Japanese consumer electronics and video game company Nintendo Co. Ltd. (NTDOY) has advanced  26.6% over the past three months. This impressive performance has been driven largely by the growth in demand for the company’s products during the holiday season, and the company’s ability to meet the rising demand for video games amid the COVID-19 pandemic.

The stock closed yesterday’s trading session at $80.95, 1.9% below its 52-week high of $82.55, which it hit on December 17.

We think Nintendo  is  positioned to hit fresh highs in the near term based on its great lineup of games. Also, NTDOY is expected to introduce new hardware and software products that could further bolster demand for its Nintendo Switch console.

Here are the factors that we think could shape NTDOY’s performance in the near term:

Favorable Industry Outlook

The video games industry has been growing at a decent clip  over the past few years. But its growth is expected to  accelerate going forward due to  increasing adoption of digital entertainment and its ongoing  product innovations with the help of new  technology.

According to a report by Grand View Research, the global video game market is expected to grow at a CAGR of 12.9% from 2020 to 2027. As a top player in the space, NTDOY should benefit significantly from the industry tailwinds.

‘Nintendo Switch’ is Driving Growth

The company’s game console ‘Nintendo Switch’, which was launched in March 2017, has proved to be a blessing for NTDOY. The company also launched the ‘Nintendo Switch Lite’ in September 2019; it is designed specifically for portable play.

Thanks largely to these developments, the company’s revenue have increased at a CAGR of 26% over the past five years. NTDOY’s EBITDA and EPS increased at CAGRs of 54.8% and 48.6%, respectively, over the past three  years.

Prospective Acquisition of ‘Luigi’s Mansion’ Creator

NTDOY makes few acquisitions, in January  the company announced o that it had entered an agreement to acquire Canada-based Next Level Games Inc. Next Level  is the developer of ‘Luigi’s Mansion’ series and has 20 years of experience in planning and developing software for home video game machines including NTDOY’s 3DS and Switch consoles. The deal is expected to be closed by March 1,pending regulatory approval. The acquisition should drive NTDOY’s revenue growth.

High Profitability

NTDOY’s gross profit margin of 55.9% is higher than the industry average 48.6%. The company also has an impressive ROE and ROA of 27.1% and 18.1%, respectively. In addition, the company’s levered free cash flow margin of 32.9% compares favorably with the industry average 10.9%.

POWR Ratings Show Promise

NTDOY has an overall rating of B, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. NTDOY has a grade of A for Quality, in sync with its high profitability.

The stock has an A grade  for Momentum also.  This is justified given the stock’s 29.4% returns over the past six months and 26.6% gains over the past three months.

Click here to access NTDOY’s grades for Growth, Value, Stability and Sentiment.

The stock is ranked #9 of 23 stocks in the B-rated Entertainment – Toys & Video Games industry.

Click here to access eight other top-rated stocks in the same industry.

Bottom Line

The video games space is thriving thanks to increasing technological advancements and an  accelerated shift by consumers to digital entertainment. Against this backdrop, we think it is wise to invest in NTDOY because of its market dominance and high profitability.

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NTDOY shares were trading at $81.36 per share on Friday afternoon, up $0.41 (+0.51%). Year-to-date, NTDOY has gained 1.04%, versus a 4.38% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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