(News Bulletin 247) – The Japanese video games specialist has increased almost 20% since the start of the year. Although its Switch is aging and some analysts see a new console as a catalyst, sales are nonetheless holding up well.

Nintendo has clearly moved to the next level on the stock market. The Japanese group is showing enviable progress on the stock market, like, it is true, all Japanese stocks. Over one year, the action of the company based in Kyoto and known for its flagship licenses such as Mario, Zelda or Pokémon rose 62.7%. The stock is also off to a good start to the year, with growth of 20.6%.

The company is certainly benefiting from the strong winds blowing across all Japanese stocks. The yen is currently trading at very low prices, notably due to the Bank of Japan’s ultra-accommodative monetary policy, which makes Japanese stocks cheaper for foreign investors and also favors exports. And increases by translation effect the revenues generated abroad, which matters for Nintendo. Over the first nine months of its current fiscal year, nearly 80% of its sales were outside Japan.

The enthusiasm for Japanese stocks can also be explained by the better economic situation and the efforts undertaken by local authorities to improve the transparency and performance in terms of capital of Japanese companies. Enough to provoke a renewed interest from foreign investors from which Nintendo certainly benefited. The group still constitutes the twelfth largest Japanese capitalization (around $68 billion in market capitalization), according to companiesmarketcap.com.

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Waiting for Switch 2?

It would nevertheless be wrong to forget the fundamentals of Nintendo, which has been buoyed in recent months by the success of its games, including the latest Zelda. The group recently revealed its results for the first nine months of its 2023-2024 financial year. Let us recall in passing that Japanese companies close their annual accounts in March, which also constitutes the end of the school year in the country. As the cherry trees begin to bloom again…

Nintendo saw its sales increase by almost 8% to 313 million yen (around 2 billion yen) while its operating profit rose 13.1% and exceeded expectations. The group has in passing raised all its financial objectives, but also its forecasts for sales of Switch consoles, going from 15 million to 15.5 million units, as well as those of games (190 million against 185 million).

However, does Nintendo have the means to continue this stock market surge? At 8,874 yen, the price is above analysts’ average target of 7,928 yen compiled by investing.com.

Bloomberg noted last week that the growing expectation around a new Switch console explained the current course of the Japanese group. The group’s versatile console (it can be used as a portable or living room console, hence the name “Switch”) will celebrate its seven years on the market next month, which constitutes a very long life cycle for this type of machine. “The Switch is nearing the end of its cycle and stocks lack catalysts until the arrival of the new console,” Morningstar judged in May 2023.

Some analysts even doubt that the new console can bring Nintendo to the stock market. “We do not believe the new console will be as successful as the Switch, and we see potential profit-taking following the announcement,” Yijia Zhai, an analyst at Macquarie Group, wrote in a note cited by Bloomberg last month. Minami Munakata, a Goldman Sachs analyst also cited by the agency, does not expect the successor console to the Switch to increase Nintendo’s total addressable market, unless the console “proves to be a machine with a new concept rather than a successor in the same line as the Nintendo Switch”.

The impact of films and theme parks

The market may in any case have to be patient. According to an English transcript of the Nintendo conference when its results were published, management refrained from any comment on this potential new console.

But does Nintendo really need this new Switch to make progress on the stock market? Although old, the Switch is holding up. Sales actually remain relatively high, and have taken analysts by surprise. “It is surprising that the Switch can generate such a high profit, given that it is already in its seventh year and heading towards the end of its life cycle,” Morningstar conceded last year. The increase in sales forecasts from Nintendo illustrates this well. “During the holiday season, we saw a particular increase in the number of new buyers of our console and we view this as a positive sign for the Nintendo Switch market going forward,” noted Suntaro Furukawa, the president of Nintendo. This allows the console to position itself “in unknown territory” currently, in terms of sales, he also declared.

This is because Nintendo licenses, although very well known, benefited from a nice spotlight with the release last April of the film Mario in theaters, which amassed $1.36 billion in revenue, according to Mojo Box Office . The direct financial impact is not disproportionate for Nintendo.

This translates into a near doubling over the first nine months of the year of revenues from the mobile division and revenues from intellectual property (in short, the royalties that Nintendo earns when its licenses are exploited for commercial purposes). But their amount remains low at group level (5% of sales over the first nine months of the year).

Second-order effect: the film seems to cause sales of Switch and additional games. “Initiatives not directly related to gaming, such as the Super Mario Bros movie, contribute to the acquisition of new users,” Kazuniro Ito of Morningstar pointed out last week. The same analyst had previously pointed out that this film seemed to have the effect of “increasing” purchases of games and consoles. This bodes well as a Zelda film is planned and there is talk of a second Super Mario Bros. film.

Apart from the seventh art, Nintendo also invested in the Universal theme parks, in 2021 in Osaka, with a space dedicated to its franchises, then two years later in Hollywood. An additional step will be taken in 2025, with Orlando, Florida, the true epicenter of leisure in the United States.

On CNBC, David Gibson, analyst at MST Marquee, cited last week this arrival in the Florida amusement park as one of the catalysts which could allow the action to trigger a “rerating”. i.e. an improvement in its stock market multiples. The analyst also mentioned films.

Certainly, he also mentioned a new console announced this year which could push the approximately 140 million Switch owners (third best-selling console after the Playstation 2 and the Nintendo DS) to opt for the new machine. David Gibson is in any case optimistic: his target price on Nintendo, at 11,000 yen, still gives a potential of almost 25% to the group’s action.