XMFSamstevens (36.11)

Daily Reexamination Day 6: Nintendo (NTDOY.PK)

April 02, 2011 – Comments (4) | RELATED TICKERS: NTDOY.PK

Pokemon is the greatest kids thing ever invented. And Nintendo came up with the game and the game console for it.  I consider myself a relatively knowledgeable gamer, so this one should be right up my alley.

Numericals: Nintendo looks "undervalued" right now with a P/E of only 10.5 and a 3.6% dividend. The lack of financial data on Nintendo is kind of annoying... someone needs to get on that... Anyways they seemed to have a good 2010 (how big I'm having difficulty finding because this earnings report is in Yen :( but projections for 2011 aren't so hot which is weird b/c they're coming out with a new portable console, the 3DS. I cannot for the life of me find good quantitative data on this company, which is in a way too bad but in another way not really that important b/c I just want to figure out if I think they can win long-term.

Qualitative: Nintendo's in an intersting position. They follow the console/game model where they sell you a console and then sell you some games that only work on that console, but then come out with a new console so you have to buy that one too model. But they don't make all the games, just some of them. They have a "home console" in the Wii, which is marketed towards younger kids and "family" and a "portable console" in the 3DS, which is pretty new and apparently uses non-glasses 3D technology. I'm a little skeptical of the Wii, because although there are a good number of people who aren't really the "gamer" types who bought wiis and probably don't play all that much, I'm not sure how many more games for it they can sell, and I feel like its going out of fashion a little bit, so to speak. Sony's PlayStation 3 and Microsoft's Xbox 360 are more traditional "home consoles" marketed towards the more hardcore "gamers" because the standard controller offers more options and precision than wii's motion-sensing controller does. "Gamers" are the ones who buy alll the hot new games right when they come out, and are a bigger source of income in terms of selling new games. They don't, however, buy new consoles all that often, so wii's wide-ranging console sales neutralize some of that effect. It's a different business model from that of microsoft and sony's divisions, but since the two companies don't actually make that great of a percentage of the best-selling games for their consoles (whereas nintendo actually does), I don't think their model is really superior for making money. 

In terms of portable consoles, Sony and Microsoft have attempted to rival the 3DS but I don't see this as being particularly stiff competition. The portable console market is more geared towards younger kids, who like to play these games in the car, at school, in their bedrooms, as opposed to the older gamers, who prefer to play on home consoles in their basements. Since Nintendo does a great job of creating games targeted towards younger kids, they will always dominate the portable console market, as the best younger-kids games will always be on Nintendo's platform, and people consequently will buy Nintendo's portable console over Sony or Microsoft's. Their business model in portable consoles is rock-solid and sure to make them money in the long-term future as long as they can continue to come out with at least similarly capable portable consoles (they always have been able to do this, and in fact theirs have traditionally been superior technologies), and continue to produce exciting new games (I'll get to this issue in a second). Being an "older gamer" I tend to think of nintendo as being not a great company but I have to remind myself that most of their stuff is not geared towards me. That being said, I actually do have some friends who have nintendo portable consoles and still play them sometimes. I'm not sure how likely they would be to buy new stuff, but still I think that's remarkable.

Nintendo franchises. The biggest one they have is Pokemon, and come on, who didn't love pokemon at some point in their lives? That stuff is genius! The only problem is that now we're on the 4th? 5th? set of new pokemon and maybe it's getting a bit tiresome? I for one was lost after the 3rd generation (almost 500 total pokemon, how could you keep track???). But again, I must remind myself that it's not about me, its about the youngers kids. So do elementry schoolers still think pokemon is the coolest stuff ever? Well, I don't know all that many elementary schoolers but I think one good indicator would be how well the new 3DS is selling, right? Well its only been out for a few days but apparently it had the best first day of any console they've ever had, so i'd say that's a pretty good sign.

Lastly I want to address something that I think is often underrated when it comes to businesses, and that's the fact that Nintendo is ONLY a videogaming company, while Microsoft and Sony are videogaming companies on the side. According to a MF report I read, Microsoft and Sony actually lose money on all the consoles they sell, and even lose money on their gaming businesses as a whole, and have for years. This is amazing, considering how good they are. It seems that the technology is still just too expensive to make money on while selling products at current prices (I'm talking about home consoles here). But since Nintendo's Wii doesn't use the same high-powered graphics systems, they can produce them actually much cheaper than Xbox and PlayStations, and they, of course, make money on Wiis. And this makes sense, because since they are only a videogame company, if they weren't making money on it, they wouldn't be selling Wiis.

Verdict: I think this more efficient, focused business model will lead them to success in the long-term future compared to Microsoft and Sony, and with the continued dominance of the portable console, Nintendo will be a good play. This one's a keeper.