Buy surging Nintendo shares because Switch console may earn more than the Wii, Jefferies says

Key Points
  • Jefferies recommends Nintendo shares, saying the video game maker's newest console will drive significant earnings growth.
  • The game maker's U.S. shares are up more than 50 percent this year and rallied nearly 112 percent in the past 12 months.
31-year-old Nao Imoto (L) and her husband David Flores, 34 (R) pose with their newly purchased Nintendo Switch game console at a shop in Tokyo on March 3, 2017.
Toshifumi Kitamura | AFP | Getty Images

Nintendo's new console may lead to even higher earnings than the popular Wii, according to a Jefferies analyst who just reiterated his buy rating on the stock.

Nintendo U.S.-traded shares are up more than 50 percent this year and have rallied nearly 112 percent in the past 12 months.

"Switch has turned out to be a stealth hit and is positioned to drive Wii-type [the company's last successful console] software sales and profits cycle," analyst Atul Goyal wrote in a note to clients Tuesday. "Switch's appeal to core-gamers (vs. Wii to casual gamers) is likely to drive higher attach-rate and higher earnings than Wii-era."

Smartphone games leveraging the big Nintendo brand portfolio will also add to results, he said.

Goyal increased his Nintendo price target to 57,500 yen from 39,200 yen, representing 66 percent upside from Tuesday's Japan close. The company's shares trade primarily in Asia. The US ADR under the ticker NTDOY has average daily volume of about 452,000 shares.

Goyal cited how Nintendo's Japanese shares rose more than 300 percent in the 12 months after the Wii console launched in 2006 versus the roughly 25 percent rally since the Switch's March launch.

He also noted smaller gaming competitors such as Konami, Square Enix and Bandai Namco with "limited IP appeal" have grown their mobile gaming businesses from zero to $1 billion per year in sales during recent years.

"This time, IP monetization on mobile should provide structural growth backdrop. It has been <6 months since the first Nintendo mobile game," he wrote.

As a result, Goyal predicts Nintendo's annual operating profit will rise to 189 billion yen in fiscal 2018 and 423 billion yen in fiscal 2019 versus his estimated 29 billion yen in fiscal 2017.

"Nintendo is also actively targeting and courting its core-gamers with a very powerful game line-up in the year 1 of Switch's launch. We believe this is the most powerful and attractive line-up of any Nintendo game console ever," he wrote.