WertArt Capital, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. A return of 16.9% was delivered by the fund for the Q2 of 2021, slightly below both its MSCI World Gross TR benchmark that delivered a 6.99% return for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of WertArt Capital, the fund mentioned Nintendo Co., Ltd. (NYSE: NTDOY) and discussed its stance on the firm. Nintendo Co., Ltd. is a Kyoto, Kyoto, Japan-based consumer electronics company with a $56.1 billion market capitalization. NTDOY delivered a -26.71% return since the beginning of the year, while its 12-month returns are down by -3.13%. The stock closed at $59.43 per share on August 13, 2021.
Here is what WertArt Capital has to say about Nintendo Co., Ltd. in its Q2 2021 investor letter:
“Nintendo offers video game entertainment for the whole family with its timeless characters like Super Mario and Luigi. At the same time, Nintendo can also inspire experienced gamers with titles such as “The Legend of Zelda: Breath of the Wild” (published in 2017 and sold 22 million times so far). In addition, Nintendo has been very successful in developing the appropriate hardware to distribute its content. Nintendo‘s current hardware, the Switch, is now in its fifth year of its life cycle.
Since the introduction of the Switch in 2017, Nintendo has sold more than 80 million units and has since achieved around 600 million software sales for the Switch. The sale of software units has become more and more profitable for Nintendo due to the digitalization of video game sales. Therefore, Nintendo can cut out the retailers to access end consumers directly through its online store (Nintendo eShop). Digital distribution also makes it easier for video game developers to access the distribution platforms directly. Customers can search for games in the Nintendo eShop and access an ever-growing
library of third-party games. The more players use the Switch, the more attractive it is for third-party developers to offer their games on Nintendo’s distribution platform, which in turn makes the Switch more exciting for potential customers.With Nintendo Switch Online, Nintendo launched a subscription service in 2018. Subscribers pay USD 20 per year for additional services. Comparable to Amazon Prime, users pay a relatively low membership fee in order to receive an incentive to use the service. As of September last year, Nintendo Switch Online had more than 26 million paying subscribers, which is a healthy subscriber rate of more than 30% (based on the Switch’s cumulative sales). Management has emphasized in the past how important this service is and that additional premium services will be added in order to make the offer more attractive for subscribers and to encourage regular use of the subscription service.
After the first Switch came on the market in 2017, Nintendo added an improved version and a cheaperversion (Switch Light) to the range in 2019. In October 2021, Nintendo will launch an OLED model that essentially has a better screen.
In the coming years, Nintendo should be able to show higher earnings stability than in the past. Similar to the development of smart phones, the switch could establish itself as a closed system on the games market. Nintendo would then no longer have to introduce a completely new hardware and software
system every few years, but could continuously develop the hardware and software.In addition to the regular hardware updates, releases of further game hits should keep the fan base happy and increase it. Customer loyalty should also be strengthened through the ever-growing digital content library from third-party developers and additional services at Nintendo Switch Online. In addition, the Switch is hardly present in many countries. For example, China could grow into an important sales market for the Switch, if the authorities approve the distribution of further Nintendo games in the near future. In my opinion, the chances of this are good, as both the Switch console and many games (e.g. Mario Kart) are better suited for social interaction than the widespread mobile phone games. After all, China has issued a series of regulations in recent years to limit the addictive behavior of young players. Together with sales partner Tencent, Nintendo is already trying to position the Switch as a family-friendly product.
Nintendo shares do not yet reflect the expected stability of earnings. Investors seem more likely to believe that the Switch cycle is ending. If, however, it turns out that the console cycle has changed due to the fact that sales will soon be completely digitized, the Nintendo share is about to re-rate.”
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Based on our calculations, Nintendo Co., Ltd. (NYSE: NTDOY) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. Nintendo Co., Ltd. (NYSE: NTDOY) delivered a -17.26% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
