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Nintendo is a leading Japanese hardware/software company in the gaming Industry. It exist for over a century, into electronic games since 1970s. Everyone heard/played Super Mario, character developed by Nintendo. Not surprisingly, Covid lock down has brought many users in to gaming hardware/software and Nintendo is not an exception. Gamers are loyal and stick to Nintendo brand and generate higher incremental revenues. Company also in the process of developing an eco system that could bring new users and expand the existing install base. They successfully forayed in to theme parks, movie and merchandise business. Macro tail winds due to Japanese economy/market is attracting investors around the world. Company with lots of intellectual property and with popular characters ( Super Mario, Zelda) among children and families available at 3X Earnings Value to sales makes a compelling study.
Feel free to skip the history and go to business model. It’s here for context.
History
Nintendo was established as a handmade Hanafuda playing card ( flower cards) manufacturer on September 1889 by Fusajiro Yamauchi in Kyoto, Japan. By the early 1900s, Nintendo had solidified its position as a premier playing card manufacturer in Japan, garnering a reputation for excellence in the industry. These cards are sold till to this day.
In the 1960s, Nintendo tried different types of businesses. Led by Hiroshi Yamauchi, the grandson of Fusajiro, company tried ventures like a taxi company, a chain of hotels for couples, and even a food busi- ness. Unfortunately, these attempts didn’t work out well, so Nintendo decided to concentrate on what it was already good at and they started concentrating on Toy production.
Figure 1:
Nintendo’s foray into Video games happened by accident. The Magnavox Odyssey is the first ever com- mercial home video game console developed in the United States and released in September 1972. They were looking for a company that could manufacture the light guns for them. In 1970, Nintendo began selling Kôsenjû SP, a pair of toy guns, a pistol and a rifle, that used a light-dependent resistor that was manufac- tured by Sharp. Like everyone else around the world, Nintendo got introduced to home video games through the Odyssey. It was their first experience with this new type of home entertainment, and they learned about it very early, possibly before anyone else in Japan. The president of Nintendo, Hiroshi Yamauchi, was in- trigued by what he saw. Even though Nintendo didn’t have immediate plans to fully embrace this new and unfamiliar industry, they wanted to be involved. As a result, Nintendo made a deal with Magnavox, granting them the exclusive rights to distribute the Odyssey in Japan. That was the birth of a modern Nintendo.
Nintendo’s turning point came in 1981 with the release of Donkey Kong, an arcade game created by the talented Shigeru Miyamoto. The game achieved tremendous success and introduced the world to Mario, a character who would become beloved by millions. That was a beginning of a long and successful col- laboration between Nintendo and Shigeru Miyamoto. He is the Walt Disney of Nintendo. His philosophy is not to have violence in children game and carefully designed Mario ( https://www.nytimes.com/2013/ 03/12/arts/video-games/shigeru-miyamoto-of-nintendo-on-wii-u-sales-and-game-violence.html). Although his recent interviews seems a change in his stand but he did emphasized that Mario is a character that never hurts other people. ( https://www.gamespot.com/articles/miyamoto-has-no-problem-with-violent-games- but-mario-wont-wield-a-gun-anytime-soon/1100-6512965/).
In 1983, Nintendo entered the home console market by releasing the Nintendo Entertainment System (NES) in Japan. The NES had an 8-bit processor and came with the game Super Mario Bros. It was a huge success and helped revive the video game industry in North America after a major crash in 1983.
The NES’s triumph laid the groundwork for Nintendo’s future dominance in the gaming industry. Over the following years, Nintendo launched several popular consoles, such as the Super Nintendo Entertainment System (SNES), Nintendo 64, and GameCube. These consoles introduced players to beloved franchises like The Legend of Zelda, Metroid, and Mario Kart, establishing Nintendo as a leading game developer and publisher.
Table 1: Nintendo Home and Handheld consoles
| Home Console | Handheld Consoles |
|---|---|
| 1977 – Color TV-Game | 1980 – Game & Watch |
| 1985 – Nintendo Entertainment System (NES) | 1989 – Game Boy |
| 1990 – Super Nintendo Entertainment System (SNES) | |
| 1996 – Nintendo 64 | |
| 2001 – Nintendo Game Cube | 2001 – Game Boy Advance |
| 2006 – Nintendo Wii | 2004 – Nintendo DS |
| 2012 – Nintendo Wii U | 2011 – Nintendo 3DS |
| 2017 – Nintendo Switch | 2019 – Nintendo Switch Lite |
Business Model
Nintendo sells hardware (consoles) as well as software (games) that is exclusive to Nintendo hardware. Since the beginning Nintendo’s culture is to keep extremely tight control over how people can view/interact with its entertainment characters. These games are produced only by Nintendo or its close associates and runs exclusively on the Nintendo’s hardware. One can not play Nintendo games in other famous gaming consoles like xbox or play station.
