Nintendo Co., Ltd (ADR) (NASDAQOTH:NTDOY)

CAPS Rating: 2 out of 5


Player Avatar JakilaTheHun (99.93) Submitted: 6/10/2011 7:49:23 AM : Outperform Start Price: $25.45 NTDOY Score: -46.56

Am I crazy or is Nintendo looking really freaking cheap?! It's selling at a trailing P/E of 3.4 and a Price/Book of 0.2 according to Yahoo Finance. Those are bankruptcy metrics; not 'company that's about to launch a next-generation cash-flow boosting product' metrics.

I'm absolutely baffled about this valuation. There must be something I don't understand about this security, being as how it's traded on Japanese markets and it's not straightforward to analyze it from an American perspective. All the same, I'll green thumb and see how it does. If nothing else, I'm much more bullish about the Wii-U's prospects than the market, which seems to think it's going to be a huge dud. So even if I'm missing something here, it still might not be a bad bet.

In my view, Nintendo is the most well-run of the big gaming companies when it comes to consumer marketing. The Wii was a stroke of brilliance; Nintendo totally went against the prevailing wisdom in the gaming industry and critics panned them. As it turns out, Nintendo's gambit worked to perfection. I don't know that the Wii-U will be as successful, but I would wager on it beating current (very low) expectations by a long-shot.

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Member Avatar dirna239 (< 20) Submitted: 6/15/2011 7:37:39 PM
Recs: 1

The yahoo metrics are wrong.

If you look at the Japanese underlying, 3/2011 EPS=606.99 yen. It closed at 16,090 yen on 6/15/2011.
So the trailing PE is more like 26.5- not "bankruptcy" cheap.

Yahoo sometimes get the ADR conversion ratio wrong- and hence the wrong EPS numbers (there's no underlying/ADR arbitrage play here)

Member Avatar KamsterJas (24.91) Submitted: 8/25/2011 3:36:11 AM
Recs: 0

NDS brought Nintendo at least $ 4 billion, Wii brought Nintendo at least $5.2 billion, and other devices in the past brought in between $1 to $2 billion. Currently, Nintendo has a market cap of $40 billion and cash $16 billion. This kind of data indicates that based on its current business model, Nintendo needs to publish at least 7 console as successful as Wii in the next 30 years to make the a valuation of $30 justifiable.

However, this estimate is clearly too optimistic by common sense—even given that the gaming population will grow. For better margin of safety, an estimate of successful gaming consoles should be between 2 to 4 with average net profit of $4 billion each. Such an estimate translates into the valuation of $22 to $27 billion and the stock price of $20 to $24. On the other hand, due to the special nature of the gaming industry (similar to that of movie industry), valuation based on perpetual free cash flow is almost always too high, and hence illogical—unless Nintendo’s business model changes dramatically.

Once as the rule-setter of the gaming industry, Nintendo never exited the armament race in product innovation and reliance on key products due to the industry’s nature. As technology progresses forward, competition heightens, player number increases, and tastes change, Nintendo might not be the most stable choice for long-term investment based on its current business model; yet given its rock solid financial condition, favorable treatments to shareholders, and potentials to launch the next block-buster product, Nintendo is a fantastic speculative bet in the eyes of hard-core gamers and insiders. With the current flop of 3DS and very possible flop of WiiU, I view the pain of Nintendo to continue, and we will probably see $15 before we see $30 until the next big blockbuster rolls along.

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