Nintendo (TSE:7974): Examining Valuation as Switch 2 Sales and New Releases Drive Fresh Momentum

Nintendo (TSE:7974) is in the spotlight this week, as the company’s recent momentum appears to be fueling renewed interest among investors. UK retail data points to a lift in September sales, partly because of the successful launch of the Switch 2.

See our latest analysis for Nintendo.

All this comes at a time when Nintendo’s share price has surged nearly 44% year-to-date, and shareholders have enjoyed a 62% total return over the past year. The buzz from new releases, like Kirby Air Riders, and the ongoing success of major franchises suggest that momentum remains strong for both the stock and the business.

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But with shares sitting just below analysts’ price targets after an impressive run, investors are left wondering if Nintendo is poised for further upside or if the current rally has already accounted for future growth.

Price-to-Earnings of 51.7x: Is it justified?

Nintendo trades at a price-to-earnings ratio of 51.7x, notably higher than its peers. Recent market enthusiasm has lifted the last close to ¥13,050. However, this premium raises important questions about valuation.

The price-to-earnings (P/E) ratio compares a company's current share price to its per-share earnings, giving investors a sense of how much they are paying for each unit of profit. For established entertainment companies like Nintendo, the P/E ratio is closely watched because it reflects both growth expectations and the strength of its popular gaming franchises.

At 51.7x, Nintendo's P/E is significantly above the JP Entertainment industry average of 22.6x and also exceeds the peer group average of 39.2x. This suggests that the market is currently pricing in substantial future profit growth. However, compared to our estimate of a fair P/E ratio at 48x, the current level also appears somewhat stretched, indicating the stock may already be reflecting much of its expected growth potential.

Explore the SWS fair ratio for Nintendo

Result: Price-to-Earnings of 51.7x (OVERVALUED)

However, slower revenue or profit growth than expected could cool investor enthusiasm. This could potentially put pressure on Nintendo’s elevated valuation in the near term.

Find out about the key risks to this Nintendo narrative.

Another View: What Does the SWS DCF Model Say?

Looking at Nintendo through our SWS DCF model provides a different angle. The DCF model currently values the shares below the recent market price, implying the stock could be overvalued based on forecasted future cash flows. This raises questions about the robust growth optimism reflected in the market’s pricing. Which method should investors rely on most?

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 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 want to interpret the numbers for yourself and develop a personal take on Nintendo's outlook, it only takes a few minutes to create your own analysis. Do it your way

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

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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.

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