[PODCAST] The Switch 2 Announcement Confirms My Thesis (Ticker: NTDOY)
Don't be afraid to average up when the story gets confirmed
YouTube
Spotify
Apple Podcasts
The Nintendo Switch 2 is officially official. Nintendo confirmed as much in a press release this week. In typical Nintendo fashion, management confirmed the console will be out sometime in “2025” without much other details. Never change, guys.
We (shareholders) need two things from this console, which are now confirmed. First, there are no wild risks with the play style. The likelihood of a Wii U stinker is quite low. Second, we needed backwards compatibility for existing Switch titles to help bridge the cyclicality gap.
Nintendo confirmed just that in the press release:
“Nintendo Switch 2 plays Nintendo Switch 2 exclusive games, as well as both physical and digital Nintendo Switch games. Certain Nintendo Switch games may not be supported on or fully compatible with Nintendo Switch 2. Details will be shared on the Nintendo website at a later date.”
Here is what this tells players: don’t worry, you can still buy that game today, it will play on the Switch 2. However, if you want to play our new games, you will need to buy the Switch 2 in order to do so.
All of Nintendo’s profits come from software sales (Nintendo Online subscriptions, game sales, and add-on purchases). Backwards compatibility is a way for the company to increase and smooth out its software sales.
In fact, in the trailer for the console, we got a teaser for a new Mario Kart game. Mario Kart is Nintendo’s best seller and largest profit driver. If the Switch 2 launches with a new Mario Kart and other flagship titles, sales will be just fine.
So where does that leave investors? As of this writing, Nintendo shares in the United States finished close to an all-time high. However, I guess the stock is down in Japan because of no details regarding the Switch games:
Look, did you really invest in Nintendo expecting a clear product roadmap shared with investors? Did any historical actions from the company indicate they would act differently? No. So stop crying and trust them. They deliver quality products better than anyone in gaming (besides maybe Rockstar).
Let’s peg Nintendo’s market cap at around $68 billion. Subtract out about $18 billion in net cash and you get an enterprise value of $50 billion.
Nintendo’s operating income peaked at over $5 billion last cycle:
Without a pandemic, adding in the existing user base, and sprinkling on theme park/movie earnings Nintendo can have higher and less cyclical earnings with the Switch 2 over the next 5 - 7 years.
My hot take? Nintendo will have 5 straight years of $5 billion in earnings after the Switch 2 releases. One caveat is foreign exchange (that damn Yen gets in the way of things).
This is why I still hold the stock and have no inkling to sell. In fact, I will probably buy some more.
-Brett
Chit Chat stocks is presented by:
Public.com has just launched its BOND ACCOUNT. Lock-in interest rates of 6% or higher (as of 9/30/24) by signing up today!
With as little as $1,000, the bond account allows you to buy a diversified portfolio of bonds and lock in your yield even if the Federal Reserve cuts rates.
It only takes a couple of minutes, get started today at Public.com/chitchatstocks and open up a bond fund today!
A Bond Account is a self-directed brokerage account with Public Investing, member FINRA/SIPC. Deposits into this account are used to purchase 10 investment-grade and high-yield bonds. As of 9/26/24, the average, annualized yield to worst (YTW) across the Bond Account is greater than 6%. A bond’s yield is a function of its market price, which can fluctuate; therefore, a bond’s YTW is not “locked in” until the bond is purchased, and your yield at time of purchase may be different from the yield shown here. The “locked in” YTW is not guaranteed; you may receive less than the YTW of the bonds in the Bond Account if you sell any of the bonds before maturity or if the issuer defaults on the bond. Public Investing charges a markup on each bond trade. See our Fee Schedule. Bond Accounts are not recommendations of individual bonds or default allocations. The bonds in the Bond Account have not been selected based on your needs or risk profile. See https://public.com/disclosures/bond-account to learn more.