Profile: Nintendo

What caught my interest?

A rough thesis on Nintendo by Moore_Capital54 on  the Corner of Berkshire and Fairfax forum:

Over the last 2 months we have built a significant position in Nintendo.

I thought I would share this idea with the board as it is the type of contrarian value investment that I love and reminds me of others which have produced fantastic results for us over the years.

What we have here is a company that is currently valued at a market cap of $19.5B USD. However, Nintendo holds over $13B in cash and liquid securities. When subtracting the cash we get an EV of only $6.5B.

Our thesis is that the earnings power of the business on a normalized basis, works out to roughly $2-3B a year.

We can go on and on about what Nintendo has done wrong, and how they desperately need a hot product. History teaches us that at least once every decade, Nintendo is able to launch such a product and when it does it produces significant FCF. FY 2011 Nintendo produced $800mm of FCF, and this was considered a terrible year.

Another catalyst is the dividend reinstatement which was suspended on September 29th, but historically ran around 1-2B a year. A reinstatement would mean the current valuation would produce between 5-10% dividend yields.

I expect NTDOY to double over the next 24 months quite easily, with very little downside risk.


Why is Mr. Market pessimistic?

Nintendo has been one of the worst performing stocks in the Japanese equity markets this year.  They are coming off their worst year in 30 years.  They actually lost money for a full year.  This is either a rare opportunity to buy the Big N at trough valuations, or this is the end of the company as we know it.  Investor sentiment indicates that most people believe Nintendo is doomed just like Sega, Nokia, or even Research in Motion.

Franchise Value

A link to the past: why Nintendo won’t make games for smartphones (June, 2013)

Nintendo has a huge range of exclusive franchises that are more or less guaranteed to sell like gangbusters, and it’s that exclusivity that makes them so valuable. The company turned a profit even through the unsuccessful GameCube years, buoyed by fans of its Mario, Zelda, and Pokemon games, and maintains healthy cash reserves. By comparison, Microsoft isthought to have lost close to $4 billion helping the original Xbox reach a similar install base to that of the GameCube.

Make no mistake — the Wii U has been a massive misstep on Nintendo’s part, and the chances of it coming close to its predecessor’s success are worse than narrow. But even with a subdued E3 showing, the company displayed enough to ensure that the system won’t be a total bust. Nintendo’s developers can knock out titles like Mario Kart 8 andSuper Mario 3D World in their sleep, and the Wii U will get a sales bump each time.

Other resources

Click to access 05_shah.pdf

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