NTDOY - Nintendo

[moore_capital54]

Over the last 2 months we have built a significant position in Nintendo.

 

I thought I would share this idea with the board as it is the type of contrarian value investment that I love and reminds me of others which have produced fantastic results for us over the years.

 

What we have here is a company that is currently valued at a market cap of $19.5B USD. However, Nintendo holds over $13B in cash and liquid securities. When subtracting the cash we get an EV of only $6.5B.

 

Our thesis is that the earnings power of the business on a normalized basis, works out to roughly $2-3B a year.

 

We can go on and on about what Nintendo has done wrong, and how they desperately need a hot product. History teaches us that at least once every decade, Nintendo is able to launch such a product and when it does it produces significant FCF. FY 2011 Nintendo produced $800mm of FCF, and this was considered a terrible year.

 

Another catalyst is the dividend reinstatement which was suspended on September 29th, but historically ran around 1-2B a year. A reinstatement would mean the current valuation would produce between 5-10% dividend yields.

 

I expect NTDOY to double over the next 24 months quite easily, with very little downside risk.

 

Enjoy!

[benhacker]

Hey Moore, thanks.  This had fallen off my watchlist for some reason.

 

Hmm.... Interesting.

 

Ben

[Guest misterstockwell]

It's a buggy whip company with a lot of cash. Times have changed. Smartphones, tablets, ultrabooks, even e-readers can all play games that are free or very low cost. Wii consoles are beyond uncool. They would need to reinvent themselves. It's possible, but I think the risk is much higher than you are calculating.

[eclecticvalue]

NTDOY seems interesting. One of the catalysts would be if the Wii U becomes popular and it seems like an interesting console so far. A main issue that has been holding back Nintendo is the handheld market. Smartphones and tablets have been taking over gaming, since Android and Apple users can buy games for a very cheap price instead of buying a handheld gaming device and cartridges that can cost $20+. I would have to do more due diligence of where Nintendo makes its money.

[tombgrt]

Thanks for sharing Moore.

 

Misterstockwell made an interesting point imo but on the other hand I believe there should be some value in Mario, Luigi and their friends as 'hidden assets' and the brand in itself.  Console gaming is still very much alive and there is a very real difference between some "B-games" on tablets etc. and actual gaming. Not sure of how much of this 'actual gaming' is a commodity tho.

 

[alwaysinvert]

Why do they suspend the dividend when they generate some FCF and have huge cash reserves? Are their coming investments that high?

 

Counting on the same cashflows from the handheld side as before is highly optimistic though, with both smartphones and the Vita cutting into their market.

 

I really don't see why they take the risk of producing their own stationary consoles, though. They never seem to be able to rack up satisfactory 3rd party support anymore (perhaps due to squeezing the developers too much in the past). The Wii has sold in almost 100m units and the profit this year has been pretty abysmal despite them being the clear winner this generation. I'd imagine they would be able to make relatively much safer money if they went third party and developed across all major platforms.

 

On the other hand, everybody said Nintendo was toast before the release of the Wii, too.

[ValueBuff]

I just looked at this earlier this week.

 

They have a great gaming franchise with Mario and Link.  They are coming out with a new console later this year.  That should drive the stock. 

 

I bought a position on monday...glad to see someone else saw this one.

[Guest bengrahamofthenorth]

I'm a pretty big gamer. It really seems like Nintendo is going to get caught in the middle. Hardcore gamers pick up high end systems like the new xboxs and playstations, while everybody else is more than happy with their smart phones and tablets. The wii was a great hit because it appealed to a mass audience who wanted fun games, now those consumers have iphones and ipads which have thousands of games for a fraction of the price or free. Nintendo should focus on software for the competition (console and mobile) much like Sega did after the dreamcast died, but with the new wii coming out, I don't see that happening and capital allocation is a serious concern. I would be extremely surprised if future profitability is similar to historical numbers.

[Guest valueInv]

I just looked at this earlier this week.

 

They have a great gaming franchise with Mario and Link.  They are coming out with a new console later this year.  That should drive the stock. 

 

I bought a position on monday...glad to see someone else saw this one.

It's been on my watch list for a while but haven't gotten a change to analyze it. How much do you think their Mario and Link franchises are worth?

 

[alwaysinvert]

I just looked at this earlier this week.

 

They have a great gaming franchise with Mario and Link.  They are coming out with a new console later this year.  That should drive the stock. 

