GameStopin (NYSE: GME) The historic tightening in sales, which caused the video game retailer’s stock to soar by more than 1,900% between January 1 and January 27, captivated – and devastated – many investors. The bubble ended up bursting, but stocks continue to rise more than 200% in the year.
These gains do not have much fundamental support. GameStop’s physical game sales are still falling as players rely more on digital downloads, while major retailers also sell the latest hardware. The coronavirus pandemic also exacerbated that pain last year.
GameStop’s revenue fell 31% year-over-year in the first nine months of 2020, and remained unprofitable. She expects her sales at comparable stores to increase in the fourth quarter as she sells new consoles and closes weaker stores, but analysts still expect her revenue to drop 19% for the full year and her bottom line to remain in the red.
Image source: Getty Images.
Instead of joining speculators and betting on GameStop’s turnaround, investors should buy better stocks for video games with a brighter future: Nintendo (OTC: NTDOY).
Nintendo’s main strengths
Nintendo has sold 79.9 million Switches globally since the console’s launch in early 2017. In comparison, Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) have shipped around 49.6 million Xbox Ones and 114.9 million PS4s, respectively, since their releases in late 2013.
The Nintendo Switch has established a strong presence in the market for three reasons. First, the Switch can be used as a portable device or a console attached to a TV. This unique format leveraged the strengths of Nintendo’s first notebooks (including the Game Boy and 3DS) to challenge Microsoft and Sony in the home console market.
Second, Nintendo has released many exclusive games for the Switch, including Mario Kart 8 Deluxe, Animal Crossing: New Horizons, Super Smash Bros. Ultimate, The Legend of Zelda: Breath of the Wildand Super Mario Odyssey. Players needed to buy a Switch to play these games, while many popular Xbox One and PS4 games were multiplatform titles that were also available on PCs.
Finally, Nintendo continued to update the console to attract new customers. In 2019, she updated the original Switch with a new chipset that extended battery life and then launched the cheaper, portable Switch Lite for budget-conscious consumers.
Image source: Nintendo.
How fast is Nintendo growing?
Nintendo’s sales increased 116% in fiscal 2017, thanks to the arrival of the Switch, and increased 14% in 2018 and another 9% in 2019.
Nintendo’s growth is slowing, but it expects its sales to increase by 22% in fiscal 2020, which ends in late March, driven by strong sales of Switch, Switch Lite and its original games.
Featured games include Animal Crossing: New Horizons, which became a virtual social platform during the pandemic; Paper Mario: The Origami King; Super Mario 3D All-Stars; and Mario Kart Live: home circuit, which allows players to race on AR tracks at home with radio-controlled cars.
The Switch’s robust sales boosted Nintendo’s operating margin from 6% in fiscal 2016 to 26.9% in 2019, and expects that proportion to reach 35% in 2020. This margin expansion has resulted in the company’s net profit Nintendo would increase 36% in fiscal year 2017, 39% in 2018, and another 33% in 2019. She expects this sequence to continue with a 55% profit growth in fiscal 2020.
Why Nintendo still has room to run
Nintendo’s growth rates look fantastic, and its stock has soared more than 60% in the past 12 months. But I believe it can still go up, for some simple reasons.
Nintendo’s ADR shares trade only 19 times next year’s earnings. The stock remains cheap because analysts expect Nintendo’s revenue and profits to drop 4% and 2%, respectively, next year, presumably because it faces tough year-over-year comparisons and new competition from Sony and Microsoft’s newest consoles.
But these estimates may be very low and probably do not take into account the possible launch of a “Switch Pro” model in 2021 or the resilience of its hybrid format and original games against the PS5 and Xbox Series S and X consoles. These favorable winds can help Nintendo easily overcome Wall Street’s low expectations – and force analysts to raise their conservative estimates.
The main lesson
GameStop bulls often claim that robust sales of the Nintendo Switch, which runs some of their games in physical cartridges, will bring more buyers to their stores. This may happen, but it is smarter and safer to simply buy Nintendo stock to follow this trend, rather than taking a big risk with GameStop’s wild stocks.