Where will Nintendo be in 5 years?
IIf you plan to invest for the long term, your time horizon for any stock purchase should be no less than five years. Fluctuations in stock prices from day to day or even from month to month should not be of concern to you. Instead, you should focus on whether the stock you’re looking for has a sustainable competitive advantage, a long growth streak, and is trading at a reasonable price.
nintendo (OTC: NTDOY) is one of the biggest game companies in the world, and I think it meets all three criteria. Here’s what the company could look like five years from now, in 2027.
1. A successful – or not – next-gen gaming device
The key to Nintendo’s success in video games has been its combination of unique hardware devices and fantastic in-house games from franchises such as mario, Zeldaand animal crossing. Its most recent hardware device, launched in 2017, is the Nintendo Switch. The Switch is a mobile/console hybrid system and has essentially been the unit sales leader since its release.
According to Nintendo’s Investor Relations page, the company has sold around 108 million Switch units worldwide. This huge installed base generates tons of software/game sales, which generate the majority of Nintendo’s profits. For example, Nintendo had 235 million software unit sales in the previous fiscal year, which resulted in an operating profit of $4.67 billion.
But the big question is when Nintendo will release its next-gen device. The Switch is now almost six years old and needs a real upgrade with better graphics and processing power. Investors should look for this new device which will be announced in a year or two, given Nintendo’s historical device upgrade cycle.
A powerful new hardware device is imperative to Nintendo’s business because it’s the engine that drives people to buy games. If Nintendo can build on the success of the original Switch and continue to sell hundreds of millions of games a year, its business will likely be in great shape in 2027. Otherwise, we could be heading for dark days, like those experienced with the disappointing Wii. Console U, which drove Nintendo’s stock price down between 2012 and 2014.
2. More robust subscription services
To get more consistent revenue, Nintendo recently created an online subscription service similar to Xbox and Playstation. Nintendo Switch Online (NSO) subscribers can play games like Mario Kart with their friends or others online while having access to some legacy games from older Nintendo devices. The standard service costs $20 per year for individuals and $35 per year for families, so it’s very accessible to gamers.
In addition to the flagship service, Nintendo launched the NSO+ expansion pack last fall, which costs $50 per year for individuals and $80 per year for families. With the upgraded service, players have access to Nintendo 64 games, downloadable packs for popular franchises, and SEGA Genesis games. It’s too early to tell, but I hope this service can generate more revenue through subscription services at higher prices.
When it last updated in September, Nintendo had 32 million subscribers across its various NSO tiers. Since then, management hasn’t given a specific number, but said NSO subscribers continue to grow, including joining downloadable packs for popular franchises such as Mario Kart and animal crossing. By 2027, investors should expect Nintendo to have more robust subscription services in place. That means more legacy games, better connectivity for online play, and more downloadable packs in the expansion pack.
If Nintendo can reach 50 million NSO subscribers worldwide who pay an average of $30 per year (which seems very conservative, given the number of subscribers it already has), that will equate to 1.5 billion dollars in annual subscription revenue. Likely with high profit margins, NSO can be very lucrative for Nintendo if it continues to grow over the next five years.
3. Expansion in non-gaming entertainment
The biggest change with Nintendo by 2027 will be getting out of just being a games company. With its successful franchises, the company decided to become more disney-like, expanding into theme parks and video entertainment.
Four Super Nintendo worlds are set to open worldwide over the next five years, built by Universal Studios under a licensing agreement with Nintendo. One is already open in Japan and has received rave reviews, highlighting how much families and kids love Nintendo characters. These parks will not only generate licensing revenue for Nintendo, but will also help strengthen the relationship it has with its fans.
Nintendo has also partnered with Illumination Studios to make an animated Super Mario movie, coming Spring 2023. We don’t know what other content is planned for the future (Nintendo is top secret), but if that movie is a success, you can bet more will be released over the next five years.
By 2027, Nintendo is expected to have multiple theme parks open around the world, along with a growing library of movies. Combined with its subscription services and the possible new hardware device, the company could double its annual operating profit to $9 billion by 2027. At a current level enterprise value only $36.8 billion, the stock looks pretty cheap for anyone focusing on the long haul.
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Brett Schaefer has positions in Nintendo. The Motley Fool holds positions and recommends Walt Disney. The Motley Fool recommends Nintendo and recommends the following options: January 2024 Long Calls at $145 on Walt Disney and January 2024 Short Calls at $155 on Walt Disney. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.