2022. NTDOY’s momentum slowed as well and the stock declined as much as 43% from its peak in 2020 to the start of 2023. Analysts expect this trend to continue as NTDOY is expected to report $0.23 EPS and $11.97 billion in ‘23 FY revenue - a 13.8% decrease YoY - at its Q4 earnings after-hours on May 9th.

Another reason for NTDOY’s declining revenue is its mainline console, the Nintendo Switch, which is entering its 7th year on the market. Slowing demand for the out of date console is likely also contributing to its declining revenues since sales for the Nintendo Switch platform decreased 21.3% YoY during the nine months ending December 2022. As a result, NTDOY cut sales forecasts to 1.8 million Switch units for the fiscal year ending March 2023.

Despite launching three models - Nintendo Switch, OLED Model, and Switch Lite - the company is likely contemplating a new console model to stay competitive. However, semiconductor shortages and other supply chain issues led to a 20% decrease YoY for hardware sales according to the company and these issues could pose an obstacle if it chooses to launch a new console this year.

Could NTDOY Replicate its 2017 Success?

In 2017, NTDOY released its newest console, the Nintendo Switch. Currently the 3rd best selling console of all time with 122.5 million consoles sold as of December 2022, the Nintendo Switch was a huge success. NTDOY reported $13.2 billion in 2022 sales revenue thanks to the Switch platform and it is estimated that 91% of Nintendo's sales earnings from 2017 to the 2022 holiday season were from Nintendo Switch platform revenues including hardware, digital and physical software, subscriptions, and add-on content.

During the same year, NTDOY also released its blockbuster video game, The Legend of Zelda: Breath of the Wild. Released alongside the console, this video game has since sold 29 million copies. In addition to winning 189 of the 2017 game of the year awards, Breath of the Wild was awarded The Game Awards’ prestigious game of the year title. As a result of the game’s incredible public reception, 9 out of 10 Switch owners reportedly bought Breath of the Wild with the Switch.

Thanks to these releases, NTDOY’s revenues more than doubled YoY surging from $4.3 billion to $9.9 billion in the 2018 fiscal year. In turn, NTDOY stock soared following both releases, increasing 130% from March 2017 until the end of January 2018.

I believe NTDOY is on the verge of replicating 2017’s astonishing success for a few reasons.

First of all, NTDOY is set to release the sequel to Breath of the Wild on May 12th 2023. One of the most anticipated games of the year, Tears of the Kingdom has won The Game Awards’ title for Most Anticipated Game of the year. Through a poll of its considerable audience, the game was also voted the second most anticipated game of 2023 by IGN - the biggest video game news outlet worldwide.

Considering Breath of the Wild’s astounding success, I believe the video game will receive a similar reception since its final trailer began trending on YouTube after it reached 5 million views the day of its release. This illustrates that there is significant demand for the game worldwide and I believe NTDOY’s 2023 revenues will reflect that.

Secondly, rumors are brewing that NTDOY will release a new Nintendo Switch console by the end of 2023. While the company has yet to confirm this, it would presumably reveal its plans for a new console this summer since this is usually the season for new product announcements.

Looking back at the history of video game console releases, most video game companies take around 6 to 8 years to release a new console. With the Nintendo Switch in the 7th year of its life cycle, the console is struggling to match video game system requirements. For these reasons, I believe NTDOY will likely release a new console this fall to capitalize on the seasonal holiday sales rush.

In a few months' time, we’ll know if the rumors are confirmed. But the similarities between 2017’s product releases and this year’s are a bullish sign. If correct, I expect NTDOY will begin recovering from its slumping sales growth this year with product demand extending into the next.

An Entertainment Maverick

Another tailwind for the stock is NTDOY’s move towards new forms of entertainment. With NTDOY lagging behind Sony’s 45% share of the console gaming market, I believe it's in NTDOY’s best interest to venture into other forms of entertainment.

Diversifying its revenue streams by entering new markets could strengthen NTDOY’s long-term position and help it even evolve into an entertainment icon, possibly even rivaling Disney (DIS). But this move comes with risk.

The video game industry is notorious for its inability to venture into other forms of media such as movies. Video game movies have a history of bad reviews and lackluster performances at the box office. One example is the movie adaptation of the video game Doom which made only $58.7 million at the box office after costing $60 to $70 million to produce. Prior to the recent release of “The Super Mario Bros. Movie” no video game movie has ever surpassed the $500 million mark at the global box office.

