NTDOY - Nintendo

[alwaysinvert]

Nintendo could be quite interesting as a play on a weaker yen, too. They get +80% of their business from abroad so the strong yen is hurting their business severely atm.

 

I don't own any stock yet but I am close to pulling the trigger.

[whistlerbumps]

I have owned Nintendo in the past (pre Wii launch) and think it is a great company.  I don't own any now though and would like to add one cautionary note.  I think it is a very flawed assumption to give full credit to the cash on the balance sheet, especially when thinking about downside protection.  This cash will not be returned to shareholders in any material quantity (see divvy cut even with wildly overcapitalized balance sheet) and will certainly be used to fund operating losses if the Wii U is a flop.  I think a material haircut (30%, 50%?) is warranted to account for the trapped nature of the cash.  Thus, I think that NTDOY at current prices is a bet that either the Wii U is successful (certainly possible) or that the 3DS will sell more software and generate sufficient cash flow to offset 3DS hardware and Wii U losses.  At this price, I am not yet comfortable with that best. 

 

[alwaysinvert]

We are way, way behind on VOD here in Europe compared to you guys on the other side of the pond, so I'm not particularly atune to the way you use it, but doesn't the TVii function look very neat?

 

[alwaysinvert]

So, seems like the interest in this thread is moderate at best... But the share price has come down quite a bit again. The Wii U sales have been good initially (something that shouldn't be considered all that important - game consoles have become successes both with bad releases and with good ones, however Christmas sales may give som good indications). They are dominating game sales in the total market since the 3DS has continued to pick up speed both on the hardware and software side.

 

Satoru Iwata on the Wii U outlook:

 

I do not yet have all the necessary information to be able to say exactly when Wii U hardware will start to be sold at a profit. If you just look at this fiscal year, I do not expect Wii U to make a big contribution to our profits since the software sales will be rather limited due to a rather limited installed base of the hardware and, even as a whole, we cannot be optimistic about their combined profit contribution either when we take into consideration the fact that we need to invest a lot into our advertising activities at first. However, in the next fiscal year, we will have a larger installed base. We will have a richer array of software and manufacturing costs will also decrease. Therefore I believe that, as opposed to simply asking when we will be able to sell Wii U at a profit, the focus should be on constructing a healthy profit structure for the business as a whole by launching a sufficient amount of quality software at fast enough a pace for our home console, on which we can look to achieve a higher tie ratio* than on handheld systems, and selling as many units of software as possible. I believe this is a goal we can achieve in the next fiscal year. While I cannot say exactly when the Wii U hardware will become profitable, I am confident that in the next fiscal year we can improve our Wii U business to a level where the platform business as a whole (when we include both the hardware and the software) makes solid contributions to our profits

 

As per the financials of Sept. 30th the stock trades at b/p 1 and ncav/p 0.8.

 

Outlook is foggy as hell but I think the cash sucking black hole scenario is out of question for this generation now. I am however not yet sure if that makes the stock underpriced enough.

[rjstc]

Rupal Bhansali.  I recently watched a Steve Forbes interview of her. She is with the Ariel Fund. I was very impressed. She had some good comments about Nintendo. I believe it was about 11/19/12.

    It's not far off 52 week lows right now. I personally have bought some.

[Palantir]

I think Nintendo has some great characteristics as well as risks....anyone have any insights/links to articles about their new CEO. I think that is absolutely crucial for a firm like this.

 

 

In some way, Nintendo is like Apple - integrate hardware with software.

 

Interested in hearing from the bulls on what indicators they would look for.

[alwaysinvert]

I think Nintendo has some great characteristics as well as risks....anyone have any insights/links to articles about their new CEO. I think that is absolutely crucial for a firm like this.

 

 

In some way, Nintendo is like Apple - integrate hardware with software.

 

Interested in hearing from the bulls on what indicators they would look for.

New? He's been there for 10 years, you know. There are some details to be read in the book Nintendo Magic.

