NTDOF - Nintendo: Earnings Seemed Fine To Us

2023-05-11 11:26:41 ET

Summary

• Nintendo Co., Ltd. saw the same profit declines YoY this quarter as last, so no acceleration in the declines, even with the Yen being stronger at this point YoY.
• However, the semiconductor excuse is getting tired, and we can see the inventories are up, so we're not impressed with Nintendo not owning up to some demand one-offs from COVID-19.
• On the positive side, Pokémon sold well, and we think there's a longer tail with this one due to bugginess on launch.
• Finally, the Super Mario Bros movie hasn't shown up in results yet this quarter, and it was a huge commercial success that will move the needle meaningfully next quarter.
• This could meaningfully change the IP story for Nintendo.

Nintendo Co., Ltd. ( NTDOY , NTDOF ) reported full-year earnings . At first, on the Pacific side of the world, the results were not appreciated. It was only at the market open in the U.S. that the earnings seem to have been digested more neutrally than negatively. We agree with this view, and the headline declines are actually better than what we might have expected, and there are some positives here and there. Most of all, we have next quarter to await the full impact from The Super Mario Bros. Movie , which could be a game changer for the company and the IP thesis.

Q4 Comments

Here are the positives and negatives from the quarter.

Positives

• Share of the OLED model is coming up. This is good since it should have higher marginality and pricing power, and it still has some scope for scale development. With the fact that operating margins fell overall, we could see some latent earnings gain once the current, overpaid-for inventory is liquidated and we get into a more inflation-normalized environment,

• The new Pokémon games sold well, about 10% worse than Sword and Shield , which is a good performance. We've assumed a longer tail on these because it had a buggy launch.
• The JPY was stronger sequentially in this quarter, which is a detriment to Nintendo's figures since they get a lot of U.S. income and the company's finances are JPY denominated. Despite the stronger Yen, there wasn't acceleration in declines that are still fighting tough COVID-19 comps in the videogame space.
• The Super Mario Bros. Movie 10xed its budget in terms of gross at the global box office. This hasn't touched this quarter, but will the next quarter, and the story about Nintendo and its latent IP value may change at that point.
• Annual playing users and digital-only sales including Nintendo Switch Online are up, and this has meant a shift to income streams that feature better economics. It's a positive thing, and shows that Nintendo has retained some of the traction it gained from the pandemic-fueled videogame buying spree.

• The new Zelda game, sequel to the megahit Breath of the Wild , is coming out this year and it is sure to be a hit. We commented on the promising pre-order trends in our last article.

Negatives

Nintendo is still going on about the semiconductor issues, yet their inventories are up more than 20% YoY, albeit possibly on price effects and not volume. It's a demand problem, we all know it, because of tough COVID-19 comps. Not everyone who decided to pick up a Switch will keep playing once life has gone back to normal. Nintendo previously did not see too much hyper-casual gaming. Its buyers are also fans of the IPs, and have been coming back to the franchises for years.

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