By Robert Guy
Nintendo (7974.JP) (NTDOY) shares are up 77% over the past year but analysts see further upside for the Japanese company given demand for its popular Switch gaming console.
Jefferies analyst Atul Goyal is one bull who thinks Switch will deliver a big bump to earnings. Here’s his thinking:
It is indeed quite impressive; demand is quite strong and the product is sold out almost everywhere. This reminds us of the Wii launch days. Switch is ‘sold out’ at most retailers and showing rare signs of a potentially big success. This stands in stark contrast to the stock taking a beating of c.12-15% twice (Oct-16 and Jan-17) when Nintendo provided details of Switch. The market had already concluded that Switch has failed, but it is turning out to be quite the opposite.
Goyal says Nintendo has a track record of underestimating the upside from its hot products – such as Wii and its Nintendo DS gaming console – and downside of its weak products (such as 3DS and Wii U). He reckons investors just need to be patient and wait for strong demand for Switch to be translated into earnings. Here’s what he expects when guidance is released later this month:
We believe for FY3/18 guidance (on 27-April), Nintendo’s guidance of Switch volumes and OP numbers could very well underwhelm the market. There is a small probability that Nintendo forecasts 10-12m unit shipment for FY3/18 but that probability is not high. However, as the below table will make it clear – that when Nintendo forecasts a certain volume for its products, it doesn’t mean that is the maximum capacity. In reality, Nintendo would adjust its capacity and supply chain during the course of the year.
Longer term, monetization of the Nintendo’s intellectual property, games and the growth in mobile is seen as a big driver of earnings. Goyal rates the stock a buy with a price target of JPY39,200 a share, implying almost 50% upside.