So far their model is to release a new console/hardware periodically and develop games optimized for that console. This way Nintendo resets the user base to zero and rebuilds with the release of hardware. Also games were not portable from one console to other. Using this model they could force the players to switch to new hardware and buy games for that console. They sell hardware at smaller profits and they make most of their margin from selling dedicated games for their hardware. Software titles released is nothing but number of game released per year or quarter. While game sales is reported as software Unit sales, total number of games sold.
With time they went through different generations of consoles/hardware, console sales and sofware Unit sales with time are shown in Figures 3 and 4. Nintendos Financial year starts from April current year and ends next year March. So all the years from here on is financial year unless stated separately. One can clearly notice that new hardware comes in to market and corresponding games introduced and slowly older ones goes out of the market. Game sales follows the hardware sales and on an average about 4 games are sold for each hardware sales. Sales peaked during 2009 when Nintendo DS and Wii made record sales. But their next console Wii U failed to live up to the expectation as well as lack of games for that console slumped the sales. Although company continued developing its next console due to solid balance sheet, this period was a big learning for the company and their business model was put to test. This lead to their current console Nintendo Switch.
Figure 3: Console Sales & Figure 4: Total Software Unit Sales
Nintendo Switch
Switch was released in March 2017 and quickly gained widespread acclaim for its unique hybrid design that allows it to be used both as a handheld device and a traditional home console. This brought Nintendo back in the game and sales started climbing up steadily. Once hardware was well received software unit sales also went up. There are two components to games sales. One is first party games sales and third party game sales. First party game sales mostly Nintendo IP like Mario, Zelda, Kirby and all characters that Nintendo developed with time. These games have incredible margins and sold at premium. These games are developed by either Nintendo or Nintendo associated game developers. Third party games are developed by other developers that can be played in Nintendo hardware that Nintendo gets paid flat 30 % on sales.
Nintendo also came up with different versions of the switch, Switch lite that is only hand held version. An improved version of switch with better display called OLED was released end of 2021 and replaced classic switch sales Figure 5. Sales peaked in FY 2021 aided by covid lock down as people stayed indoors and looked for home/indoor entertainment. Software unit sales continue go up although different switch versions are introduced as shown in Figure 5.
Figure 5: Nintendo Switch Sales on the left and Sofware Unit Sale for the NS on the right
Nintendo Switch Online
During the successful journey of Nintendo switch, Nintendo managed to develop an eco system. As of Dec 2022 ~ 300 Mill users registered for Nintendo account. Nintendo account is a basic account that a player can save his/her progress. It also facilitate two additional accounts. Nintendo switch account and Nintendo Switch Online account. Unlike earlier generation of hardware, users are not tied to one piece of hardware. Now using one account they can play across devices. This can also be seen the seamless release of Switch lite and Switch OLED model.
Also this eco system lead to another revenue stream for Nintendo. There is a annual fee for Nintendo Switch online acount (NSO). As of Nov 2022 Nintendo has about 36 Mil paying users. NSO account is necessary to play with friends as well as other random online players. There are two kinds of account types “Nintendo Switch Online individual membership” that costs about 20 $ per year and “Nintendo Switch Online + Expansion Pack individual membership” costs 50 $ per year. Similar such packages are available for families with 35 $ and 80 $ per year. if we take an average of 30 $ per user 36 Mil users would give Nintendo about 1 Bill recurring revenues every year. Nintendo reported about 12 Bil USD Revenues last financial year. Its already contributing about ~10 % of the revenues.
Nintendo theme parks & Merchandise
Nintendo has joined forces with Universal Studios to bring their popular characters to theme parks in different parts of the world. These parks will be located in Singapore, Japan, California, and Florida and are expected to be ready by 2025. When it comes to the theme parks, Nintendo, led by Miyamoto ( Walt Disney of Nintendo), is working together with Universal to design the areas dedicated to Nintendo’s games and characters. However, Universal Studios is responsible for providing the financial investment. This means that Nintendo doesn’t have to spend as much money. But the revenue share is not clear and how much Nintendo will gain financially. Even if it does it may not add be meaningful given the size of revenue. But parks will add to the eco system and pull more people to Nintendo’s games. Nintendo also expanded its business model and brought its well known characters to merchandise business. Official Nintendo Store KYOTO is scheduled to open on October 17, 2023. Again this may not be revenue acretive but fits very well to the eco system to get more people to their games.
Entry in to movies and the success of Super Mario
Movies are not new to Nintendo they already released a Super Mario movie in the 1990s titled “Super Mario Bros.”.Although the movie had high expectations due to the popularity of the video game franchise, it received mixed reviews from both critics and fans. Since then Nintendo became very strict with lending their IP to other franchises.
