Stock Pick of the Week: Is Nintendo (NTDOY) a Buy?
A look at the recent growth from Animal Crossing and Nintendo Switch
For those joining in for the first time, welcome! Pocket Change is a newsletter where Tony + Karine keep track of and analyze stocks we think are noteworthy (and whether we should invest pocket change into). We’ve been friends since 2013, and have been sending each other stock suggestions and portfolio screenshots over the years. Pocket Change is our way of opening up the conversation and sharing these ideas more publicly. This newsletter goes out every weekend with our analysis and decision for a new stock.
Summary
🇯🇵Founded in 1889 in Japan
📈Revenue: JPY 1.3 trillion, up 9.0% YoY
🐻13.41M copies of Animal Crossing sold in the first 6 weeks
🎮21M Nintendo Switch consoles sold in this financial year
As consumers have been forced to stay inside during the pandemic, it should be no surprise that people are spending more time and money on video games, like Nintendo (NTDOY)*. With the rise in popularity of Nintendo Switch and newest release of Animal Crossing (seemingly perfectly timed for quarantine), we thought it’d be timely and relevant to take a look at Nintendo, maker of beloved games like Super Smash Bros, Mario Kart, and Animal Crossing and popular consoles like Game Boy, Switch, the Wii, and etc.
*To trade Nintendo stock, investors can either purchase NTDOY or NTDOF. One NTDOY represent ~⅛ of a Nintendo share, whereas one NTDOF share equals one share of Nintendo traded in Japan. We’d recommend choosing NTDOY if you’re looking to invest in Nintendo because it has a higher volume of trading than NTDOF - with fewer shares trading hands, any movements in price can cause more volatility. Since Nintendo shares are traded in the Japanese Yen, investors should be aware of exchange-rate risks.
Did you know?
Nintendo is a Japanese company founded in 1889 to capitalize on the rising popularity of playing cards! In the 1980s, they shifted their focus to popularize arcade games by launching FamiCom (or Nintendo Entertainment System in the US), their first home video game console that came with three games (Donkey Kong, Donkey Kong Jr., and Popeye).
Fundamentals (as of 6/8/2020)
Enterprise Value (EV): JPY 4.5 trillion
Revenue: JPY 1.3 trillion
Revenue Growth: 9.0% YoY
EV/2020 EBIT: 13.8x (lower compared to other peers in the gaming industry)
How does Nintendo make money?
Dedicated video game platform (96%)
52% from hardware, such as Nintendo Switch and Switch Lite
32% first-party software, such as Super Smash Bros. Ultimate and Animal Crossing
16% digital sales. Digital sales are downloadable versions of packaged software, download-only software, add-on content and Nintendo Switch Online. Digital sales grew by 72%.
Mobile, intellectual property income (4%)
Leveraging IP for mobile apps such as Mario Kart Tour
Playing cards and others (< 1%)
Growth Opportunities
Historically Nintendo has depended on hardware and big game hits to drive the majority of its sales. However, this can be very unpredictable if multi-year investment in the new hardware turns out to be a total flop, such as Wii U in 2012. Nintendo also has been slow to mobile, and only seriously started to invest in the platform in 2015.
Despite this, Nintendo has shown willingness to adapt to new business models. In 2018, they launched the Nintendo Switch Online subscription service, with plans starting at $3.99/month. This year, Animal Crossing: New Horizon was a huge hit, and Nintendo was even able to increase recurring monetization with continuous release and add-ons. As a result, digital sales have grown to 16% of total revenue, up from 10% last year.
Generally, we think this is a favorable change in Nintendo to shift from hardware to software. However, this is not a simple switch, like a phone manufacturer switching to make apps. But similar gaming companies have made this transformation. Sony’s Game & Network Services division went from 56% in software and digital to 68% in two years, from 2017 to 2019.
Investors will likely value Nintendo more favorably if a greater percentage of revenue is from recurring digital sales compared to the risky hardware business model.
Key Questions to Ask Yourself (before we think you should buy...)
Can Nintendo continue to launch new and innovative games for the traditional console business?
Can Nintendo move fast enough into mobile, digital gaming, and other forms of entertainment using its IP?
If you want exposure to gaming as an industry, are there other companies that may be less reliant on hardware and specific game successes and benefit from the industry as a whole? Tencent could be a good choice.
Our Take
Karine: I believe that the valuation on NTDOY stock remains reasonable given the long term growth opportunities, and its comparison to other companies in the space. In the short term, Switch console and video game sales will seem to continue growing - so I think the stock is a good buy. However, I’d also look into companies like Tencent (which owns Riot Games) for exposure to esports and the broader gaming category.
Tony: I think the price already reflects the upside of Animal Crossing. I think Nintendo can grow software and digital revenue to offset the decline in hardware revenue, and the stock is a good choice for long-term investors.
* Note this is not investment advice. Please consider doing your own research before making any investments!
We’d love to hear what you think! If you have any feedback/comments, please let us know. Or consider subscribing if you aren’t already.
Two Additional Fun Facts
Nintendo is working on two larger initiatives that we’re excited to see personally - a Super Mario Bros. Film (estimated in 2022) in partnership with Comcast / Universal and a Super Nintendo World built inside Universal Studios!
Nintendo is the full owner of the Pokémon trademarks – the name, logo, and every character name from Pikachu on!