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Morningstar | Trim Nintendo’s FVE to JPY 49,000, but Recovery of Switch Shipment Is Underestimated by the Market

We trim Nintendo’s fair value estimate to JPY 49,000 from JPY 51,000 as we revise our earnings forecasts, but continue to see that Nintendo’s shares are undervalued. Considering the stagnation in the first half, we lowered the Switch hardware shipment assumption for this fiscal year from 21 million to 18.5 million, which is the main reason for revising our fair value estimate. While we acknowledge that lack of big titles caused the temporary slowdown, we will retain our view that the software pipeline from December quarter is quite attractive to reignite the console shipment momentum, which is underestimated by the market. Moreover, the market seems to be overlooking the revenue growth of Nintendo’s mobile game business and online subscription business, which may start to pick up from the December quarter. Overall, we believe that Nintendo’s current share price, dropping approximately 30% from its recent peak in January, is providing a nice investment opportunity.

We are encouraged that recent news flows are supporting our view. On Nov. 16, Nintendo announced that sales of Pokemon: Let’s go, Pikachu!/Let’s go, Eevee! reached 3 million in the first week of launch, becoming the fastest selling Switch title since its launch. Nintendo also mentioned that the preorder for Super Smash Bros Ultimate, which will be the largest title for this fiscal year, is within its high expectation. Moreover, in Nov. 28, the company announced that U.S. Switch hardware sales on Thanksgiving and Cyber Monday increased 115%, compared with the previous year. As the console shipment is driven by the first party software, we believe that the momentum will be even accelerated in 2019, as Nintendo plans to release attractive titles, such as Super Mario Bros. U Deluxe, Yoshi’s Crafted World, Luigi’s Mansion 3, and brand-new titles of Animal Crossing and Pokemon.

While we slightly cut our Switch shipment assumption, we raise our revenue forecast from its mobile games and online subscription service, which are critical drivers for Nintendo to achieve long-term revenue growth. According to the company, sales of Dragalia Lost, its latest mobile game title launched in September, reached JPY 4 billion in the first month, which is above our forecast and exceeding the revenue of other three titles. We view that the success will urge Nintendo to deepen the collaboration with third party software makers to accelerate the launch of mobile games. As a result, we forecast that approximately 20% of Nintendo’s revenue will come from mobile games and online contents in fiscal 2023 (financial year ending March 2023), which will contribute mitigating the cyclicality of game consoles.