Nintendo (TSE:7974): Assessing Valuation Following a Strong Share Price Run

Nintendo (TSE:7974) shares have seen some movement lately, sparking conversation about what could be driving current sentiment. Investors are taking a closer look at recent trends, particularly the company’s performance over the past month.

See our latest analysis for Nintendo.

While Nintendo’s share price has been climbing, up nearly 10% in the past month and delivering an impressive 53% return year-to-date, its momentum stands out even more in the long term with a 72% total shareholder return over the past year and a remarkable 158% over three years. This strong run suggests investor optimism may be fueled by consistent performance and renewed expectations for future growth.

Inspired by Nintendo's momentum? Now’s a great time to expand your watchlist and discover See the full list for free.

But after such a strong run, investors may wonder whether Nintendo’s shares still offer value at current levels or if the stock’s recent gains suggest that all future growth is already reflected in the price.

Price-to-Earnings of 43.9x: Is it justified?

Nintendo is currently trading at a Price-to-Earnings (P/E) ratio of 43.9x, which provides insight into how highly the market is valuing its profits compared to peers and historical benchmarks.

The P/E ratio measures how much investors are willing to pay for each yen of annual earnings, often serving as a direct reflection of expectations for future growth. For a company like Nintendo, which operates in a dynamic sector where innovation and momentum can drive significant profits, a high P/E may indicate optimism about earnings expansion.

However, at 43.9x, Nintendo's P/E stands well above the Japanese Entertainment industry average of 22.5x as well as the peer average of 35.8x. Notably, it is still considered fair relative to an estimated fair P/E of 46.7x, providing a potential reference point for where the market might recalibrate if expectations are maintained.

Explore the SWS fair ratio for Nintendo

Result: Price-to-Earnings of 43.9x (ABOUT RIGHT)

However, slower revenue growth or a pullback in net income momentum could quickly challenge recent enthusiasm regarding Nintendo’s share price outlook.

Find out about the key risks to this Nintendo narrative.

Another View: SWS DCF Model Suggests Overvaluation

Looking at Nintendo’s valuation through the lens of our SWS DCF model tells a different story. The DCF approach estimates the company’s fair value at ¥9,800.13, which is well below the current share price of ¥13,905. This suggests the stock could be overvalued if the model holds true. The question remains whether Nintendo’s growth can continue to justify this premium.

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Nintendo for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 876 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Nintendo Narrative

If you have a different perspective or want to dive into the numbers on your own terms, you can quickly shape your own take in just a few minutes: Do it your way

A good starting point is our analysis highlighting 1 key reward investors are optimistic about regarding Nintendo.

Looking for more investment ideas?

Don’t let opportunity pass you by. Expand your options now with new stocks that fit your unique goals. Here are three smart routes worth your attention:

• Snag reliable income by reviewing these 16 dividend stocks with yields > 3% for companies offering yields above 3%, perfect for those who favor steady returns.
• Catch the next wave of finance by jumping into these 82 cryptocurrency and blockchain stocks, where innovation in blockchain and crypto-tech is reshaping entire industries.
• Spot undervalued potential by scanning these 876 undervalued stocks based on cash flows, revealing stocks priced below their true worth based on future cash flows.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com