We came across a bullish thesis on Nintendo Co., Ltd. (NTDOY) on Schwar Capital’s Substack by Schwar Capital. In this article we will summarize the bulls’ thesis on NTDOY. Nintendo Co., Ltd. share was trading at $13.43 as of Sept 11th.
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Nintendo, renowned for its iconic franchises like Mario, Pokémon, The Legend of Zelda, and Animal Crossing, has maintained its status as a leader in the global gaming industry. The company’s revenue is primarily derived from its Dedicated Video Game Platform, which makes up 94% of its total revenue. This segment includes hardware, software, and accessories, with hardware accounting for 43.6% of revenue and software sales comprising the remainder. Digital sales now represent over 50% of software sales, highlighting a shift towards higher-margin offerings. Additionally, 81.2% of software sales are from Nintendo’s first-party titles, underscoring the success of its exclusive games and leaving room for potential growth in third-party software.
The Nintendo Switch has roughly 123 million active players, with over 38 million subscribers to the Nintendo Switch Online service, reflecting a committed user base that contributes to a steady stream of subscription income. This positions the Switch as a leading “App Store Platform” in the console gaming market. Beyond gaming, Nintendo’s Mobile and IP-related income, which includes revenue from visual content, smart-device content, and royalties, now accounts for 5.5% of total revenue and is nearly double the previous year’s figure. This growth has been driven partly by the success of the Mario Movie, with further growth anticipated from new films and theme park additions.
Nintendo’s appeal spans a broad demographic, with 70% of its player base over the age of 18 and an equal male-to-female ratio. This broad appeal, combined with the social nature of the Switch console, enhances its market potential, as multiple devices are often purchased within a single household. The upcoming launch of the Switch 2 is expected to improve hardware performance, attract a broader audience, and increase support for AAA games, thereby expanding Nintendo’s player base and boosting revenue from digital sales.
Financially, Nintendo boasts robust margins, with a gross profit margin of 57% and a net margin of 29%. The company has minimal debt, substantial cash reserves (constituting 24% of its market cap), and a history of shareholder-friendly actions like share buybacks and a 2.7% dividend yield. Valuation estimates suggest potential stock price appreciation: in a bull scenario, a 12% EPS growth rate could lead to a valuation of $21 per share, while a base scenario sees an 8% growth rate resulting in $15.5 per share. The bear scenario anticipates a 4% growth rate and a $11.5 per share value.
Overall, Nintendo presents an asymmetric investment opportunity, driven by a new console release, innovative use of intellectual property, continued high-quality content production, and potential improvements in capital allocation. However, risks remain, including the possibility of the Switch 2 underperforming, unfavorable currency exchange rates, and economic challenges in Japan. Nevertheless, Nintendo’s strategic initiatives and strong financial foundation position it for significant upside potential in the coming years.
Nintendo Co., Ltd. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 1 hedge fund portfolios held NTDOY at the end of the second quarter which was 1 in the previous quarter. While we acknowledge the risk and potential of NTDOY as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NTDOY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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