Overview of the business and the company
Nintendo share price today
Nintendo Co., Ltd. IS A Japanese multinational video game company headquartered in Kyoto. It develops, manufactures, and sells home entertainment products in Japan, the Americas, Europe, and internationally. Founded in 1889 as Nintendo Karuta by craftsman Fusajiro Yamauchi which originally produced handmade hanafuda playing cards.
1889 – 1969: Card Company
1929 – 1968: Investing in business – instant rice, chain of love hotels, a taxi service
1969 – 1972: Classic and Electronic toys
1972 – now: video games
At the time, Nintendo saw the potential success of video games and began to experiment with them. Home video game systems were exceedingly scarce at the time. Nintendo then began creating its own video games for both home and arcade use. Mitsubishi suggested a collaboration with Nintendo in the 1970s to produce “Color TV Game Development.” They published “Color TV Game 6” in 1977, and the rest is history.
Subsequently, Nintendo continuously developed others video game systems with astronomical hits in Nintendo Entertainment System (NES), Switch and Wii.
Switch, which was released in 2017, has enormous success once it has been released, having sold over 111.08 million units as of 30 June 2022. Wii, which was released in 2006, sold over 101.63 million units. Followed by Nintendo Entertainment System, 61.91 million units.
The breakdown of Nintendo’s Net Sales comprises of 3 main segments:
- Video Game Platform – Nintendo Switch Platform (Hardware, Software [Including downloadable versions of packaged software, download-only software, add-on content and Nintendo Switch Online) and accessories, Other Platforms and also Amiibo
- Mobile and IP related Income (Smart Device Content and Royalties)
- Other (Playing Cards)
In 2006, Nintendo released Wii. The sale of Nintendo slowed down sharply after 2010. It started to gain back traction recently with the release of Switch back in 2017.
The gaming industry is highly cyclical as people are always looking out for the next big game.
The bulk of Nintendo’s sales are generated from Switch which comprises over 97% of the revenue generated by segment. Mobile and IP Related Income generated 3%.
Consumer Electronics Industry
In 2023, the consumer electronics industry revenues amount to US$1,028.00 billion. The market is expected to grow annually by 2.32% (CAGR 2023-2028). Throughout the last 3 years, there were a sudden spike in growth due to the COVID-19 pandemic. This is because of the worldwide lockdown; most people were forced to stay at home which resulted in people spending on electronic goods.
Video Game Industry
With the latest available data in 2021, the global video games revenue amounted to over US$214.2 billion. The expansion is mainly driven by social and causal gaming after millions of people picked up their controllers to escape the boredom and isolation of COVID-19 lockdown.
The video game industry kooks poised to grow, with other big companies such as Microsoft and Sony continuously enhancing the game experience of the user. With the rising prevalence of 5G, Augmented Reality (AR) and VR, there could be a further increase in demand for the gaming market.
Nintendo has a strong brand equity as a provider of video gaming consoles. While for many consoles, they often adopt the classic razor-and-blade business model. Nintendo Switch on the other hand, is different as it operates at a profit compared to its peers, Sony PlayStation, and Xbox. Their low production costs put the company in a great position to grow.
Nintendo seems to be trading at a discount at the moment. Utilizing mean reversion, Nintendo’s average 5 year P/E is 19.15, while its 10 year P/E is 34.77. Today, Nintendo’s current P/E is trading at 14.52. Given a 15% margin of safety, there will still be about 12% upside. The key reason I feel why investors are putting a discount on Nintendo shares today is because investors are worried Nintendo may head into another cyclical downturn if its next-generation hardware after Switch is a flop like Wii U or GameCube.
Digital sales increased by 12.7% year-on-year to 405.2 billion yen and accounted for 48.2% of total software sales for our dedicated video game platforms.
Digital sales for the full year reached a record high. This was primarily due to the continuing weakness of the yen resulting in an increase in the sales amount at the time of conversion, and a rise in sales of the downloadable versions of packaged software and Nintendo Switch Online-related sales.
Nintendo Switch Online, a service that makes Switch more fun and convenient, has exceeded 36 million paid memberships as of September 30, 2022. Memberships have grown alongside an increase in users playing Switch and the release of titles that support online play. This service offers more than just the ability to play compatible games online. It also provides access to an expanding list of other benefits, such as the growing collection of classic titles.
NINTENDO IP UTILIZATION
Nintendo also opened Nintendo OSAKA in the Daimaru Umeda building on 11th November 2022. They are also considering additional new stores both within Japan and overseas.
