Nintendo (NTDOY 3.25%) just reported its first-quarter results for fiscal year 2022, and Wall Street was not happy. Sales and profits were down from the prior year, leading the stock to sell off sharply late last week.
As of this writing, shares of Nintendo are down 17.5% just in the last month. While current investors in Nintendo (myself included) are not jumping for joy at the moment, one lackluster quarter does not mean Nintendo is doomed, and it may provide an opportunity for investors to buy shares of Nintendo at a discount.
With the stock price now down 26.8% in 2021, is it time to scoop up some shares of Nintendo?
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Q1 earnings results
Sales were down 10% year over year to $2.92 billion in Q1. Operating profit was down 17% year over year to $1.08 billion, giving Nintendo an operating margin of 37% in the quarter. Since last year's Q1 was in the heat of the pandemic (April to June 2020), and Nintendo had just released one of its most popular games of the last few years, Animal Crossing: New Horizons, this was a tough year-over-year comparison for the company.
In fact, Animal Crossing is already the second-most popular game on the Switch, Nintendo's current gaming console, after being out for just over a year, selling 33.89 million software units over its lifetime. If you exclude the impact of Animal Crossing, Nintendo's first-party game sell-through (which measures how many items were sold to customers) was actually up this year. Nintendo management also reiterated its full-year guidance for $14.5 billion in sales and $4.5 billion in operating profit. Both of these numbers would be a slight decline from last fiscal year, which is a worry, but investors should remember that Nintendo is always conservative with guidance and that last fiscal year saw a rise in gaming demand due to the COVID-19 pandemic.
New projects coming
Nintendo is making numerous investments to diversify outside of its dedicated gaming hardware business. These initiatives may not bring in tons of direct revenue for Nintendo, but they can help get kids more in touch with its entertainment characters, which will hopefully lead to more engagement with its highly profitable video games business.
For example, Nintendo is building four theme parks around the globe in partnership with Comcast's Universal Studios. The first center is open in Japan, with three others in Singapore, California, and Florida opening over the next few years. A Super Mario movie is coming in 2022 and is being produced by Illumination Studios, which has a strong track record of success with kids and family films like Despicable Me and The Secret Life of Pets.
Lastly, Nintendo recently announced a new partnership with Niantic to produce mobile applications combining Niantic's augmented reality technology and Nintendo's entertainment characters. The first application is around the smaller Pikmin franchise, but the two companies have multiple mobile apps planned for development. What's even better is that Nintendo participated in Niantic's Series A funding efforts after it was spun out of Alphabet's Google, meaning it likely still has a large ownership stake in the company (the exact amount is unknown).
Take the long view
While investors can get nervous about one disappointing quarter, it can provide clarity to look out over a few years when evaluating the health of a business. If you compared Nintendo's first-quarter results to the period two years ago, sales were up 87% and operating profit was up 332%, which makes the double-digit percentage decline from last year look a lot better.
Nintendo stock also currently trades at an incredibly cheap earnings multiple. Backing out the $13.78 billion in cash on its balance sheet, the stock trades at around 8.5 times its trailing-12-month operating profit, which is a lower earnings multiple than almost every other company.
Time to buy?
The risk with Nintendo is that the Switch goes through a sharp cycle of popularity and loses a large part of its player base a few years from now. This would lead to Nintendo losing some of its current earnings power, which would likely lead to the share pricing tumbling even lower from here.
However, if you believe that Nintendo can smooth out its historical hardware cycle with updates like the new OLED model in October and the Nintendo Switch Online subscription service, while also diversifying into the other projects listed above, now could be the time to buy Nintendo stock while shares trade at a discount.
