To Move Higher, Nintendo Stock Needs Only a Switch… in Direction

Nintendo (OTCMKTS:NTDOY) stock continues to fall. The sales growth of its Switch console and many of its games would seem to help the company. Still, Nintendo stock has failed to gain traction and now appears positioned to fall back to 52-week lows. NTDOY stock trades at an attractive valuation and follows a strategy that can bolster its long-term success. However, due to lagging sales in the overall sector, Nintendo stock remains a victim of its industry.

Nintendo Will Bring Virtual Reality to Switch

Source: Shutterstock

Nintendo just announced the creation of a virtual reality (VR) headset for its popular Switch console. The company will release this headset on April 12. This cardboard headset will cost $80, and it comes with an alien shooter game. This is the company’s first crack at VR since it released the Virtual Boy in 1995.

This comes in much less than the $300 VR headset Sony (NYSE:SNE) released for its PlayStation gaming console. The interesting thing about the VR headset is it reaffirms Nintendo’s commitment to consoles. While it produces smartphone-based games, Nintendo designs them to spark interest in console games. The company has even gone so far as to discourage partners from charging customers excessive fees to speed up gameplay or win special characters on its smartphone games.

Console Strategy Makes Sense

Admittedly, the company’s strategy seems like a negative for Nintendo stock at first glance. Players will sometimes spend hundreds or even thousands of dollars on such upgrades. Discouraging some of these fees appears to sabotage a lucrative revenue stream.

Also, as viewing has diversified away from televisions, video game console sales have steadily declined since the early 2000s. Recreational game players tend to gravitate toward devices. On the other end, competitive players prefer PC-based gaming for its speed. Hence, a commitment to consoles seems counterintuitive.

However, Nintendo’s console connects to tablet consoles just as easily as to a television. This makes it both portable and conducive to multi-user play. Also, tablet compatibility increases the likelihood consumers will buy more than one Switch per household. This can compensate for the revenue lost from charging fewer fees on smartphone-based games.

Strategy Will Help Nintendo Stock

I think Nintendo has made a wise decision by questioning the fee for play strategies that drive many gaming companies. If the airline industry serves as an indicator, excessive fees charged by airlines other than Southwest (NYSE:LUV) have stoked resentment. Avoiding the “fee for everything” approach has not hurt Southwest stock. I do not think it will hamper Nintendo stock either.

Sales figures also appear to validate this strategy. In January, videogame sales fell 19% on a year-over-year basis. The Nintendo Switch was the only platform to see growth amid the decline.

Also, Nintendo currently sells three of the ten best-selling games. Only Take-Two (NASDAQ:TTWO) currently matches this feat. Drawing on long-time franchises has helped. InvestorPlace contributor Bret Kenwell considers Nintendo the Disney (NYSE:DIS) of the video game industry, as it has kept franchises such as Mario Bros. popular for decades.

When Is the Right Time to Buy Nintendo Stock?

So, where does that leave Nintendo stock? The 23 price-to-earnings (PE) ratio comes in well below historical averages. Yes, both Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA) support slightly lower multiples. Still, I like the innovation I see from Nintendo, so I do not think this valuation should discourage buyers.

The only reason I see not to buy NTDOY stock right now pertains to the direction of the Nintendo stock price. The equity has traded in a range over the last few months. It fell to a 52-week low of $31.38 per share on Christmas Eve. It then rose above $39 per share in January before falling back. Today, it trades at just above $33 per share.

As sales declines have hit the entire industry, NTDOY has fallen along with other gaming stocks. Until we know the Nintendo stock has established a firm bottom, I do not recommend buying. However, the new VR headset should help revenues and conditions for an eventual recovery remain in place. Once it begins to trend upward, I think Nintendo can reach and surpass its $57.96 per share high.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

 

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