On top of keeping a close eye on COVID-19, Nintendo’s goal is not only to sell its related products, but to also share information about Nintendo through in-store events and game demos, creating more touchpoints to their loyal consumers.
In addition to permanent locations, Nintendo also launch pop-stores throughout Japan in the year of 2021 and 2022, at cities like Nagoya, Fukuoka, Sendai, Hiroshima, Sapporo, Kumamoto and Kagoshima
Nintendo is also expanding into theme parks. Super Nintendo is currently under construction at Universal Studios Japan. It opened on 4 February 2021 for Annual Pass Holders and the grand opening was earlier this year on 18 March 2021.
As of the end of October 2022, the number of unique downloads across all our mobile apps totalled more than 800 million.
This is thanks to the global proliferation of smart devices, which many people are familiar with. We provide these mobile apps in up to 164 countries and regions.
This has provided opportunities for people to come in contact with Nintendo IP in countries and regions that Nintendo’s video game platform business cannot reach.
This is Amiibo, which was launched back in 2014.
What is cool about amiibo, is by: Tapping an amiibo to an NFC touchpoint on hardware can have all kinds of fun results in compatible games, such as the in-game appearance of the amiibo character or special items.
Nintendo continues to release new amiibo products each year, and cumulative global sell-in of amiibo figures has surpassed 77 million units.
Aside from Amiibo initiatives, Nintendo also collaborates on merchandise with other companies.
The LEGO Super Mario series of products, made in collaboration with LEGO, creates opportunities to experience Mario characters in a unique world that is fun for everyone, including for children who have not come in contact with the world of Mario through a video game.
The series, which was launched in 2020, expanded its product lineup with last year’s introduction of LEGO Luigi and this year’s introduction of LEGO Peach, among others.
Revenue By Geography
Nintendo’s revenue are worldwide, with bulk of its sales coming from The Americas which comprises over 44%. Europe contributed over 24%, while Japan amounted to over 23% and others added up to 9%.
Unit Sales for PS4, PS5, Switch, Xbox One and Xbox Series X|S
Since the release of Nintendo Switch in 2017, Switch has achieved phenomenal sales with 2022 at its peak generating over 28.83 million units of sale.
Nintendo’s EPS also grew steadily throughout the years. There is no huge drop in earnings per share which is a good thing which means shareholders value is still very much inline.
Nintendo Debt to Equity Ratio is at 0.27 which shows Nintendo’s financial leverage position is very much safe. There should be no short-term and long-term worries of Nintendo going down soon.
Nintendo has also built a strong cash and cash equivalents reserve. In 2023, it has over 1.19 trillion YEN of cash and cash equivalents.
Nintendo’s current PE is trading at 14.49 (as at 09/08/2023), the 5-year average P/E is valued at 19.12 while 10-year average is 34.74. Being conservative, we use the 5-year average with a potential upside of +31.9%.
Utilizing a potential upside of 31.9%, our target price for Nintendo is JPY$8,108.10.
To be on a safer side, with an additional 15% Margin of Safety, we still have an upside of 12.2%.
Nintendo overseas sales account for more than 70% of its total sales. Therefore, any significant fluctuations in foreign exchange rates have a strong influence when they are revaluated for financial reporting purposes.
Therefore, this could affect Nintendo’s financial position, operating results and cash flows. Furthermore, the Japanese Yen has not really been performing well against the US currency, especially in recent years.
Development of New Products
Every 6 years, Nintendo tends to release a new product. 2023 is the 6th year after the release of Nintendo Switch. Hence, many speculators are speculating a potential 2nd version of the well-sold Switch. Having said that, there could be a potential failure as well given a new product. In 2012, Nintendo launched Wii U which was a huge failure. However, they only managed to sell 123.56 million units of its hardware. In Jan 2017, they decided to stop production for Wii U.
Nintendo sales may have seemed to hit its in 2021. After the 5th – 6th year of a product cycle, sales tend to always drop. Although sales remain relatively strong, there are doubts how long such sales can last and when the next product will be released by Nintendo. The key reason why I feel investors are putting a discount on its shares today is because they are afraid Nintendo will head into another cyclical downturn if its next-generation hardware is a flop like Wii U or GameCube.
Nintendo is a renowned Japanese multinational video game company and has evolved into a global leader in the gaming industry. While investors should carefully consider the cyclical nature of the business and the uncertainties tied to future releases. We believe with the company’s focus to in digital sales, coupled with its strong financial foundation, suggest a potential investment opportunity in the market right now.
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