Nintendo: Ready To Trade Higher (OTCMKTS:NTDOF)

Thesis

I have previously highlighted that I am bullish on Nintendo (OTCPK:NTDOY)(OTCPK:NTDOF) stock, as I believe the Japanese gaming company is well positioned to benefit from secular tailwinds – including more leisure time available for escapism and the socialization of gaming. But there are also good arguments to be made why Nintendo is a great short-term investment and could trade higher by end of the year.

Personally, I believe the news related to the recently held Nintendo Direct event will significantly improve shareholder sentiment, while the strong sales performance of new game titles could support analyst consensus upgrades. I also advise investors to watch the 1 October, as I believe the stock-split will add new buying pressure from retail investors.

Nintendo Direct & New Games

On September 13, Nintendo hosted its latest Nintendo Direct event and surprised the market with a strong line up of new game titles, including the highly anticipated Legend of Zelda: Tears of the Kingdom, which is estimated to first sell to the public in May 2023

Notably, Nintendo’s previous edition of the Legend of Zelda series — Breath of the Wild – sold about 28 million copies. If similar numbers could be expected for Tears of the Kingdom, then the game might easily support more than $1 billion of sales, with arguably high-margins given that the Legends of Zelda franchise is well known and does not need a high marketing budget.

Other notable reveals are, amongst others, Pikmin 4, Octopath Traveler 2 and Fire Emblem Engage, which are all expected for January 2023. Finally, Ubisoft has recently announced a joint project with Nintendo: Mario + Rabbids: Sparks of Hope, which expands on two extremely successful franchises and should thus support both high sales levels and profit margins. The is expected as early as October 2022.

Strong Games Sales

Recently announced Nintendo games have exceeded sales expectations. Notably, Splatoon3, which was released on September 9, sold 3.5 million copies within only 3 days. The games previous edition, Splatoon 2 took more than a quarter to generate a similar level of sales. Nintendo is expected to launch Pokémon Scarlet and Pokémon Violet in November 18, a combination that I believe could cumulatively generate as much as 20 million sales by year-end if previous Pokémon game titles could serve as a reference.

Accordingly, a strong performance from new games and attractive pipeline of new launches should, in my opinion, offset supply chain challenges and fading demand for hardware sales. However, while slowing hardware sales have for a long time been priced into Nintendo stock, stronger than expected game sales could drive upside to consensus estimates.

10:1 Stock Split

Empirically, shares of a company that announces a stock-split rise after the news. But technically, this does not necessarily makes sense since a stock split doesn’t change the fundamental value of a business. But the 10:1 stock split that Nintendo schedules for October 1 (announced in the first quarter of 2022) could indeed serve as a reasonable catalyst for a higher stock price. Let me explain: Nintendo’s shares listed in Tokyo (7974 TJ) trade at a 61,300 yen, which translates into about $430 per share. But notably, there is a 100 shares trading limit in Tokyo – resulting in a minimum investment of about $43,000. Without a doubt, this significantly reduces Nintendo’s potential shareholder base. Nintendo’s 10:1 stock split would reduce the trading minimum investment to approximately $4,300, thereby opening the opportunity for higher retail investor engagement and elevated buying pressure towards year end.

Risks

The main downside risk to my thesis is related to the opposite of my bullish arguments: less successful new games sales number and delays in the release of new titles – which fails to smooth market concerns regarding supply chain pressures and slowing hardware sales. In addition, I would like to highlight macro-economic risk factors, including elevated volatility for stocks and JPY yen currency fluctuations, which could influence Nintendo’s fundamentals in an unpredictable fashion. However, as a fundamental investor, I believe macro-arguments should be ignored as much as possible.

Conclusion

I rate Nintendo Buy. In my opinion, Nintendo is one of the most valuable assets in the gaming industry with unmatched brand image and drive for ingenuity. Moreover, that NTDOY stock is cheap has been well noted by many investors – and I personally calculate a $69.49/share target price. But what is going to kindle the price appreciation that NTDOY trades in line with fundamental value? In this article I have presented two potential catalysts: First, I believe that better than expected games sales will drive upside consensus estimates. And second, I argue the 10:1 stock split scheduled for October 1^st should bring additional buying pressure from retail investors.