Forget GameStop, Nintendo is a better stock of video games

GameStopof (NYSE: GME) the historic brief pressure, which skyrocketed the video game retailer’s stock by more than 1,900% between Jan. 1 and Jan. 27, has captivated – and burned – many investors. The bubble has finally burst, but the stock remains up more than 200% for the year.

These gains don’t have a lot of fundamental support. GameStop’s physical game sales continue to decline as gamers rely more on digital downloads, while big box retailers also sell the latest hardware. The coronavirus pandemic has also exacerbated this pain over the past year.

GameStop’s revenue fell 31% year-over-year in the first nine months of 2020, and it remained unprofitable. It expects its same-store sales to increase in the fourth quarter as it sells new consoles and closes weaker stores, but analysts still expect its revenue to decline 19% for the full year and that its results remain in the red.

Instead of joining the speculators and betting on GameStop’s long-term turnaround, investors should buy better video game stock with a brighter future: Nintendo (OTC: NTDOY).

Nintendo’s main strengths

Nintendo has shipped 79.9 million switches worldwide since the console’s launch in early 2017. By comparison, Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) have shipped approximately 49.6 million Xbox One and 114.9 million PS4, respectively, since their launch in late 2013.

The Nintendo Switch has established a strong presence in the market for three reasons. First, the Switch can be used either as a portable device or as a console connected to a TV. This unique form factor leveraged the strengths of Nintendo’s older handhelds (including the Game Boy and 3DS) to challenge Microsoft and Sony in the home console market.

Second, Nintendo has released many exclusive 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 Wild, and Super Mario Odyssey. Players had to buy a Switch to play these games, while many popular Xbox One and PS4 games were cross-platform titles also available on PC.

Finally, Nintendo continued to update the console to attract new customers. In 2019, it upgraded the original Switch with a new chipset that extended battery life, and then launched the cheaper, portable-only Switch Lite for budget-conscious consumers.

How fast is Nintendo growing?

Nintendo sales jumped 116% in fiscal 2017, thanks to the arrival of the Switch, and grew 14% in 2018 and 9% in 2019.

Nintendo’s growth has slowed, but it expects its sales to increase by 22% in fiscal 2020, which ends at the end of March, supported by strong sales of Switch, Switch Lite. and its proprietary games.

Exhibition games include Animal Crossing: New horizons, which has become a virtual social platform throughout the pandemic; Paper Mario: The King of Origami; Super Mario 3D All-Stars; and Mario Kart Live: Home circuit, which allows players to roam the AR tracks at home with rc cars.

Robust Switch sales have pushed Nintendo’s operating margin from 6% in fiscal 2016 to 26.9% in 2019, and it expects that ratio to reach 35% in 2020. This expansion of the margin increased Nintendo’s net profit by 36% in fiscal 2017, 39% in 2018, and a further 33% in 2019. He expects this streak to continue with profit growth of 55% in fiscal year 2020.

Why Nintendo still has room to operate

Nintendo’s growth rates look fantastic, and its inventory has already grown by over 60% in the past 12 months. But I believe it can go even higher, for a few simple reasons.

Nintendo’s ADR shares only trade 19 times next year’s earnings. The stock remains cheap as analysts expect Nintendo’s revenue and profits to fall 4% and 2%, respectively, next year, likely due to tough year-to-year comparisons. other and new competition from the latest consoles from Sony and Microsoft.

But those estimates could be too low, and likely don’t take into account the potential launch of a ‘Switch Pro’ model in 2021 or the resilience of its hybrid form factor and proprietary games against PS5 and Xbox Series S consoles and X. These favorable winds could help Nintendo easily wipe out weak Wall Street expectations – and force analysts to raise their conservative estimates.

The key to take away

The Bulls of GameStop often claim that the robust sales of the Nintendo Switch, which runs some of its games on physical cartridges, will attract more buyers to its stores. It can happen, but it’s smarter and safer to just buy Nintendo stock to follow this trend instead of taking a big risk on GameStop wild stocks.