Super Nintendo Snes
An analysis of Nintendo (NTDOY)
Even before the announcement last week of Sony (SNE), it seems almost certain that the domination of the company in the PlayStation 2 generation of video game consoles would give way to a much fairer for the PS3 generation. This time, Sony is face a much tougher competition from both Microsoft (MSFT) and Nintendo (NTDOY).
While the Nintendo name is most closely associated with a platform video game (NES), the real focus of the company has always been the game rather than the platform. It is Therein lies the true distinction between Nintendo and its two larger rivals. Nintendo seeks to make good games. Microsoft and Sony seek to control a distribution channel.
Nintendo is the only company among the three console makers that began life as an entertainment company – and it shows. Microsoft is known for software, Sony is known for hardware, and Nintendo is known for games.
American gamers are well acquainted with the brand Nintendo, but, American investors generally know very little about the company. This is unfortunate because, despite the attention given to operations and Sony video game from Microsoft, Nintendo is the ultimate pure play the video game company.
Nintendo is great. The company surpasses U.S. video game giant Electronic Arts Publishing (ERTS) in sales, earnings and market capitalization. On the last count, some argue that in May Nintendo only has a market cap greater than EA, because its share price has risen sharply over the last year, while share price EA has actually declined. However, there is a much simpler explanation.
Nintendo has a higher market cap Electronic Arts, because Nintendo (the company) worth more than EA (the company). The rise in share price Nintendo May is entirely due to improved investor perceptions of future prospects of the company because of the good press surrounding De Nintendo's upcoming console, the Nintendo Wii.
Nevertheless, such an increase in share price of Nintendo was justified by the value relatively low, the market had previously placed on Nintendo's business. We can not be said of Electronic Arts. Even after underperforming the S & P 500 over the last three years, the stock price of EA remains at levels that are almost impossible to justify the use any form of rational thought. So, Nintendo really is the purest in the world play video game company.
Nintendo is an interesting company write about the perspective of an investor for several reasons. The company operates in a dynamic industry with excellent prospects long term. It is more reasonably priced than many public companies in this sector (although this is not saying much). It is a matter quite unique (with a unique past), and has a clear vision of what it is and what it is not. Obviously, Nintendo of enormous intellectual properties add to its appeal both as a subject of an article and the object of interest of the investor.
Nintendo has been a good steward of its intellectual properties. It has been very careful to protect the image of his characters the most beloved. In fact, some would say the company has occasionally been too protective of its strongest franchises.
For example, between 1994 and 2002, there were no new Metroid games, despite the popularity of this franchise. The advantage of such a strategy is that when Metroid Prime was released in 2002, She has received extraordinary reviews and sold over one million units. The disadvantage of this approach is obvious. Nintendo effectively surrendered revenue (almost certainly more than 100 million dollars) that could have been milked from the franchise throughout the latter half of the 1990s.
Nintendo is one of the few companies in this position. It is a rare and precious eligible to spend some time "in the vault. Nintendo has several properties. For this reason, Nintendo has more in common with companies like Disney (DIS) and Lucasfilm than it does with manufacturers of consumer electronics.
Nintendo is an entertainment company, not an electronics company. Sales of consoles are inextricably associated with game sales. Hardware sales account for a large part of total sales of Nintendo, but hardware sales do not drive much of Total sales of Nintendo. At Nintendo, the games sell consoles. Of course, the console itself can affect the gaming experience in its role as platform. For example, the console itself should be a differentiator gameplay of the Wii will be launched later this year. If is a positive factor or negative, we do not know. But the Wii itself will certainly help differentiate Nintendo games from their competition.
Third party publisher support for the Wii has been the subject of much debate and speculation. Nintendo consoles have had less support from third parties that the consoles competing, because Nintendo has been less willing to work with third parties for their conditions.
While many publishers are now interested in releasing titles for the Wii, there is a new and substantial impediment to successful third party titles. Games will be designed around the Wii. In the past it was easier for third parties to offer titles for Nintendo's consoles, without targeting that console in particular. Now, it will be much more difficult. Wait a few botched attempts early on.
A long slow decline
Position Nintendo equipment has been declining for well over a decade now. In fact, the culmination of Nintendo's fortunes in the console business was the NES itself (launched in 1985). It has been downhill since then. Nintendo launched the Nintendo Entertainment System (NES) in 1985, the Super Nintendo Entertainment System (SNES) in 1991, Nintendo 64 (N64) in 1996, and the GameCube in 2001.
