Stock Analysis: Nintendo (US NTDOY, JP 7974) - Why the Nintendo Stock is Undervalued
Stock Analysis: Nintendo (US NTDOY, JP 7974) - Why the Nintendo Stock is Undervalued
TLDR: I think betting on the Nintendo stock is a bet that they can pivot to new money-making areas like theme parks and movies which will fuel their already strong merchandise arm. I believe that in 3-5 years, these new segments could make up for more revenue than their present gaming segment.
In terms of gaming, the company is likely too conservative and un-agile to compete in the next realm, with cloud computing and virtual reality likely being a requirement to enter.
Even if Nintendo’s bets on pivoting doesn’t go well, the company is making so much money and has a fair dividend of 3% that its likely a good buy-and-hold stock in any way.
We all know and love Nintendo!
It’s perhaps the world’s most renowned gaming company with hits like Super Mario, Metroid, Zelda, Kirby, Pokémon… basically everything you loved in your childhood!
Nintendo has a lot going for it! A panic educed demand for video games and consoles have shot up Nintendo’s profits by 84.31%, or $7.833B and titles like Animal Crossing; New Horizons have developed a cult-like following during the past years.
You’d think that investors are flocking to get a piece of the Nintendo-pie, but you’d be dead wrong!
The stock is trading at a P/E (Price/Earnings ratio) of measly 14, compared to its 7-year average of 41(!). On top of that, the stock has been falling ever since February last year and there is no sign of recovering.
Here is the full data sheet with 10 years of Nintendo’s balance sheets and income statements that was used for this analysis:
Why is Nintendo’s Valuation so Low?
Let me list up the major reasons why I think the stock is trading so low:
Profits are higher than ever
As earnings increases, the P/E ratio goes down, and profits 2021 for Nintendo was a whopping $16.534B, a 37.34% increase from 2020. In fact, even though the P/E ratio has fallen drastically for the company, its stock has only had a 20% drop since its all-time high.
Where can they go from here?
Nintendo has doubled down on making everything they sell themselves.
Basically, all hits on their consoles are made by them, they practically never license out their franchises to other consoles or even mobile platforms. Also, their latest console, the Nintendo Switch, has an amazing design and appeal, but its not especially compatible with online gaming and has such a small storage that even buying games online (online sales of games took over physicals sales in 2015) is nearly impossible.
This has helped keep profit margins at an astonishing 20%, but has also resulted in far fever game sales than we see on the PS5 or Xbox Series X. As Sony and Microsoft are pushing for a future of cloud gaming and online gaming subscriptions, its easy to see how Nintendo can fall behind.
This leads me to my next point:
Traditional company = Traditional Issues
As I mentioned above, playing games online on Nintendo’s consoles have always been notoriously bad. In-game purchases are possible but lacking the depth and of their competitors. Even heavy online games like Animal Crossing constantly had issues on the console, and players couldn’t sometimes log in for days.
While Microsoft’s Xbox Series X and Sony’s PlayStation 5 are consolidating and pivoting to subscription models and virtual reality, Nintendo’s latest bet is the Nintendo Switch with and LED panel instead of an LCD panel, and 5% (debated) better battery life…
Upsides for the Nintendo Stock?
However, if I only saw problem in this stock, I would of course not give it the privilege of an article on my Substack. Hence, here are the main reasons I think this stock can perform incredibly well in the coming years:
New profit areas
Nintendo has been ramping its ambitions to become a series theme park player massively. They opened the Super Mario Land in Universals Studio Japan which even during the pandemic has sold out tickets, and they also have plans to open a Nintendo only theme park in Japan.
The present theme park is a gorgeous traditional theme park, but it also heavily encourages everyone to buy Nintendo merchandise, such as watches, stuffed animals with QR codes etc. to get an “enhanced” experience of its many rides, something that from my time visiting it looked like a massive success.
I think this is a good indication that Nintendo knows how to increase revenues more than traditional theme park holders. If they can pull off their Universal Studios Japan success in their own theme park, it will likely be a huge arm in their play for increased profits.
Good Movies = More merch!
Did you know that there is a live-action Super Mario Bros. movie from 1993?
No?
Good, because it was an utter disaster. It flopped in the box office and Nintendo did everything to make people forget about it.
Knowing this, you might be shocked to hear that in December next year (April 2023), Nintendo will release a new Super Mario Bros movie, featuring Chris Pratt as Mario. Based on Nintendo’s previous disastrous venture into the world of movies, this could send shivers down the spine of investors.
As the positive pea I am, I believe Nintendo have learned from their mistakes and will hopefully make a better effort this time.
But even if they don’t, it can still be a success!
Undoubtedly Pixar’s (owned by Disney) worst movie franchise, Cars, is by no means the highest grossing movie Disney has produced, but it is still their biggest cash-cow!
You see, 90% of the profits they made from the franchise was in merchandise, and basically everything you see in the Cars movies are purchasable.
The amount of merchandise Nintendo could sell with the new Super Mario movie is boundless, and I think the company aims to earn most of their movie profits this way.
Can you see where I am going here?
Nintendo is on its way to build a profitable theme park arm and a hopefully a profitable movie arm to Hyper-fuel their already very profitable merchandise arm!
If these new areas of venture are successful, we could see them growing into a bigger cash cow for Nintendo than their entire gaming division!
Also, Nintendo makes boatloads of money!
I promise, this is my last point for why you should own the Nintendo stock.
Sony and Microsoft lose copious amounts of $$ for every console they sell. Their bet is that you’ll spend so much money on games and in-game purchases that they’ll make up for the difference. As we know, this strategy has mostly worked out for them, but it’s a fragile business-model at best.
Nintendo on the other hand makes boatloads of cash on everything they sell (remember that 20% profit margin?).
For example, the Nintendo Switch console basically has the same hardware as a 7-year-old Samsung phone, and customers happily spend $300-$400 to get their hands on one.
Also, most of their games are developed in-house, so while Sony and Microsoft rely on a 10-15% license fee for most games sold, Nintendo gets to eat the whole cake on almost every game sold on their consoles!
Yes, investors are likely eyeing a future where Sony and Microsoft make recurring revenues from gaming passes and in-game purchases in virtual reality or what-not, but these are all still just pipedreams. Nintendo is making money now!
So even if Nintendo would fail on their new bets, they won’t stop making money tomorrow. They company has been around for 133 years after all!
Also, with a dividend of over 3%, it is sure to be a buy-and-hold stock no matter what.
Where can I buy the stock?
If you don’t have access to the Japanese stock market directly, you have two good alternatives:
If you have access to US markets, you can buy a representative stock of Nintendo with the ticker NTDOY
If you have access to the European markets, you can buy Nintendo on the Frankfurt stock exchange under the ticker NTO:GR