Nintendo (NTDOY 0.27%) and Take-Two Interactive (TTWO -0.39%) represent two very different ways to invest in the video game market. Nintendo produces video game consoles and publishes its own games, and it develops family-friendly franchises like Mario, Zelda, Donkey Kong, and Metroid. Take-Two is smaller than Nintendo, doesn't sell any consoles, and primarily targets older gamers with its Grand Theft Auto, Borderlands, Red Dead, Mafia, WWE 2K, and NBA 2K franchises.
Both companies experienced growth spurts during the pandemic as people stayed at home and played more video games. But they also experienced tough slowdowns as the pandemic passed, and those tailwinds dissipated.
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Both companies also face a lot of pressure to launch new products and games in the near future: Nintendo's Switch is now more than six years old, while Take-Two's blockbuster game GTA V is nearly 10 years old. Should investors buy either of these stocks as gamers await their latest moves? Let's dig deeper and find out.
Nintendo could still surprise the market
The bear case against Nintendo is pretty strong at the moment. Its revenue fell 6% in fiscal 2023 (which ended this March), representing its second straight year of shrinking revenues, and it expects another 9% decline in fiscal 2024. Its net profit slipped 9% in fiscal 2023, and it's bracing for another 21% drop in fiscal 2024.
Nintendo's sales and profits are withering because the aging Switch has largely saturated its addressable market, with nearly 125 million units sold since March 2017. It's refreshed the console with the cheaper Lite version and the pricier OLED version over the years, but it will likely need to launch a brand new console to revive its revenue growth again.
On the bright side, Nintendo's recent launch of The Legend of Zelda: Tears of the Kingdom, which sold 10 million copies globally in the first three days alone, could drive some gamers to either buy new Switch consoles or upgrade to the higher-end OLED model. The market's healthy appetite for Nintendo's evergreen franchises -- which can be seen in the Super Mario Bros. Movie's box office performance and the popularity of its Super Nintendo World theme park attractions in Japan and California -- also suggests there will be plenty of demand for Nintendo's new console when it finally arrives.
Nintendo's stock looks reasonably valued at 20 times forward earnings, yet those valuations are pegged to analysts' conservative estimates for its near-term growth. If Nintendo's Zelda sales continue to shatter new records -- or the company unexpectedly unveils its next big console -- those estimates could be raised, and its valuations would drop.
Take-Two expects its "next phase of growth" to start
Take-Two's bookings rose 55% in fiscal 2023 (which ended this March), bouncing back strongly from its 4% post-pandemic decline in bookings in fiscal 2022. However, a lot of that growth was driven by its takeover of the mobile game maker Zynga last May. That acquisition caused Take-Two to post a net loss in fiscal 2023.
Most of Take-Two's bookings growth in fiscal 2023 was driven by its NBA 2K games, GTA V and GTA Online, Red Dead Redemption 2 and Red Dead Online, as well as Zynga's Words with Friends, Merge Dragons, and Toon Blast. But after lapping its Zynga acquisition, Take-Two only expects its bookings to rise 3% to 5% in fiscal 2024.
That outlook suggests that Take-Two needs to follow up GTA V, which it already expanded significantly with GTA Online, with a proper sequel. The same can be said about Red Dead Redemption 2, which was launched in 2018. Take-Two hasn't set a firm launch date for GTA VI yet, but CEO Strauss Zelnick recently suggested the company would experience its "next phase of growth" in fiscal 2025 as it launches "several groundbreaking titles" to generate over $8 billion in full-year bookings.
Therefore, its bookings could jump about 45% in fiscal 2025 as several eagerly anticipated games -- which will likely include GTA VI -- finally hit the market. If that happens, its stock might be a bargain right now at 22 times forward earnings.
The better buy right now: Nintendo
I believe Nintendo and Take-Two are both great long-term plays on the gaming market. But if I had to pick one over the other right now, I'd stick with Nintendo because its business is better diversified, it owns more evergreen franchises, its stock is slightly cheaper, and it's approaching the trough of its cyclical slowdown. Nintendo also pays an attractive forward yield of 3.5% to reward its patient investors, while Take-Two doesn't pay a dividend at all.
