Nintendo's move into mobile smartphone gaming is proving to be super effective. Pokemon GO sits atop the App Store just 48 hours after the game's launch. The stock market has rewarded Nintendo shareholders today to the tune of a 10% gain on NTDOY (Nintendo's American Depository Receipt) shares. In my opinion, this is merely the beginning of a new bull market in shares of the company.
In 2014 I asked, "Just how long can Nintendo keep its head in the sand with respect to mobile?" in an article for GamesIndustry International. "Nintendo has an opportunity to create a tiered system for releasing their content, where some virtual console titles will be made available on mobile phones and the new AAA Nintendo titles will still be made exclusively for 3DS/Wii U. The current walled garden philosophy isn't going to cut it. Super Mario 3D World was one of the most critically acclaimed games of 2013, yet the Wii U sales still were pathetic. The idea that software sells hardware does not seem to be working, so why not sell some older software on proven hardware platforms that are still growing?"
In a little over 2 years, Nintendo has finally accomplished what they should have been working on as early as 2008. Their efforts on mobile are not going unnoticed and their share price and earnings performance are beginning to reflect this shift in strategy. Stocks move based on the expectations of future earnings and sales, and Nintendo has finally given analysts a reason for optimism. After 9 years of negativity, Nintendo has entered a growth market with their first two mobile apps, Miitomo and Pokemon GO. Their intellectual property lends perfectly to a "tiered content system" as I mentioned in 2014. These mobile apps will never be as robust as a 3DS or Wii U game, but they introduce new users to the greatness that is Nintendo. The company has also wisely partnered with DeNA and Niantic Labs, two very accomplished mobile developers, to create new experiences tailored for mobile instead of merely porting NES titles with unintuitive on screen controls. This is what makes Nintendo great. They may not be the first to a market, but they have a clear vision and attention to detail when they do decide to enter new territory.
You may be asking yourselves if Nintendo's stock is still a buy after its sizable jump in price today. I believe the stock still offers a solid value to investors at its current price. Shares peaked at $77/share in 2007 at the height of the hype surrounding the blockbuster Nintendo Wii. The share price bottomed during the malaise of lackluster Wii U sales below $12/share. There is still plenty of room for the share price to appreciate now that the company has positive catalysts ahead. When you back out the nearly $9 billion of cash on Nintendo's balance sheet, the company is currently being valued at approximately $12 Billion. King Digital, makers of Candy Crush, were recently acquired by Activision Blizzard for $5.9 Billion and Supercell, makers of Clash of Clans, were recently valued above $10 Billion in their recent deal with Tencent.
If Nintendo has more blockbuster mobile apps up their sleeves, this is going to be a huge bump to profitability as profit margins on digital distribution of mobile software is way higher than their traditional business model. We have seen this secular shift to digital and mobile play out for companies like Electronic Arts as they recorded over $500 Million in mobile sales in their fiscal 2015.
Nintendo finally has some tailwinds. Next year the NX will be unveiled and we will finally know what they have been working on. CEO Tatsumi Kimishima mentioned at the Annual Meeting of Shareholders that Nintendo has considered making controllers for iOS devices. The company has already announced a partnership with Universal Studios on an upcoming theme park venture. Nintendo also has begun efforts to bring their content to the big screen in the form of feature films and shorts. There are now a whole array of new revenue streams that the company has at its disposal. The company's stock trades at a 3.5 price to sales ratio, which could prove to be cheap if revenues grow as I expect they will over the next few years. The prospects of revenue growth, positive margin expansion, and potential new joint ventures are all great reasons to continue to own Nintendo's stock for the foreseeable future.
At the time of this article, Asif A. Khan, his family members, and his company Virtue LLC had the following positions:
Long Nintendo via NTDOY ADR