 

I bought a position on monday...glad to see someone else saw this one.

It's been on my watch list for a while but haven't gotten a change to analyze it. How much do you think their Mario and Link franchises are worth?

The Zelda franchise is worth considerably less than the Pokémon franchise, anyhow.

[hyten1]

any comments and update after recent earnings?

[alwaysinvert]

Counting on the same cashflows from the handheld side as before is highly optimistic though, with both smartphones and the Vita cutting into their market.

It seems like I may have been wrong on this one:

 

As you’re all aware, the sales of Nintendo 3DS hardware continue to outpace the sales of Nintendo DS hardware at similar points in their life cycles. But what’s less known is the fact that the Nintendo 3DS is outperforming the Nintendo DS on software as well. In its first 14 months versus the first 14 months of Nintendo DS, which is a platform that didn’t have to compete with mobile phones, social and other factors that are present today, the Nintendo 3DS has managed to sell 10.5 million physical games so far. This figure exceeds the pace that was set by the best-selling system of all time, and the Nintendo 3DS is just getting started.

 

Granted, they did make a massive cut in the price tag of the 3DS shortly after the release because of low sales. However:

 

One point I’d like to make is that in the sales comparison of the Nintendo DS and the Nintendo 3DS, the price of the Nintendo 3DS hardware ($169.99) after the markdown is still higher than the original price of the Nintendo DS ($149.99) at the launch in the U.S.

 

I think this is starting to get interesting for real. 3DS chugging along with good prospects of hitting its peak earning years with a comparable user base to the DS, an option on the Wii U being a success and a cash hoard of 1T yen while the company sells at 1.15T.

 

Check out this blog:

 

http://valueprax.wordpress.com/2012/06/01/would-you-buy-this-business-a-bargain-in-the-videogame-industry-valueinvesting-ntdoy-videogames-aapl/

 

http://valueprax.wordpress.com/2012/06/13/good-news-for-shareholders-e3-updates-from-nintendo-ntdoy-msft/

 

And the Q&A from E3:

 

http://www.nintendo.co.jp/ir/en/library/events/120606qa/index.html

[Liberty]

Pointless and irrelevant trivia...

 

Nintendo & RIM:

 

http://i.imgur.com/h6E10.png

[beerbaron]

Maybe you could do spread arbitrage :P

 

BeerBaron

[Rabbitisrich]

The Wii U looks interesting. The old complaint about Nintendo is that they come out with amazing products (Wii and DS), but overly rely upon old brands in those first few months after release.

 

http://www.latenightwithjimmyfallon.com/video/nintendo-wii-u-console-demo-6-15-12/1406484

[Green King]

The Wii U looks interesting. The old complaint about Nintendo is that they come out with amazing products (Wii and DS), but overly rely upon old brands in those first few months after release.

 

http://www.latenightwithjimmyfallon.com/video/nintendo-wii-u-console-demo-6-15-12/1406484

 

Overly reply on brands? Please explain.

The Wii U look like another other game changer.

[alwaysinvert]

The Wii U looks interesting. The old complaint about Nintendo is that they come out with amazing products (Wii and DS), but overly rely upon old brands in those first few months after release.

 

http://www.latenightwithjimmyfallon.com/video/nintendo-wii-u-console-demo-6-15-12/1406484

Well, Wii Sports/Play was a new brand available at the release of the Wii and Sports is now the most sold video game ever, selling almost twice as much as the runner-up (the original Super Mario Bros. from 1985).

[Rabbitisrich]

The hardware is undeniably great. The 3DS is an AMAZING product. The Wii U is a very logical progression. However:

 

http://www.techradar.com/news/gaming/handhelds/nintendo-exec-lack-of-great-3ds-games-killed-momentum-990613

Nintendo's failure to offer strong games at launch is responsible for poor sales of the Nintendo 3DS handheld console, according to the company's US president.

 

http://mynintendonews.com/2012/05/04/miyamoto-says-lack-of-playstation-vita-games-is-killing-handhelds-prospects/

Legendary games developer Shigeru Miyamoto has told Edge magazine that while the PlayStation Vita is a powerful piece of hardware, the system is struggling from the same lack of games that the Nintendo 3DS encountered last year.