Here the unit worldwide sales of these four systems as of March 31 this year:
SEN: 61.9 million
SNES: 49.1 million
N64: 32.9 million
GameCube: 20.9 million
This is not a pretty trend. To add insult to injury, the number of games sold per console had been declining until the GameCube tragically reverse that trend.
Here the number of games sold per console for each of four systems:
NES: 8.08 games
SNES: 7.72 games
N64: 6.84 games
GameCube: 9.05 games
GameCube
The above GameCube number is especially interesting because Sales of GameCube games in the Americas has been extraordinarily strong considering its modest installed base relative to what previous Nintendo consoles had enjoyed.
The GameCube has better than the United States it has elsewhere. The Americas account for 58.37% of GameCube unit sales worldwide while Japan is only 19.14% of worldwide sales. In the Americas, the number of games sold per GameCube is approximately 10, while in Japan it is only 7.
If a difference of 10 games per system to 7 games per system may not sound that important, there is much difference greater in the number of games sold per system between geographic regions than exists with any other current platform from Nintendo. Consequently, in the Americas account for nearly two in three games sold for the GameCube.
Nintendo DS
At first it seems that the situation is reversed with the Nintendo DS. Japan accounts for more than 4 out of 10 sales of both DS games and the handheld platform itself. However, earlier this year, the ratio of software to sales of hardware is a little higher in the Americas than it was in Japan. This is true for all platforms Nintendo, although the games per platform gap varies from very wide (GameCube) to quite narrow (DS).
Game Boy Advance
Nintendo Game Boy sales have always been pretty impressive. The Game Boy Advance, which launched in 2001, has sold over 75 million units and more 325 million parts. This does not include sales of the various Game Boys 20th century (the original launched in 1989) which has sold more 100 million units and 500 million games.
The Game Boy has helped Nintendo's financial results because it was a great artist more consistent. Taking part in the "Console Wars" is expensive, tedious and risky. Risks are involved from the outset; rewards come on the back half of the trip. Having the support of regular income from the Game Boy has certainly not hurt when you are involved in such uncertain undertaking as launching a new console by half every ten years.
Financial Performance
Considering the industry, it operates in, Nintendo has been an excellent performance. The company consistently turns a profit, which is not easy when there are no other divisions to overcome one of the shocks caused by the launch of new consoles and launch new products essentially constant.
After all, is the biggest difference between the video game company and almost all companies around. All of your sales are "new" products even if they are variations on the same theme or suites within an established franchise. The life cycle of each product is unnervingly similar to the cycle life of a fruit fly.
Thus, the company depends on an adequate because a lot of work many times. Generally, businesses where you only do one smart thing every two decades are the best paris.
Conclusion
Apparently, most Japanese gamers now believe the Nintendo Wii will come out on top in this round of console wars. It is a surprising and somewhat disturbing finding. If the Wii is truly a revolution in the making, I think they will be right. But I still think this is Sony's race to lose.
What will be the price of the PS3 be in December of 2007? Until I know I can not predict more than a much tighter race this time nothing.
What about Nintendo as an investment? The stock is cheap, if you expect her to win the next round of console wars. Otherwise, it is difficult to assess. There are two major issues: the Wii and handheld gaming.
I am not convinced that there will be serious competitive threats to Nintendo position in handheld gaming coming high-tech cell phones that are quickly becoming the Swiss Army Knife the 21st century. I do not think the three major barriers to awkward controls, a lack of interest from the manufacturer, and a lack of interest user will be easily overcome. Nintendo is in the best position of any company to profit from handheld gaming in the future. They will be compete, but they will start with the advantage of knowing what their product is (a gaming machine).
So if you're comfortable with the position of Nintendo in the handheld gaming and you truly believe in both society and the Wii, it would be a reasonable investment long term at this price. However, even considering the large amount of cash and securities on the balance sheet compared to Nintendo's market capitalization, this is not a "value" style purchase based on past performance alone. The stock at current price is a bet on a future radiant.
While I like Nintendo's prospects at the moment, it is generally safer to bet against the revolution. So, I must say that Nintendo is a very interesting case that is a price too high to be a very interesting investment.
About the Author
Geoff Gannon writes a daily value investing blog and produces a twice weekly (half hour) value investing podcast at Gannon on Investing.
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