Is Nintendo’s Star on the Rise? ($NTDOY)

Nintendo has a huge hit on its hands in the Nintendo Switch. And that’s a great thing for Nintendo investors. Their last flagship console, the Wii, sold just over 100 million units during its lifespan (more than Playstation 3 and XBox 360), but a strong showing from the Playstation 4 and XBox One (with pioneering associated technologies from both) meant that Nintendo Switch had to be a hit.

Early analysts weren’t so sure. The Switch’s bold combination of mobile and traditional console gaming seemed confusing to some, but fortunately the public immediately understood what Nintendo was going for. Projections suggest that the Switch will sell at least 40 million units in its lifetime.

So Should I Buy Nintendo Stock?

Today, it’s clear that the Switch is a smash. The question is: is this value reflected in $NTDOY’s current pricing, or is there still some meat on the bone for new investors?

To answer this question, we have to look at two main factors: 1) Nintendo’s revenue generation strategy from the Switch, and 2) the company’s underlying financials.

How the Switch Makes Nintendo Money

First things first, you’ve got to understand that Nintendo isn’t making money selling consoles. It is industry standard for console gaming companies to sell each unit at a price that just barely exceeds what it cost to make it. In the case of the Wii, Nintendo was making a reported $6 for every unit sold. That adds up when you sell 110M units, but Nintendo runs on revenue in the Billions.

Revenue like this comes from games and subscriptions. Even though Switches are flying off the shells, Nintendo won’t be making real money until they have hit games and subscriptions. They probably will, but because their stock price is currently at a nine-year high, it seems that investors are wrapped up in the Switch’s console sales, even though its main revenue potential has not been realized. It’ll come, but it’s not here yet, though it seems that Nintendo investors might have already paid for it.

Nintendo’s Underlying Financials

We could talk about many of Nintendo’s financial statistics, but the most telling is their Forward P/E Ratio of 70. For those who don’t know, a forward P/E Ratio essentially expresses how much an investor should expect to spend on company stock over the next 12 months to see one dollar in earnings. Nintendo’s 70 Forward P/E means that you’d have to spend $70 to see $1 returns. That’s not so good.

In short, Nintendo would have been a great stock to buy a year ago, but today it seems to me to be pretty much maxed out. Even with a hit on their hands, the Switch will almost certainly not sell as many console units as the Wii, and game sales and subscriptions are unlikely to turn this console into a world-slaying gaming juggernaut. At least as much as it would need to be to move the needle on share pricings in a way that shareholders will be happy with.

There are plenty of other tech and gaming stocks with more growth potential. As much as I love Nintendo’s games and legacy, I wouldn’t put my money into it right now.