 

http://www.g4tv.com/thefeed/blog/post/700315/nintendo-admits-losing-momentum-with-wii-blames-lacking-games/

Nintendo president Satoru Iwata has blamed the company's inability to roll out compelling software to maintain momentum in the past and Japanese newspaper Sankei Shimbun (as translated by Andriasang) said that remains the biggest stumbling block for Nintendo. "We were unable to show a new game to become 'the next thing.'" said Iwata about Nintendo's latest earnings report. "In the game market, once you've lost the momentum, it takes time to recover."

 

Of course, those articles are based on impressions of numbers, not the numbers directly, but they do cover a period from '09-'12.

[leftcoast]

Well, Wii Sports/Play was a new brand available at the release of the Wii and Sports is now the most sold video game ever, selling almost twice as much as the runner-up (the original Super Mario Bros. from 1985).

 

Not really fair to compare Wii Sports to any other game, since it was bundled with every Wii console. If you bought Nintendo's platform, you couldn't not buy Wii Sports.

[leftcoast]

The Wii U looks interesting. The old complaint about Nintendo is that they come out with amazing products (Wii and DS), but overly rely upon old brands in those first few months after release.

 

http://www.latenightwithjimmyfallon.com/video/nintendo-wii-u-console-demo-6-15-12/1406484

 

Nintendo's strength has historically been its 1st-party game development, meaning the games that Nintendo makes for its own platforms. Nintendo has some of the strongest (and oldest) IP in the business, including Mario, Zelda, and Pokemon. Those are franchises you can only play on Nintendo's platforms.

 

Nintendo's weakness has historically been support from 3rd-party publishers like EA, Activision, and Take Two. There are a bunch of reasons for this, but the main ones are:

• Nintendo tends to favor its own 1st-party games, which can discourage 3rd-parties from trying to compete.
  
• Nintendo's hardware is under-powered relative to other consoles, and generally uses some unique user interface scheme (Wiimote, Wii U tablet, dual screen, etc.). This means games need to be redesigned before they can be brought to Nintendo's platform, which is expensive for developers.
  
• For the past 10 years or so, Nintendo has been positioning its consoles for families and casual gamers, making it less attractive to bring big blockbuster "Core" games to their platform, especially those with mature themes.
  

[alwaysinvert]

Well, Wii Sports/Play was a new brand available at the release of the Wii and Sports is now the most sold video game ever, selling almost twice as much as the runner-up (the original Super Mario Bros. from 1985).

 

Not really fair to compare Wii Sports to any other game, since it was bundled with every Wii console. If you bought Nintendo's platform, you couldn't not buy Wii Sports.

Super Mario Bros was bundled too. Wii play is the most sold non-bundled game of all time.

[leftcoast]

Well, most copies of Wii Play were actually sold bundled with the Wii Remote controller. The Wii console shipped with only one Wii Remote, so if you wanted to play with friends you needed to buy a second controller. Your choice was to pay $50 for the controller by itself, or for an extra $10, you could get it bundled with Wii Play. So the game wasn't quite given away, but it was pretty close.

 

As "brands," I don't think Wii Sports or Wii Play or Wii Fit are nearly as valuable as Nintendo's other franchises. They are products designed to teach people how to use some new piece of hardware. I'm sure a similar type of game will ship with the Wii U, to teach people how to use the tablet controller.

 

It's been a very long time since Nintendo successfully launched a new franchise based on original IP. I think the last one was Pokemon in 1996.

[alwaysinvert]

Well, most copies of Wii Play were actually sold bundled with the Wii Remote controller. The Wii console shipped with only one Wii Remote, so if you wanted to play with friends you needed to buy a second controller. Your choice was to pay $50 for the controller by itself, or for an extra $10, you could get it bundled with Wii Play. So the game wasn't quite given away, but it was pretty close.

 

As "brands," I don't think Wii Sports or Wii Play or Wii Fit are nearly as valuable as Nintendo's other franchises. They are products designed to teach people how to use some new piece of hardware. I'm sure a similar type of game will ship with the Wii U, to teach people how to use the tablet controller.

 

It's been a very long time since Nintendo successfully launched a new franchise based on original IP. I think the last one was Pokemon in 1996.

Nah, on this point I think you are wrong even if you don't consider Wii Sports/Play games proper IPs (with Wii Sports Resort also selling humongous amounts, although admittedly also mostly in bundles with the upgraded controller).

 

Nintendo has still released new IPs like Nintendogs (24m copies), Brain Age (34m copies counting both games in the series), Animal Crossing (11.5m for the DS version and a couple million more each for the N64, GC and Wii installations) and Pikmin (some 2-3m units, which were great numbers for GC games). They also relaunched the old IP Metroid to great sales figures.