 

First outside CEO ever (first one not from the Yamauchi clan, even), trained computer programmer and game developer who headed HAL Labratory (now a second-party developer for Nintendo; the company behind the Kirby franchise and Super Smash Bros. among other games) before being handpicked by Yamauchi to head Nintendo. For me he gets full marks and seems to not only care about Nintendo as a company but also about the shareholders.

 

The problems I have with Nintendo are more due to business characteristics. There is a perfectly valid reason that they have so much cash on the balance sheet. And it's not that they are Japanese. When it comes to corporate governance, Nintendo is as Western as a Japanese company can be - they wouldn't hurt the returns for shareholders just to be able to not lay off people when times get rougher. The reasons are, explicitly stated by Iwata, that a flop could get them $5b or so in the hole quite easily. So they should maybe not get 100% credit for the cash in a valuation. On the other hand, it's extremely hard to deny the value of their franchises - but even harder to quantify.

 

My sole worry when it comes to personel is that Shigeru Miyamoto is getting old and has most of his ideas behind him - and those are the ideas that are Nintendo of today. Mario, Zelda, Donkey Kong, Star Fox, Pikmin etc. The only high-profile long-lasting Nintendo franchises that weren't his ideas are Metroid and Pokemon, and even there he has had some input, at least in later installations. Even if he has another 10 years of work in him, the creative flame is likely extinguishing, like for most people that are 60+ . So the hope in that regard is that his continuing mentoring will foster some good talents. The option on a new big hit of some kind is always attractive of course and may be the deciding factor on the value of the company. A new Pokemon type hit would make current shareholders filthy rich.

[Green King]

you have done some great work. Seems all one needs is to wait.

[Palantir]

:-[ Oops....I confused NTDOY with Sony then regarding "new CEO".

 

I agree with your point on Mr Miyamoto aging, but a lot of these franchises are in place already, for example the core story of Zelda has been created and reinvented many times throughout the game's history. (My fave was OoT). I'm not that worried about the continuation of these franchises. The biggest concern to me apart from threats from smartphones and tablets is the fact that one flop would likely be enough to vaporize the company given the firm's size.

 

With Xbox, MSFT is turning this into a living room powerhouse, something that will integrate with other Microsoft devices, and I don't think Nintendo can create the same network effects.

 

I like Nintendo, and that's the only system I owned as a kid, but I don't play videogames anymore, and I don't know if the current generation of kids have the same attachment to these games that my gen did.

 

 

Do you think a strategic acquirer like say Disney is a possibility? NTDOY's situation seems to me to be a hybrid of Apple prior to Jobs and Disney after Walt.

[Green King]

Rupal Bhansali Forbes inteview

 

 

I think there is a free call on new ways to monetize the franchise.

Also I don't think there is significant synergies with full interrogation. (not sure) What will be the benefit for me ? or the game developers? 

[Palantir]

Nintendo’s TVii a replacement for the remote

 

http://www.salon.com/2012/12/19/nintendos_tvii_a_replacement_for_the_remote/

[hyten1]

anyone ever did any analysis on what if NTDOY becomse purely a game developer/utilize its franchiese in mario, zelda etc

 

instead of building console etc.

 

the star wars franchise sold for 4bil, how much is nintendo's many characters/franchise worth?

 

their enterprise value is currently 2.5bil or so, not if wii u is a flop that can easily eat into some of their cash positions.

 

i haven't follow this long anyone ever ask nintendo management and what were their response?

[Rabbitisrich]

http://www.dan-dare.org/Dan%20Mario/SMBMovie-MarioLuigi2.jpg

[alwaysinvert]

anyone ever did any analysis on what if NTDOY becomse purely a game developer/utilize its franchiese in mario, zelda etc

 

instead of building console etc.

 

the star wars franchise sold for 4bil, how much is nintendo's many characters/franchise worth?

 

their enterprise value is currently 2.5bil or so, not if wii u is a flop that can easily eat into some of their cash positions.

 

i haven't follow this long anyone ever ask nintendo management and what were their response?

