Earlier this year I enrolled myself into the Penn State Online MBA program, because I am specifically interested in economics, finance, business models, and investing. I do a lot of researching & reading on these topics both in and outside of class.
One piece of investing advice struck me from Warren Buffet and Peter Lynch.
“Buy what you know and stay in your circle of competencies.“
This is my practice investment thesis on Nintendo. Why? Because it’s in my circle of competencies. I know Nintendo because like many Millennials and Gen-Z, I grew up playing Nintendo games.
Why Nintendo?
Why is Nintendo a value investment? It’s simple business model that is easy to understand. Mario, Pokémon, and its hardware moat the Switch Platform. Nintendo I believe is completely undervalued by the market, I would even say resented Nintendo for its past performance for not embracing the mobile trends like every other company. The overall volume of trading shares of Nintendo are less compared to the S&P 500. I assume that not many in the investing community cares about Nintendo. There was always one question I had in mind about Nintendo since 2021.
Why is Nintendo stock traded less than other stocks?
Nintendo in contrast to that question is really a great company. Nintendo owns a powerful IP, maintains strong brand equity and the video game market is growing. The video game market has been growing for years and has a large customer base; there are 190 million Americans who play video games in 2024. Beyond that there are 3.2 billion people who play video games. As this article mentions China, America, and Japan are the largest gaming markets in the world currently for gaming. Nintendo has its foot in all three countries. Even though there is geopolitical risk surrounding the potential invasion of Taiwan at this time, I think investing into Nintendo would be the least of everyone’s concerns, as the invasion would be devastating to the global economy.
What about the falling Yen? Yes, the Yen is falling compared to the dollar and you could assume that poses a risk to Nintendo; however that is not true because “overseas sales account for more than 70% of its total sales, and the majority of monetary transactions are made in local currencies.” Nintendo exposure is larger with foreign markets such as Canada and UK, which Nintendo hedges against. So ironically when the Yen falls Nintendo’s profit rises due to earning foreign currencies of greater value compared to Yen. This could over-inflate expectations in Japan so it’s best to always look at it from USD plus its suppliers are located outside of Japan and mostly deal in the same foreign currency it earns.
Should you buy Nintendo for short-term trades?
Absolutely not! unless you have the skill set for it. Nintendo’s stock price is volatile recent hardware sales dropped -12.6% compared to last year 2023 to today at May 2023, it’s a cyclical consumer stock. This has made the stock price drop recently and made investors afraid to invest.
However, part of Nintendo’s business model is changing as shown in the graph below it’s annual playing users are on the rise, that means user retention is really high for its product and is growing. Even though its flagship product the Switch is older the quality of design, feel, and durability is appraised even today, this how its still retaining users and seeing sales so late into its product life cycle.
Nintendo is capitalizing on this through its new monthly subscription and digital sales. Digital sales are on rise with +9.4% with it’s evergreen titles.
That is the thing hardware is difficult to make and the Switch lasted 7 years it is getting old but that doesn’t mean the Switch 2 will be as “successful”. That is a risk of trading short-term on Nintendo, an extremely common criticism repeated by surface-level analysts is the Wii U’s failure everyone knows that but past performance doesn’t predict future performance, however, I believe Nintendo’s management is extremely competent and can make amazing turnarounds, the switch speaks for itself as an innovative and profitable product that turned Nintendo around from its failure.
Why do I think the Switch 2 will be successful? because Nintendo after so many years of innovation have truly achieved a blueprint that they can improve on if they improve the GPU, and CPU, and make the joycons not plastic and fragile. It’s long standing competitors Xbox and PlayStation are in arms race with each other that Xbox has lost and cannot emulate that success it cannot emulate Mario Kart, that remains in the minds of consumers that is strong product/brand. There is something unique about that and valuable that I cannot get from Xbox or Playstation.
What is Nintendo’s Moat?
- Nintendo understands its competitive moat that is to provide unique/fun experiences for customers at low cost leadership and differentiated.
- Nintendo Innovates differently from every other company. Nintendo does not innovate on benching marking hardware but innovates through Lateral Thinking developing experiences no one else can get from its competitors, you don’t need to use the latest technology, but affordable and well-defined technology of well-known quality.
- Nintendo turns things around, competent management
Competitive Analysis of Nintendo
Michael E. Porter Competitive Strategy[3] is the only book that I recommend to people to truly conduct competitive analysis on any industry or market. His five competitive forces “Forces Driving Industry Competition”[3] are simple yet elegant descriptions competition on industries and markets. We will apply this framework to Nintendo’s Industry and market by looking at the rivalry among existing firms, entrants, substitutes, Suppliers, and Buyers (Demand). [3]
In the center of the competitive analysis diagram I have Xbox, Sony, and the Nintendo switch in which we see a rivalry among existing firms, a 2-3 decade rivalry that have existed since the 2000s known as the console wars. [1] Xbox is however is falling out of the market. It lacks competitiveness and has for a long time relied on benchmarking and I agree with Tom Peters, I think benchmarking is the worst form of competitive innovation. [2] It’s a race to bottom but that doesn’t always translate into value for customers or investors.
