Nintendo ADR (OTCMKTS: NTDOY) is up 8% in a week and now trades at its 52-week high of around $16. The recent optimism was fueled by the company’s official announcement of the much-awaited Switch 2 gaming console. However, the lack of specifics – including pricing, launch date, and hardware – upset investors which resulted in the stock falling 5% in after-hours trading. Nintendo in its release stated that it will provide more information in April as a part of its Nintendo Switch 2 Experience events across the globe over the next few months.
NTDOY is up 20% since the beginning of 2024, slightly underperforming the broader indices, with the S&P 500 index up 24%. If you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
The upcoming Nintendo Switch successor is a critical release for Nintendo, with significant attention from both the gaming community and investors alike. Since its 2017 debut, the Nintendo Switch has become Nintendo’s most successful console, reaching total sales of 147 million units. But sales for the console have been on a decline lately as gamers awaited the next generation of Switch. Based on the recently released video, Switch 2 appears to feature an expanded screen size, magnetically attaching controllers, and an additional button.
Now, it’s difficult to pack the power of a PlayStation 5 or an Xbox X|S in a handheld device, but the new Switch should be much more powerful than its predecessor. Initial reactions to the console preview were mostly favorable, though news about potential game compatibility limitations with the Switch 2 has sparked disappointment among players.
Nintendo relies on games that go with the console. For perspective, the company has sold over 1,300 million units of software for the 147 million Switch consoles thus far. A new Mario Kart game is likely to be released along with the new Switch 2. Overall, investors are hoping that Switch 2 could revive Nintendo’s sales growth, which has been on a decline over the recent years. Nintendo’s revenue gradually declined from 1.76 trillion JPY in 2021 to 1.67 trillion JPY in 2024 (fiscal year ends in March).
The changes in NTDOY ADR over the last four-year period have been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the ADR were -28% in 2021, -82% in 2022, 25% in 2023, and 13% in 2024.
The Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and geopolitical tensions, could NTDOY face a similar situation as it did in 2021, 2022, and 2024 and underperform the S&P over the next 12 months — or will it see a recovery?
The anticipated Switch 2 launch could provide a much-needed boost for Nintendo, which has faced declining console sales and reduced gaming demand since the pandemic-driven surge in the industry. That said, a lot has already been priced in. For perspective, at its current levels, Nintendo stock is trading at 6.5x trailing revenues, much higher than the stock’s average P/S ratio of 4.1x over the last three years. For potential Nintendo investors, it may be prudent to wait until the April announcement, which should provide more insight into future revenue projections based on the new console’s pricing strategy, capabilities, and game lineup.
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