Short answer on the pure software developer question is that it's not going to happen. At least not until it would be painfully obvious that the present road is going nowhere. For all the specific reasons I again direct you to the book Nintendo Magic. But in short: the company views itself not as a gaming or tech company but as an amusement company. As such its main objective is not to develop good games but make fun, novel products for the consumers.

 

To be able to do that they want to have complete control of the user experience (not unlike Apple in that regard) and not do that inhibited by some system set up by another company. That's also the reason why pretty much all Nintendo hardware is 'gimmicky'. They pride themselves in offering new and unique experiences and ways of playing. The internal analysis is that they strayed from that objective in the N64 and GC generations, which were comparably high-tech creations, and that's why they fell behind. So you are not going to see them make something traditional very soon or maybe even ever.

 

As for the franchises, I am pretty sure they are underutilized despite  the company chugging out sequels at a decent clip. Why couldn't there be one or several Nintendo theme parks? I know for sure that my 10 year old self would rather visit one of those than Disney World. Cable channels or big-screen movies doesn't seem that far out of reach either. But Nintendo wants to have quality control and they obviously don't have the inhouse competence to do all these things, so I don't know when or if it actually could happen. They also always stress not making what the other guy does and building theme parks and licensing games for movies certainly falls under that label. Maybe if they could find a partnership with a very good director so it won't turn out like some awful attempts (Super Mario Bros with Dennis Hopper and the animated Final Fantasy movie for example).

 

Some of Nintendo's value simply elude quantification. You know there's great value there, but the characteristics of both the business itself and the competition makes it very hard to grasp.

 

I highy recommend the Q&A:s at Nintendo's IR site, by the way. Lots can be gained when it comes to management culture and business strategy from them. And reading the extremely Japanese politeness in English adds some flavour to it :)

[Palantir]

It really does sound more and more like Apple, especially your comment about not making technologically advanced products, but focusing on the user experience.

[eclecticvalue]

alwaysinvert, you beat me to it. I would like to add that being a game developer it is a "hits" business and you have to churn them every year that is not always possible since the competition is tough. Today THQ, one of the publicly listed companies filed for bankruptcy. So I wonder who will be next take-two or maybe EA.

[alwaysinvert]

alwaysinvert, you beat me to it. I would like to add that being a game developer it is a "hits" business and you have to churn them every year that is not always possible since the competition is tough. Today THQ, one of the publicly listed companies filed for bankruptcy. So I wonder who will be next take-two or maybe EA.

Yes, and that's also why I don't know if the Apple parallells should make me more bullish on Nintendo or more gloomy on Apple. Or perhaps both :)

[eclecticvalue]

Care to expand on why you would be gloomy on apple?

 

Also, Valve has thrown its hat into the console realm. It will be interesting to see what they can do in that space. So I would watch it very carefully.

[alwaysinvert]

Care to expand on why you would be gloomy on apple?

 

Also, Valve has thrown its hat into the console realm. It will be interesting to see what they can do in that space. So I would watch it very carefully.

It's no unique insight or anything. Just like Nintendo, it's in a "hits" business, like you said. A protracted period of successful product launches makes normalizing earnings pretty much impossible.

 

Basically, I view buying Apple now somewhat akin to buying Nintendo in 2009. The flipside of that is that buying Nintendo now may be somewhat like buying Apple 10 years ago, at least in small scale. Still, even at these prices it's to some extent a bet that they have the proper culture and business strategy for the future. What's better is that Nintendo hasn't experienced a trough anywhere close to rivalling the one Apple had in the 90s. What's worse is that the target market is, and likely will stay, infinitesmally less profitable on the whole. However, if history can be a guide, they will get a new punt in about 5 years with the meter pretty much reset - even if this generation should prove a failure. But that obviously ignores the 'paradigm shift' argument.

