GameStopsay (NYSE: GME) Historical short pressures, which boosted the video game retailer’s inventory by more than 1,900% between January 1 and January 27, captivated and burned many investors. The bubble eventually popped up, but the stock remained up more than 200% for the year.
These gains do not have much fundamental support. GameStop’s sales of physical games are still declining as gamers rely more on digital downloads, while major box retailers are also selling the latest hardware. The coronavirus pandemic has also exacerbated the pain in recent years.
GameStop’s revenue fell 31% in the first nine months of 2020, and it remains profitable. It expects its comparable store sales to rise in the fourth quarter as it sells new consoles and closes weaker stores, but analysts still expect full-year revenue to fall by 19%, and the defeat to remain in the red.
Image Source: Getty Images.
Instead of joining the speculators and betting on GameStop’s long-term turnaround, investors should buy a better stake in video games with a better future: Nintendo (OTC: NTDOY).
Nintendo’s strengths
Nintendo has shipped 79.9 million switches worldwide since the console’s launch in early 2017. Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) has shipped approximately 49.6 million Xbox Ones and 114.9 million PS4s respectively since their launch at the end of 2013.
The Nintendo Switch had a strong market presence for three reasons. First, the switch can be used as a handheld device or as a console connected to a TV. The unique form factor took advantage of the strengths of Nintendo’s earlier handheld computers (including the Game Boy and 3DS) to challenge Microsoft and Sony in the home console market.
Second, Nintendo has launched many exclusive first-party games for the Switch, including Mario Kart 8 Deluxe, Animal crossing: new horizons, Super Smash Bros. Ultimate, The Legend of Zelda: Breath of the Wild, en Super Mario Odyssey. Players had to buy a switch to play those games, while many popular Xbox One and PS4 games were titles on different platforms that were also available on computers.
Finally, Nintendo has continued to refresh the console to attract new customers. In 2019, the original Switch was upgraded with a new chipset that extended its battery life, and then launched the cheaper Switch Lite for budget conscious consumers.
Image source: Nintendo.
How fast is Nintendo growing?
Nintendo’s sales increased by 116% in fiscal 2017, thanks to the arrival of the Switch, and increased by 14% in 2018 and by another 9% in 2019.
Nintendo’s growth has slowed, but it expects fiscal 2020 sales to rise by 22%, ending in March, driven by strong sales of the Switch, Switch Lite and its first-party games.
Outstanding games include Animal crossing: new horizons, which has become a virtual social platform throughout the pandemic; Paper Mario: The Origami King; Super Mario 3D All-Stars; and Mario Kart Live: Home, which allows players to race through AR lanes at home with radio-controlled cars.
The Switch’s robust sales increased Nintendo’s operating margin from 6% in fiscal 2016 to 26.9% in 2019, and it expects the ratio to reach 35% in 2020. That margin expansion increased Nintendo’s net profit by 36% in fiscal 2017, 39% in 2018, and another 33% in 2019. He expects the line to continue with 55% profit growth in fiscal 2020.
Why Nintendo Still Has Space to Run
Nintendo’s growth rates look fantastic and the stock has risen more than 60% in the last twelve months. But I believe it can rise even higher for a few simple reasons.
Nintendo’s ADR shares will only trade at 19 times next year’s earnings. The stock remains cheap as analysts expect Nintendo’s revenue and earnings to fall 4% and 2% respectively next year, presumably because it faces a tough year-on-year comparison and the new competition from Sony and Microsoft’s latest consoles .
But estimates may be too low, and probably not the potential launch of a “Switch Pro” model in 2021 or the resilience of its hybrid form factor and first-party games against the PS5 and Xbox Series S and X consoles . . The tailwind could help Nintendo easily resolve Wall Street’s low expectations – and force analysts to raise their conservative estimates.
The most important takeaway
GameStop’s bulls claim that robust sales of the Nintendo Switch, which runs some of its games on physical patterns, will bring more sellers to its stores. This can happen, but it’s smarter and safer to simply buy shares of Nintendo to ride on the trend instead of taking a big risk on GameStop’s wild stock.