Before this, NTDOY released “Detective Pikachu” which generated $ 428.9 million at the worldwide box office. With a budget of $100 million, Detective Pikachu is the 2nd highest-grossing video game movie adaptation of all time. This movie was a step in the right direction for video game movie adaptations and is another sign that NTDOY has broken the video game movie adaptation curse.

For now, The Super Mario Bros. Movie holds the title for the best opening weekend of 2023 after generating a total of $906 million worldwide as of April 27th. Produced with a budget of $100 million, NTDOY may partner with Universal Pictures to produce sequels after this since NTDOY’s The Pokémon Company is set to produce a sequel in 2024.

By collaborating with notable producers like Universal Pictures and Warner Bros, I believe NTDOY will continue to bring more of its characters to the silver screen - making it much more than just a video game company. NTDOY owns significant intellectual property with characters that speak to kids and adults alike such as Super Mario, Kirby, and Pokémon characters. These characters appeal to Generation X all the way up to the current Generation Alpha and Nintendo still has not capitalized on the opportunity to create a movie adaptation of its blockbuster, The Legend of Zelda.

Theme Parks

Nintendo is also working to translate its IP into theme parks - a riskier endeavor that has never been attempted by a videogame company before. However, if it succeeds it could be very lucrative.

The theme park market reached $54.9 billion in 2022 and is expected to hit $82.4 billion by 2030. The US market alone is valued at $15 billion and Disney, a titan of the theme park industry, brought in $28 billion from its theme parks division in 2022. Considering that, like Disney, Nintendo has considerable IP and a similar audience, the move towards theme parks could trigger incredible long-term growth for NTDOY.

In collaboration with Universal Pictures, NTDOY opened Super Nintendo World in Universal Studios Hollywood on February 17th after the pandemic delayed its initial opening.

As is, the revenue split for their collaboration has not been disclosed but Universal spent $580 million building the Japanese Nintendo World location. While Universal will take a greater cut of the revenues, NTDOY could secure a higher profit margin since it did not foot the initial cost of the park.

Time will tell how profitable the move towards theme parks is, but NTDOY and Universal Pictures appear very confident since they are set to open two other Super Nintendo World theme parks in 2025.

Risks

Still, there is no guarantee that these theme parks will be a financial success. Additionally, NTDOY is operating in a highly competitive market that requires significant investments in R&D, as well as a good deal of creativity and innovation to keep up with the competition.

Its two main competitors, Sony and Microsoft, own a significant share of the console market with Sony commanding 45% in total. Microsoft’s share has been inching up to Nintendo's, increasing from 25.5% to 27.3% - placing it slightly behind NTDOY’s 27.7% share. Since consoles currently make up a significant portion of NTDOY’s revenues, its shrinking market share could pose a risk to the company.

Additionally, the video game industry is affected by entertainment trends, and NTDOY’s share of the market could shrink with shifting consumer preferences. The same applies to the movie industry as well. As is, The Super Mario Bros. Movie’s success is not necessarily indicative of the success NTDOY would see with its other characters since Mario is a mainstream character known outside of the gaming community.

Despite rumors that a new console will be released this year, the company is yet to announce anything official regarding the matter. Considering the impacts of the semiconductor shortage on NTDOY, its hardware production could also be negatively affected this year.

Given that overseas sales account for more than 70% of its total sales, NTDOY could also be impacted by fluctuations in foreign exchange rates. Consumer demand might also be affected by rising inflation and a possible US recession which would lead to cuts in their discretionary spending.

How you can play this...

After missing on earnings, NTDOY dropped 13% but has been recovering quickly. Looking at the daily timeframe, NTDOY has just broken out of a downwards channel and is trading above the 200 MA. Given the fundamental catalysts and these bullish signs, a possible play would be to go long after the retest and hold of the upper trendline.

Investors could place their stop-loss at the $10.23 support and take profit at $10.86 and $11.25, leaving a tail for a potential retest of $12.96 as the game’s sales are reflected in its quarterly earnings. This play yields an R:R of 4.05 if the $11.25 take profit is met.

Conclusion

After thriving during the pandemic period, NTDOY’s revenues have been shrinking ever since, notably due to declining demand for its aging mainline console the Nintendo Switch. However, I expect NTDOY to see a boost in revenues this year as it is set to release the highly anticipated game, The Legend of Zelda: Tears of the Kingdom. If the rumors prove true and NTDOY releases a new Switch console, I believe 2023 could replicate 2017’s success.

NTDOY diversifying its revenues by venturing into theme parks and videos is another bullish sign. The Super Mario Bros. Movie’s box office success and its potential to release new movies and sequels in the future could be future catalysts for the stock. For these reasons, I believe NTDOY is a buy.

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