NTDOF - Nintendo: Authority To Print Money

2023-03-24 06:30:00 ET

Summary

• The logic of a Nintendo investment is that with the same game formula across some of its most major properties, it can pump out a game that everyone will buy.
• Pokémon is the most obvious example, but some of the smaller properties also can do this.
• On the other hand, they also have revolutionary games that people love, in particular, sandbox game Zelda: Breath of the Wild, which will have its sequel released in 2023.
• The power of its IPs and the consistency of its brand mean that it can basically print money on the release of its major titles - they are guaranteed an audience.
• Also, they are demonstrated as being profoundly recession resistant, even with the precedent for that being the financial crisis where their cash economics was less developed.

Published on the Value Lab 03/19/23

Nintendo ( NTDOY ) has traded down pretty meaningfully to levels from the middle of 2020. In the meantime, major releases have strengthened IPs, and lots of new gamers have been converted. In particular, Nintendo is getting cheap in terms of multiple and with rate hikes possibly ending soon a recession-proof consumer staple makes a lot of sense, where a consistent and rather high earnings yield will be able to easily compete with tapering risk-free rates. With markets generally being hit by jitters, Japanese markets are also attractive in that they're less extended. Nintendo has its fingers in IPs that virtually give it the ability to print money, with the same formulae for games still hitting new records in Pokémon, and lots of promise in some of the franchise revivals like Zelda. Eventually, there'll be a new switch, and we should see another typical explosion in Nintendo results. In the meantime, an assurance of strong performance. Great pick for the current equity environment, to the extent that you're allocated to equities.

Recession Resistance

Using the financial crisis of the late naughts as a precedent, we can see that the trajectory of business wasn't particularly impacted. The critical dates are the release of the Wii in late 2006 , which factored in partially into the year ended March 2007 as well as leaked into the year ended March 2008. As a pretty major console, the Wii was responsible for pushing forward the results - a hardware pop, which happens whenever Nintendo releases a new console.

Where Nintendo really demonstrates that it is standing on its own two feet is in the year ended March 2009, because the Wii pop no longer is the key impulse for results, and the DSi, which would be the next Nintendo DS edition to be released, would come out only in the following year. Despite substantially deteriorated economic conditions, results managed to grow substantially because of software releases, as Mario Kart and the associated Wii Wheel which you'd put your Wii controller into, was a massive success, on top of the solid release of a new Kirby title that year.

The year after saw a hit. This is because the Wii had turned about 4 years old, and its price got cut. Moreover, it was a tough comp to follow with new software releases that could garner the same supermassive success of Mario Kart being impossible.

We do not see the 2009-2010 declines as a sign of recessionary pressures at all. This is something that a lot of gaming companies that are focused on periodic blockbuster titles have to deal with. Even now, we expect that after a year of Pokémon Scarlet and Violet the 2023 should see some net sales declines on account of the fall-off from these sales, although the relatively buggy release might mean a long-tail for the game, where bug fixes are coming starting in February 2023. Nonetheless, a record 20 million units were sold as of the latest report, and it sold 10 million in the first three days, which signals how wildly popular the franchise remains. With the end of Ash Ketchum's journey after decades in the anime also coming, interest is likely to be more sustained than usual.

Setup for 2023-2025

2023 will be weaker than 2022, but there are still some major releases, specifically the Zelda: Breath of the Wild sequel, which should bring the phenomenal sandbox concepts one step further. Pre-orders have already surpassed Breath of the Wild which was a runaway success, and one of the times Nintendo proved it can really make great games - where Pokémon for all its appeal is very formulaic.

Moreover, there is the speculation of a follow-up console to the Switch, which should have higher specs where the Switch is getting long in the tooth and struggles to run some of the newest releases. A new console release will be a huge steroid to Nintendo's results. In the meantime, the newer versions of the Switch (OLED Switch) which were slowed down by supply chain issues should be seeing some longer-tail demand now that it is coming into stock more efficiently. Also, there'll be scale and learning economies on that production. Finally, 2023 will be a year which will have its mix skewed towards software products which should carry higher margins , although logistic and semiconductor costs are coming down and should help out operating margins which were hit by that in 2022 .

Bottom Line

Pokémon, which is a property that Nintendo owns in substantial part, is a great example of Nintendo's ability to print money. Virtually the same game is released every couple of years just with new gimmicks, and it's going to get gobbled up by markets. Fantastic in a regime where money supplies are coming down. Additionally, Nintendo is not far away from a blockbuster Zelda release in 2023, nor is it far away from the release of another Switch console, or something else that's new, since the current Switch is getting pretty old, now 6 years. Trailing PE is 13x, and while 2023 might be a worse earnings year than 2022, it won't be much worse thanks to Zelda and recession resistance, and 2024 could be another major year, if not 2025 that will render current prices very attractive. There is huge long-term value in Nintendo, and its IP is also still pretty underutilized and could gain value in unexpected ways. Overall, a lot of embedded options, a lot of current value, and all for a pretty low price. Clear buy.

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