 

Yes, they still depend heavily on Mario, but to some extent I think stating that as a big weakness is somewhat akin to wondering what the heck Disney would be without Mickey Mouse and Donald Duck. 

[leftcoast]

Well, most copies of Wii Play were actually sold bundled with the Wii Remote controller. The Wii console shipped with only one Wii Remote, so if you wanted to play with friends you needed to buy a second controller. Your choice was to pay $50 for the controller by itself, or for an extra $10, you could get it bundled with Wii Play. So the game wasn't quite given away, but it was pretty close.

 

As "brands," I don't think Wii Sports or Wii Play or Wii Fit are nearly as valuable as Nintendo's other franchises. They are products designed to teach people how to use some new piece of hardware. I'm sure a similar type of game will ship with the Wii U, to teach people how to use the tablet controller.

 

It's been a very long time since Nintendo successfully launched a new franchise based on original IP. I think the last one was Pokemon in 1996.

Nah, on this point I think you are wrong even if you don't consider Wii Sports/Play games proper IPs (with Wii Sports Resort also selling humongous amounts, although admittedly also mostly in bundles with the upgraded controller).

 

Nintendo has still released new IPs like Nintendogs (24m copies), Brain Age (34m copies counting both games in the series), Animal Crossing (11.5m for the DS version and a couple million more each for the N64, GC and Wii installations) and Pikmin (some 2-3m units, which were great numbers for GC games). They also relaunched the old IP Metroid to great sales figures.

 

Yes, they still depend heavily on Mario, but to some extent I think stating that as a big weakness is somewhat akin to wondering what the heck Disney would be without Mickey Mouse and Donald Duck.

 

Nintendogs and Brain Age - Both huge sellers. But they were also one-hit wonders with little lasting competitive advantage as IP. They are not enduring franchises with moats.

 

Animal Crossing - Yes, definitely a successful new franchise. I forgot about that one!

 

Pikmin - Great game, but those numbers are not great for a franchise of 5 titles. Only 2 Pikmin games managed to hit even 1M units.

 

I didn't state that depending on Mario was a huge weakness. I was just pointing out (or maybe agreeing with another poster) that Nintendo does heavily rely on its own stable of long-standing IP, since it gets relatively weak support from 3rd-party developers.

 

I have a lot of respect for Nintendo. This is a company that has been making games for over 120 years! They have created amazing franchises that go all the way back to arcade machines in the 1970s. They have been written off as dead or irrelevant several times, and have always managed to innovate their way back into position.

 

At the same time, I think it's really hard for anyone to handicap the odds of success going forward. The video-game business is going through a tremendous amount of disruption right now. Increasingly, Nintendo's competitors in the casual and family gaming space are not Microsoft and Sony, but Apple and Google. It's very difficult to compete with $1-$2 games on open platforms.

 

I've never looked at Nintendo as a stock, so I don't know to what extent the investment thesis depends on assumptions about its future. Maybe it's a net-net, in which case predicting the future is not necessary. But if you need to assume anything about where Nintendo will be in 3-5 years, then for me it would be in the "too hard" pile.

 

Time for Father's Day brunch!

[alwaysinvert]

I'm not sure why you state Nintendogs and Brain Age as one-hit wonders. They have both had high-selling sequels. Yes, they sure aren't as reliable as Mario or a Blizzard franchise at the moment but I don't think we can be so sure that they aren't enduring franchises.

 

As for Pikmin, I only know of two titles that were both released for Gamecube, and thus never could rack up the huge sales of Wii games. For Gamecube games they did very well, however. Let's wait and see how Pikmin 3 does for the Wii U.

 

I agree with you that handicapping what happens next is hard. Valuing Nintendo merely on FCF history is hazardous, but I still think there are huge values in their numerous franchises, even if Nintendo could possibly squander a lot of value by getting on the wrong side of the next technology paradigm. To me, however, it seems that management is taking a somewhat pragmatic view even if they won't do what everybody is screaming for and develop for Apple.

 

Nintendo is not quite a netnet, but damn close for a company with their quality.

 

And I'm not so sure $1 games on an Ipad(Iphone is really a substitute for New Super Mario Bros. I see very few free or low-cost games that you could spend hour upon hour playing, while they certainly serve their purpose well in short bursts.