Nintendo’s stock (NTDOY) experienced a volatile week, initially surging 8% to a 52-week high on the official announcement of its highly anticipated Switch 2 console, only to fall 5% in after-hours trading due to the company’s withholding of key details like pricing, launch date, and hardware specifications. This initial excitement followed by investor disappointment underscores the weighty expectations surrounding the successor to the hugely successful Nintendo Switch. Despite the recent fluctuations, NTDOY has seen a 20% increase since the start of 2024, slightly trailing the broader S&P 500’s 24% gain. This performance highlights the potential volatility of individual stocks compared to diversified investment strategies like the Trefis High-Quality Portfolio, which has consistently outperformed the S&P 500 since its inception.
The Switch 2 represents a pivotal moment for Nintendo. The original Switch, launched in 2017, became the company’s best-selling console with 147 million units sold. However, recent sales figures indicate a decline as consumers anticipate the new generation. The preview of the Switch 2 showcased several enhancements, including a larger screen, magnetically attaching controllers, and an additional button. While it remains unclear if the new console will match the raw processing power of competitors like the PlayStation 5 or Xbox Series X|S, expectations are high for significant performance improvements over the original Switch. Initial reactions to the preview were positive, though concerns about potential backward compatibility issues with existing Switch games have emerged.
Nintendo’s business model relies heavily on software sales tied to its consoles, having sold over 1.3 billion software units for the Switch. The launch of the Switch 2 is expected to be accompanied by a new Mario Kart game, further fueling sales. Investors anticipate the new console will revitalize Nintendo’s revenue growth, which has been declining in recent years, falling from 1.76 trillion JPY in 2021 to 1.67 trillion JPY in 2024 (fiscal year ending in March). The success of the Switch 2 is crucial for reversing this trend and restoring investor confidence in the company’s long-term growth prospects.
NTDOY’s performance over the past four years has been marked by significant volatility, with annual returns fluctuating dramatically compared to the more stable S&P 500. The ADR experienced returns of -28% in 2021, a steep drop of -82% in 2022, a recovery with 25% in 2023, and a more modest 13% growth in 2024. This volatility contrasts sharply with the performance of the Trefis High-Quality Portfolio, a collection of 30 stocks designed for lower volatility and consistent returns. The portfolio has outperformed the S&P 500 over the same four-year period, demonstrating the potential benefits of diversified investing in mitigating risk.
The Trefis High-Quality Portfolio’s consistent outperformance of the S&P 500 over the past four years underscores the advantages of a diversified investment approach. By spreading risk across a basket of carefully selected stocks, the portfolio aims to deliver superior risk-adjusted returns compared to investing in a single, potentially volatile stock like NTDOY. The portfolio’s performance metrics demonstrate a smoother, more predictable growth trajectory, making it an attractive option for investors seeking to mitigate risk while aiming for strong long-term returns. This consistency is particularly valuable during periods of economic uncertainty.
The current macroeconomic landscape, characterized by uncertainty around interest rate cuts and geopolitical tensions, raises questions about NTDOY’s future performance. Will the stock experience similar volatility and potentially underperform the S&P 500 as seen in 2021, 2022, and 2024, or will the Switch 2 launch propel the company towards a period of renewed growth? While the Switch 2 is expected to provide a significant boost to Nintendo, addressing declining console sales and the post-pandemic softening of gaming demand, it’s important to consider that much of this anticipated growth may already be reflected in the current stock price. Trading at 6.5x trailing revenues, significantly higher than its three-year average P/S ratio of 4.1x, NTDOY appears to be priced for optimism. Potential investors are advised to await the detailed information expected in April, which should provide a clearer picture of the console’s pricing, features, and associated game lineup, allowing for a more informed assessment of future revenue projections and investment potential.