Back in 2018 Nintendo announced Super Mario movie partnership with Illumination ( they made Movies like Despicable Me, minions). Due to Covid and lockdown it was postponed and finally released in April 2023 and became best-selling animated movie of all time on its opening weekend (5-day opening weekend contributed as well). Movie grossed almost 1.3 Bill as of May 2023. They will also earn money from at-home sales, TV distribution, and streaming deals. Movie was made with 100 Mil budget and Nintendo spent about 50 Mil for marketing. Due to the success the gaming fraternity already came up with list of Nintendo IP that can be converted to movie ( https://www.cbr.com/nintendo-games-illumination-should-adapt/). Although neither Nintendo nor Illumination confirmed about sequal it looks highly probable.
Figure 6: Super Mario Movie Franchise
Triggers
Nintendo Switch - Is it different this time
Nintendo managed to grow active playing users steadily over the years. They have also built an eco system with 300 M Nintendo accounts, 36 M Nintendo switch Online accounts as well as 114 M annual playing users ( Figure 7 right panel) for Nintendo switch. Annual playing users has went up every year even after covid ( Figure 7 right panel). Business wise it doesn’t make sense to reset the users to zero and starts fresh for new hardware. Stock is also not fully priced mainly becuase market is nervous that Nintendo may start from the scratch for the new hardware. But there are definite signs that switch is here to stay. If one looks at the number of game titles developed and released since the console is available, as shown in left panel of Figure 7 it usually peaks between 3 and 5 years and then falls down. Switch was released about 7 years ago and (shown in Figure 7, colored cyan ) development is still strong and number of titles are trending higher. Also the seamless upgrade from Switch to Switch OLED model also speaks for it. Even if Nintendo comes up with new upgraded hardware one should be able to play same games with better hardware. Nintendo also filed many patents including using AI to improve image quality among others giving a flavour of what comes next.
Figure 7: Nintendo Games released per console (left) and Annual Playing Users (right
Nintendo switch online users
Nintendo Switch online was introduced on September 18, 2018. In the last four years they managed to gain 36 M users ( as of Sep 2022). Please note one need Nintendo console to play these games. Nintendo has realised the importance of this and said
“Memberships have grown alongside an increase in users playing Nintendo Switch and the release of titles that support online play. This service offers more than just the ability to play compatible games online. It also provides access to an expanding list of other benefits, such as the growing collection of classic titles. By expanding the range of available play options like this, we believe we can create opportunities for users to continue playing Nintendo Switch for a long time”
That further establishes the fact that switch is here to stay and they may not disrupt it.
Nintendo Platform
One will be surprised to learn that almost 52 % of games are bought using physical SD cards. Nintendo has mentioned that it is left to the users which medium they want to buy their games. They continue to offer SD cards as well downloadable version. Digital sales has been trending higher with time and as of last quarter digital sales accounts for 56 %. Once more and more users switch to digital purchases that will add to the margin as Nintendo dont have spend on cartridges, transport and save distribution margin. This brings us to the next trigger “Digital Store” eco system.
Nintendo has developed a digital app store Platform ( like iOS, Android) infrastructure that third party developers will find it easy to sell their games for Nintendo hardware. Nintendo simply facilitate and get flat margin from the sales without much effort. Gross Average Revenue per user for third party software sales is lowest for Nintendo ($27) compared to xbox ($152) or playstation ($140). In the past ( during 1980-2014) Nintendo did not encourage third party developers but the philosophy has changed since then. More and more third party developers are rleasing titles for Nintendo Switch. If Nintendo provides continuity this can grow pretty fast and contribute to earnings. Nintendo switch also limited by the old 2015 Nvidia Tegra X1 chip. Once the console get its upgrade third party developers can offer better modern games. Nintendo’s substantial audience “core” gamers belong to 18-39-year-old demography. This group constitutes 70% of the Nintendo Switch’s active user base, and has purchasing capacity unlike kids and Teen age kids Nintendo can tap this potential using third party games. Almost 8 million units third party games were sold in NOS.
Influence of Super Nintendo parks, merchandise and Movies
Movies, parks and merchandise activities may or may not give a boost to the earnings, but this can pull more and more users to the games. Its like disney fly wheel model in which people watch movies, visit parks , buy merchandise and interact with characters using games. Each one can add to Nintendo’s idea of pulling more people to its gaming consoles. After all gaming is the biggest margin business among entertainment industry. Although profit sharing with Universal on Parks are not clear, but Nintendo is not investing its capital and share its popular characters and make money with it and gain users for its gaming business. There are already reports saying that Super Mario movie has increased the game sales (Mario games see UK sales boost following movie success | Eurogamer.net). Another interesting report claims that “Movie Is Destined to Sell Tons of Games” (This 'Super Mario Bros.' Movie Is Destined to Sell Tons of Games | WIRED) supports the idea of pulling more people in to games.
