First things first, I am a Nintendo fanboy and a shareholder. This is not investment advice. You are advised to do your own diligence before investing.
Nintendo, I think is the best gaming stock to buy. My partial reasonings:
- Gaming is all about IP. And Nintendo has the most recognisable IP. Mario, Pokemon(part ownership), Zelda etc have the brand recognition that few other games have.
- Pricing power. Nintendo can sell a game without giving any discounts and people will buy it. Case in point, Nintendo released its latest Super Mario 3d All-Stars games at $60, which are just 3 fairly simple ports. Yet, they sold 5.21M copies within 12 days(at page 10). Because of its IP strength, they are also able to sell older Wii-U ports at full price. Their titles also don't get much discounted. No other gaming company boast such pricing power among its player base. This is one of the reason there Operating Profits jumped 209% till September(click the first link).
- Lower development cost. Nintendo game philosophy is centred around the concept of "fun". So, unlike developers like Ubisoft, EA, Bethesda(parent acquired by MSFT), Rockstar, Activision Blizzard etc, they follow a unique strategy in developing games which results in a much lower development cost compared to their peers. Nintendo's gaming base(which includes hyper fans to children) is also supportive of its efforts. This has two-way benefits for Nintendo compared to its peers.
- Development costs of games are skyrocketing and at this rate, these companies will slowly have more difficulty in recouping costs.
- Nintendo's development cost, while not known per games is hypothesized to be lower. This means Nintendo finds it much easier to recoup costs.
- Other game companies in different stock exchanges worldwide have much higher multiples of valuations. Nintendo, who is expected to have higher growth(for the next 4 years) than most of the developers I have searched for, is relatively cheaply valued. Simple Valuation Comparison.
- Nintendo has more than adequate cash buffer. It is currently the most cash-rich company in Japan. Given Nintendo's experimental strategies, this ensures that Nintendo is extremely unlikely to face any liquidity crisis.
- Nintendo is also a platform holder. Which means it stands to profit from every game sold by other developers in its platform and its own games have a higher margin. This also allowed it to launch Switch Online subscription service, which while cheap, could provide a hefty return, especially in the upcoming few years. Also, unlike Sony and Microsoft, Nintendo actually makes money from the beginning while selling each console.
- Future plans(rumour based)
- Nintendo is expected to release a pro version of Switch(or just upgrade the Switch internals) which would boost Switch sales(management already upgraded forecast today by 20%).
- Nintendo management didn't shy away from the possibility of launching other forms of online gaming service. They are experimenting with game streaming. Control: Ultimate Edition is already available to stream in Nintendo Switch.
- Many others not mentioned here for brevity's sake.
- Growing diversified revenue source.
- Their merchandising business is going to grow along with its gaming revenues.
- Unique products like the Mario Kart: Home Circuit, Amiibos(which are a combined form of merchandise and in-app purchase), Nintendo Labo etc points to a company that has managed to integrate the physical and virtual world very competently. These products while a small part of its revenue equation would likely keep on growing.
- Their cinema ventures(an upcoming movie in partnership with Illumination) could grow further. Management has stated that they are likely to invest in these ventures more based on their success. This may result in TV shows and similar products getting released more. It must be mentioned though, Nintendo generally uses partnerships to venture into these markets and doesn't directly release the products, which means they get a small portion of the overall revenue.
- Theme park partnership with Universal.
- Upcoming titles could add significant profit potentials for Nintendo. Although we don't exactly know what they will be, management has already stated that they have merged their development efforts(before it was split among Wii-U and 3ds) which would lead to higher outputs.
- One of the disappointments is that Nintendo still seems to have not poured enough resources into its mobile gaming efforts and seems like we wouldn't get any revolutionary products like Pokemon Go. However, Nintendo published games in the Switch have very high attachment rates which somewhat counters the lack of games on mobile.
- As an example, let's compare Super Mario Odyssey against Witcher 3. Witcher 3(an extremely popular game and released a movie), which released in 2015 and is available in many platforms sold around 50M(as of May) copies. The base price of the game has been much lower than the $60 price Nintendo requires. Yet, Super Mario Odyssey sold around 19M copies being in a single platform. This, by no means, is an apple to an orange scenario. But I presented this example to illustrate the next point I am coming to and to make you aware of the strength of the Switch platform.
- Brand loyalty. Nintendo fans are very brand loyal because of the unique market approach of Nintendo. While other publishers are constantly barraged with gamer complaints and vocal minorities, Nintendo, while keeping its fans loyal, managed to shield itself from much of the disdain some gamers have towards other publishers. EA, Activision Blizzard, Epic, Ubisoft(even CD Projekt Red) etc seems to be constantly bamboozled by their vocal minority fans. As a result, the sense of community and brand loyalty is missing. Nintendo tends to do exceptionally well in this regard which is necessary for sustainable game sales. This also somewhat explains the exceptional attachment rates, pricing power etc. Its various games' fanbase also has a reputation of being helpful and welcoming, lacking the toxicity(Smash is an exception) of other gaming communities.
- Competent management. This is the name of the game. While other studios constantly seem to in the need to change management, developer exits etc. Current Nintendo management has proved itself to be worthy. *ARKK ETF contains NTDOY as a holdings.
- Nintendo has a habit of creating extremely profitable products and then suddenly getting derailed. However, for the next 4 years, this sort of mishap is unlikely to happen.
- Sony and Microsoft are going to release their next-generation consoles. Although, this is unlikely to dent sales(because of Nintendo's blue ocean strategy) as management didn't really imply that it would happen; instead they chose to upgrade the sales forecast.
Gaming has entered a mega-trend territory. I think Nintendo is best positioned to capture this mega-trend as they have all the ingredients of success. Plus, Nintendo being undervalued compared to its peers make it a good opportunity to ride this trend.
Gaming is ultimately a risky business and no other publisher(other than MSFT, which already is valued to the teeth) is as well positioned in this market as Nintendo.
TL;DR: I think Nintendo is the best stock for the next 3-4 years among other gaming stocks.
Have a good day! 🙂
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