[cpan]

Nintendo looks very tempting at this valuation.  It almost trades at tangible book.  From the paradigm shift perspective, I am really wondering if this free game app deluge will slow down.  The economics of making apps is so bad that I would think it will eventually end with either worse game apps or fewer of them.  I am really surprised how good the game mechanics in games like Kirby as compared to what is available on the phone.  However as a parent, I don't really care how good the game mechanics my kids are playing with ( I am fine if they want to chop watermelon all day on the ipad as long as its free).  This compared to the demographic who plays CoD, they do care how good the games are and they are capable of paying it.  The thing I think Nintendo has a real shot is to do something like Pixar where they make games parent and kids both enjoy playing together.  However even if they crack that nut, it is still a one hit thing but you could say the samething about Pixar. 

 

(disclosure: on the fence about buying NTDOY)

[ItsAValueTrap]

I don't think that the free game app deluge will hurt Nintendo that much.  Look at other cultural industries and intellectual property industries... there are people out there who make free music, short films, feature films (shudder...), free information on websites, etc.  You can get free software too (e.g. Ubuntu, Open Office).  There is still a big market for paid intellectual property.  Microsoft competes against Ubuntu and Open Office... Microsoft still makes huge amounts of money.  The market for high-quality IP should still be profitable in my opinion.

 

I think that high quality smartphone games will put a huge dent into the handheld market.

 

I am not bullish about Nintendo's hardware business.  Maybe they will pull a Sega and turn itself into a game studio/software company.  Nintendo might do better than Sega as long as its "magic" is still there.  Some game studios such as Blizzard are able to put out hit after hit after hit (Blizzard is extremely unusual because it often cancels games completely and has such a ridiculous track record of success).  Management is everything.

 

*I haven't really researched this company.

[alwaysinvert]

Immersion is a big issue with touch based games... I don't really think the free bus ride type of games like Angry Birds and Wordfeud are threat to what Nintendo does either. From my perspective they are to console gaming what Youtube is to the cinemas. What could potentially be problem for Nintendo is price-point anchoring. While Square Enix games for IoS are very expensive compared to other games on the same platform, they are still cheaper even than their 3DS games. This could potentially prove problematic even if I'm pretty sure that most of the games in those genres are considerably worse gaming experiences on tablets. A high-selling and well-functioning game pad for tablet use could change that pretty quickly, though. I really don't know why there isn't one already. Technically that should be a piece of cake.

[cpan]

I think the app deluge does hurt nintendo because it took away the incentive for people to buy games for their kids.  It seems to me that kids are not really picky about the quality of games being played (neither are the parents actually).  This makes it harder to get people to pay up for the quality IPs that nintendo have.  When there was only 2-3 game consoles plus PC software, they owned a share of the market no matter what since if you want a game for kids you know to go with nintendo.  Now,  the distribution channel is wide open (kind of like network TV actually) so they really have to differentiate which is hard to do especially when other people are giving away their IP for free. 

 

I guess I'll pass on this one unless it falls a lot below tangible book.

 

[alwaysinvert]

I think the app deluge does hurt nintendo because it took away the incentive for people to buy games for their kids.  It seems to me that kids are not really picky about the quality of games being played (neither are the parents actually).  This makes it harder to get people to pay up for the quality IPs that nintendo have.  When there was only 2-3 game consoles plus PC software, they owned a share of the market no matter what since if you want a game for kids you know to go with nintendo.  Now,  the distribution channel is wide open (kind of like network TV actually) so they really have to differentiate which is hard to do especially when other people are giving away their IP for free. 

 

I guess I'll pass on this one unless it falls a lot below tangible book.

I don't agree. Maybe 5-6 year olds aren't so picky and are quite easily amused with simpler games like slicing fruits and such. But there is a reason why people are committing their lives to playing WOW and not Angry Birds. The 3DS is outpacing the DS (which just surpassed the PS2 as the highest selling system of all time - 154 million) in sales right now. Admittedly, they are not making money on the hardware, which Nintendo always used to, but if the tie ratio is anywhere close to where it was historically for handhelds it will prove a success in terms of profits.

 

People are confusing the secular trough that the gaming industry is going through now with the ultimate demise of it. Problem for me is even if I can clearly see that, this doesn't make Nintendo a clear winner by default.

[eclecticvalue]

I find gaming apps=appetizers. Only great for 5 minutes then want to move on to something else.