Nintendo (OTC: NTDOY) was one of the most popular stocks in the year 2020, according to MarketWatch. The COVID-19 lockdowns, as well as the success of Animal Crossing: New Horizons, helped the Japanese video game company see sales of its Switch platform soar last year, reaching 28.8 million units worldwide.

Demand has slowed in 2021, with the company predicting 25.5 million Switch (and Switch Lite) sales in free ACNH items fiscal year, which ends in March 2022, compared to the previous year. This is most likely a major contributing factor to the stock's 25% year-to-date decline.

Nintendo, on the other hand, has some new products and partnerships in the works to coincide with a busy holiday season, which should help the company maintain its profitability. Is this a sign that Nintendo's stock is on the verge of a turnaround by the end of 2021?

The company is doing extremely well.
Nintendo's most recent quarterly update covered the three months ending June 30, which corresponded to the company's fiscal 2022 first quarter. Net sales were down 9.9% year on year, and operating profit fell 17.3% to 119.8 million yen ($1.09 billion), a decrease from the previous year. The decrease in operating profit can be directly attributed to a decrease in software (game) sales that occurred during the period under consideration. Sales of software in the prior year totaled 50.4 million units, but they fell to 45.3 million units in the most recent quarter.

At first glance, this appears to be a cause for concern, but investors should recall the game Animal Crossing: Wild World. After releasing in March 2020, New Horizons surpassed 10.6 million units sold in Nintendo's fiscal 2021 first quarter, makingfree ACNH bells the second-best-selling Switch title of all time behind Mario Kart. The game is now the second-best-selling Switch title of all time. One year later, Animal Crossing unit sales totaled just 1.3 million, a difference that more than makes up for the software shortfall that occurred between the two years prior. Overall, gamers are still actively engaged with their Nintendo Switch devices.

Hardware sales were down in the quarter as well, but this was primarily due to a decrease in Switch Lite sales during the period. When the original Switch, a hybrid console and mobile gaming device, was released, unit sales grew by an impressive 8.5% year on year. Once again, this demonstrates that there is a consistent demand for Nintendo's flagship gaming console throughout the world.

A strong lineup of games, including Metroid Dread, Pokémon Legends: Arceus, and Splatoon 3, is scheduled to release this holiday season and in 2022. Nintendo may be able to maintain strong software sales over the next few years with this lineup of games. In terms of future operating profit and cash flow, this is the most important factor to consider.

There are numerous opportunities for development.
While Nintendo's game lineup appears to be strong, the new Switch OLED device is the most significant new product to be introduced. With a larger screen, a brighter OLED display (hence the name), and 64 GB of storage, the new model will outperform its predecessor. In advance of the release date of October 8, pre-orders have already sold out at major online retailers such as Amazon, Walmart, and Target. If the Switch OLED sells well during the holiday season, Nintendo's financial results will improve significantly over the next few quarters.

Apart from the OLED display on the Switch, Nintendo is also releasing a new mobile application in collaboration with Niantic, the mobile and augmented-reality developer behind the Pokémon Go mobile game. Based on the Pikmin franchise, this new game is expected to be released later this year or early next.

Last but not least, in collaboration with Comcast's Universal, Nintendo is developing theme parks around the world, and a new Mario film, produced by Illumination Studios, will be released in 2022. Even though these two ancillary businesses will not contribute to top- or bottom-line growth for at least a few years, they are excellent opportunities for the company to introduce new people to its well-known entertainment personalities. As a result, more people will be drawn to the highly profitable gaming ecosystem that it has created.

Although valuation is low, investors must exercise patience.
Nintendo's stock trades at 8.5 times its trailing-12-month operating profit, even after taking into account the $10.1 billion in cash on its balance sheet. Considering the new Switch OLED and games lineup that will be released over the next year, as well as the additional investments that Nintendo is continuing to make, this appears to be a very good deal for the company.

Management expects operating profit to be down 22% in the current fiscal year, to $4.57 billion, according to projections. This would increase the company's valuation multiple to 10.5 times. Investors should be aware, however, that Nintendo has a reputation for being extremely conservative in its guidance. For example, Nintendo has outperformed its operating profit forecast for the upcoming fiscal year every year since the beginning of fiscal 2018. However, while there is no guarantee that the company will do so again in fiscal 2022, there is an excellent chance that it will.

And this does not imply that Nintendo's stock will soar in the near future. Management takes a long-term approach, and it is possible that the stock price will not recover its 2021 losses until the new year. The good news is that shareholders who own shares in this company should be able to sleep well at night as long as the company's key business metrics remain strong.