Latest perspective on Game sales
For the next financial year Nintendo forecast’ed that they will sell 180 million sofware Units. Nintendo recently their new game “The Legend of Zelda: Tears of the Kingdom” and 10 million Units were sold in first 3 days after the release. Game was released on 12th May 2023 and it topped the sales chart even on 29th May 2023. This is sold for 70$ per unit. If they mange to sell 15 Mil then that would be 1 Bill revenue from this game alone. This is to illustrate that game sales is still strong and there is a dedicated fan base for these games.
Competition
Console market is dominated by three big players Sony Playstation, Microsoft Xbox and Nintendo. Sony has the largest market share followed by xbox and Nintendo. Recently Microsoft announced that they will acquire activision blizzard ( fourth largest gaming company), they will get closer to the market leader. Sony and Micorosoft cater to larger audience and they sell PC and mobile games as well. Play station 5 was released on 2020, due to supply chain issues they were not available. As supply chain issues eased they are widely avaiable now and so far in 2023 PS-5 is the top selling console following by switch and xbox. Competition was always fierce but Sony and Nintedo domniante the top 10 best ever selling consoles (5 from Nintendo, 4 from Sony and 1 from xbox). Unlike Nintendo other two players make more money from games, network service and Add on content and contribution fromm hardware sales is not as big as Nintendo. Nintendo also started concentrating on Add on contenet and other things recently.
Valuation
Nintendo is trading at 50 B USD market cap and has about 14.2 B USD cash at hand. Nintedo owns 30 % of pokemon game company Niantic (IPO valued at 4B USD). They also own 10 % of Seattle Mariners baseball team, and the DeNa and Bandai Namco gaming studios. If we value other investments at 0.8 B $ we will be paying 35 B USD for the complete business. Stock is trading at 3X EV to Revenue that is close to lower band since the release of Nintendo Switch. Nintendo has reported impressive 22 % ROC and 20 % ROE.
If one analyses the top 100 gaming company one can see how undervalued Nintendo is. This mis pricing opportunity exists mainly due to market is nervoud about the fact that users will be set to zero and start afresh. There are enough evidences that point otherwise indicating it is not the case.
If Nintendo can leverage the Movies, merchandise, theme parks as well as third party games and bring more and more players to their games and will provide incremental margin and their it can easily expand from here.
Also when they bring next generation switch ( expected in next 12 months) and leverage new and better chips and AI ( Nintendo filed a patent in January for this Newly published Nintendo patents show plans for DLSS-style AI upscaling | VGC) to improve the gaming experience, nintendo can not only maintain the current install base but expand it. Already Nintendo has the highest annual playing users among xbox, play station and switch.
There are multiple triggers are set for Nintendo and if it executes well, organic margin expansion along with re rating can take the stock higher.
Risks
Any investment write up is incomplete without analyzing the risks involved. Nintendo’s strength is their weakness as well. Biggest question lingering in everyone’s mind is whats next console after Nintendo Switch ( thats also reason for mis pricing). Satoru Iwata, the current president of Nintendo, said:
“Apple is able to release smart devices with various form factors one after another because there is one way of programming adopted by all platforms. Apple has a common platform called iOS. Another example is Android. Though there are various models, Android does not face software shortages because there is one common way of programming on the Android platform that works with various models.”
One can get the idea of how the company is thinking in this regard. But Nintendo did reset the install base in the past, so one need to consider this carefully.
Walt Disney of Nintendo Shigaru Miyamoto who established the main Nintendo charterers is 70 years old. He is overseeing the movie as well as park construction. Considering his age he could reitre and no clarity on succession.
People could change from Switch to Play station 5 as Swithch is still a old generation hardware. One need to watchout this as well.
Where to buy
To my knowledge it’s only available for NRI’s though I could be wrong.
Nintendo is listed in Tokyo Stock exchange (TSE) with ticker id ‘7974.T’. If one has Interactive Brokers account they can buy directly from TSE.But in TSE one can buy only in the quantities of 100. There are two options that one can buy from OTC market, tickers are $NTFOF and $NTDOY. NTDOF is nothing but Nintendo stocks but quoted in dollars. Unfortunatley this has really low liquidity. NTDOY is an ADR that is 1/4th of what NTDOF holds. This has enough liquidity and I bought it from there.
Disclaimer
I do hold 1% NTODY in my portflio. So my opinions could be biased and please do you own due diligence.
Source
Nintendo is well followed stock and there is plenty of information everywhere. Its also very easy to track the game sales and opinions about them. Nintendo maintains a investor relations in English that one can find here (IR Information : Financial Results Announcement/IR Events ). They have sales figures for games and consoles since 1980 in tabular form and that was used to make the all the plots in this writeup.
