Stakes are high for Switch 2 after Nintendo's stock valuation surges
The stakes are high for the unveiling of the console on Wednesday, with the stock trading near its priciest level in seven years. The pressure to impress with the device and related games has ramped even higher on concerns that Donald Trump's tariffs may drive up the Switch 2's price.
Shares have climbed about 25% in the past 12 months, far outperforming Japan's Topix benchmark and briefly pushing the firm's market capitalization above $100 billion for the first time. Short interest has spiked in recent weeks, as some investors bet on a decline.
Unless details of the Switch 2 exceed market expectations, "I think the run that Nintendo has had over the past year probably sums up the upside,' said U.K.-based Japan equity analyst Pelham Smithers. The stock may look less attractive after the console's release because it has "done so well on the hype,' he added.
The stock did lose some steam in mid-January after the company released a Switch 2 teaser video with fewer details than expected. Wednesday's announcement should reveal more, and compatibility with third-party games is seen as a key point to watch, along with the new console's price.
"If it's going to come at $449 or $499, as many are predicting, that's very high — and that's before tariff talk,' Smithers said. The ability to play titles not available on the original Switch, such as those released for Sony Group's latest PlayStation, would help boost demand, he said.
Investors are also hoping for an announcement of new in-house games for the Switch 2, which is seen going on sale as early as June.
"The important thing will be having a really attractive software lineup,' such as new Mario Kart and Pokemon titles, to sustain demand for the console beyond its initial launch, said Doug Creutz, an analyst at TD Cowen.
Creutz, who has a buy rating on the stock, sees Nintendo's rally as far from over, projecting upside of more than 20% over the next year. "Their intellectual property has been having a lot of success, and I think that's value that still has not been fully recognized by the market,' he said.
Anticipation of further earnings upside from nongaming IP, like "The Super Mario Bros. Movie," has helped boost the stock's price. It's been trading around 30 times estimated forward earnings for the past two months, a level last seen in early 2018, and pricier than console peers Sony and Microsoft.
The lofty valuation has led to increased bets on a drop. Short interest in the stock has risen to above 1.8% of the free float, near the highest level in about a year, S&P Global data show.
Sell-side analysts remain mostly positive, however, with 21 buy recommendations versus eight holds and three sells. Bulls point to the potential for the Switch 2 to revive sales and profit growth, which have slumped as its predecessor has aged.
The stock's huge run-up may leave it vulnerable to disappointment upon Wednesday's unveiling. By way of comparison, shares dropped around 6% in the week after details of the original Switch were revealed in January 2017.
"It shouldn't be a surprise if there's a round of profit-taking' after the Switch 2 reveal, said Robin Zhu, an analyst at Sanford C Bernstein. Losses will "probably be bigger than the hardware unveiling last time,' due to the stock's historically high price, he said.
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