Shares of Nintendo (NTDOY 2.44%) (NTDO.F 4.87%) have surged 25% so far in 2025 and are sitting close to all-time highs. Investors are clearly optimistic about Nintendo's upcoming Switch 2 launch. The original Switch came out in 2017 and became one of the company's best-selling game systems, selling more than 150 million units to date.

The stock's recent gains reflect high expectations for sales. The stock is currently trading at a multiple of sales typically reserved for the fastest-growing video game stocks. Let's look at how the Switch 2 could be successful, and whether investors should buy, sell, or hold.

Will Switch 2 return Nintendo to growth?

Nintendo didn't provide a lot of details about the new console, other than to say it will support games from the original Switch. The company also didn't provide a specific release date but noted that it will be available in 2025.

Reports suggest that Nvidia, which supplied the original Switch with custom processors, will supply Nintendo with an updated Tegra processor for Switch 2. The extra processing power could enable newer games to be available for the new system, such as Take-Two's upcoming Grand Theft Auto VI (GTA VI), but there's been no official announcement from Take-Two to know for certain. If it can, that alone could make the Switch 2 a success, since Grand Theft Auto is one of the best-selling franchises.

The new system has big shoes to fill. Recent sales of Switch have been falling, with Nintendo guiding for March-ending fiscal 2025 sales to be down 29% year-over-year. The stock is moving higher on the expectation that Switch 2 will revive demand and grow sales again. But assuming it does, the stock's valuation may already be discounting higher sales over the next few years.

The stock is priced for perfection

The stock is trading at more than 10 times trailing sales, which is expensive compared to other gaming stocks. For example, Roblox posted revenue growth of 32% year-over-year last quarter, and its stock trades at a price-to-sales multiple of 12.

Even considering Nintendo's improving margins from growing game sales in recent years, the stock is trading at an expensive forward price-to-earnings (P/E) ratio of 34. This is high for a company that is dependent on a cyclical console market.

Nintendo has to sell more hardware units, which generate low profit margins, to drive revenue growth over time. Leading video game software companies have a much smoother sales history and trade at lower valuations than Nintendo. One of the leading video game publishers, Electronic Arts, trades at a forward P/E of 18.

The value just isn't there right now. No one really knows how many units the Switch 2 will sell, but it certainly needs to perform well to grow Nintendo's sales again. Nintendo's annual revenue peaked at $16 billion in fiscal 2021, but analysts expect revenue for the current fiscal year to fall to $8 billion.

Given the uncertainty of Switch 2 sales, it's not a good idea to buy the stock hitting new highs. If Switch 2 sales disappoint, the stock could fall from these highs, as the stock's rich valuation leaves little room for error. Investors that hold Nintendo stock could even consider taking profits here and reinvesting in another video game stock that offers better value.