We have many entrants from above are trying to enter into ATARI made a comeback believe it or not. Others entrants VCS bundle, Meta’s Oculus Quest 2, google tried poorly with Stadia just no games came with it?, Then the only successful entrants disrupting the industry are Steam Decks and Oculus Quest 2. There are even older console at play still as entrants like the gamecube and PS2.
Then below we have substitutes gaming PCs and Mobile gaming are on a constant rise replacing peoples time away from consoles to more interactive and multiplayer mediums. This is an entertainment market a persons limited time could be less than 4 hours for working adult to relax and enjoy a game. There are so many substitutes that meet this need that Nintendo, Playstation, and Xbox are competing or even become a “Entertainment System” to allow streaming services through its platform like Netflix, and Crunchyrolls. PlayStation has some competitive advantages due to owning so many movie titles.
Then to the left we have suppliers, many suppliers lack influence or power over the gaming console industry, many are glass manufacturers, plastic suppliers, secondary chips manufacturers, labor is plentiful. With the notable exception of Nivida GPUs and Semi-conductors’ chips shortages that threaten the Gaming Console Industry could play secondary to Apple for instance. Nintendo has always used chips or hardware that is not latest or cutting edge to its advantage it uses older versions of hardware that are well developed and supported because its cheaper to implement and buy hardware that was surpass by Moore’s Laws. This why Lateral thinking is so powerful, no one says you have to be the latest and greatest but benchmarking has push competitors to lose money on every Xbox or PlayStation sold. Moore’s Law pushes forward older hardware becomes less valuable/cheaper however due to Nintendo’s engineering philosophy they maintain their competitive advantage by using low-cost materials, easy to implement in manufacturing components, and differentiation to maintain that advantages.
We have Buyers who hold lot power over the Gaming Console industry because there is such a wide array of competing options now, we have potential entrants, we have mobile gaming, we have PC gaming entertainment has never been so cheap and plentiful. Buyers and their dollars could go anywhere is else? The real question is how has the gaming console industry maintained its competitive advantage?
Well let’s look at some more concepts by Porter, and apply them to Sony and Nintendo. Nintendo 3 essential concepts describe by Porter to maintain its competitive advantage the 1st is innovate to differentiation, then won the overall cost leadership compared to PS5 and Xbox, and offers a unique experience that furiously defend through IP lawyers. I.E. Mario kart is a experience I cannot get anywhere else. If we look at Xbox and Sony (PlayStation) in the past 10 years they maintained a competitive moat by providing exclusive titles to their consoles such as Halo and God of War, however recently Xbox went Live As A Service where it freely provides its IP for licensing fees on other platforms like PC, PS5 and even the Nintendo switch. They gave up the “exclusive IP” moat because they saw the writing on the wall for themselves, they were not making any profits on hardware, it was all software for them, its benching marking against Sony directly. Sony had to double down its unique exclusives and innovative DualSense Wireless controllers’ with haptic feedback where the PS5 has evolved into a entertainment system providing Netflix and Crunchyroll streaming services. On top of that I think Microsoft is so large as firm its competitiveness for Xbox products has lost sight of the Xbox’s long term competitive advantage. Only through acquisitions of software companies and game developers has Xbox has remain relevant and potentially AI can improve game experiences but I haven’t seen that application yet which is disappointing only hobbyist have applied the technology a glimpse into the future of gaming.
Substitutes coming in? Again, substitutes are an offering amazing experience, I personally love PC gaming it was not until recently that I was reintroduced to console gaming by my fiancée who brought a PS5 and had a Nintendo switch. The thing about substitutes is that darn price point, PC gaming is expensive to the average person, and I would say to the average person the technology is complicated to understand which can be huge barrier to entry, I had a friend recently build/buy a gaming PC and it intimidated him terribly he thought he broke it. There is also second hand market for gaming PC and the substitutes can co-exist pretty well with gaming consoles because the experiences on both platforms are just different, its easier to use a gaming controller versus a mouse and keyboard. Again the gaming console industry maintains that moat by being accessible to buyers and it being quarter the price of gaming PC on average, the Switch can be ~$250-299 some PC can go for ~750 > depending on the performance you want to get.
Buyers especially in high interest rate environments and economically troubling times will be more price sensitive PC gaming and even mobile gaming could seem way to much in terms of cost for what the person receive. Buyers are always looking for alternatives, and lower prices, so if switch is $250-$299 we can see the PS5 price point at $599 makes a huge difference. This why each gaming console has formed its own niche that carters to different customers Sony’s PS5 and Xbox carters to a older teenage segment while Nintendo is brought by adults its also brought most commonly for children, outside of Robolox & Fortnite of course.
As shown in this chart below we can see Switch and PS5 sales are out pacing Xbox sales.
Nintendo’s Innovative Strategy
Nintendo has existence for over 135 years since its inception as a playing card manufacturer of Hanafuda, founded by Fusajiro Yamauchi. [4] Today, in 2024, Nintendo’s market cap is 72 billion USD in the video game software and hardware console market. [5] One common highlight noted by many observers is its significant allocation of expenses to R&D. Nintendo spends 12.54% of its revenue on R&D alone. Nintendo puts significates financial capital to its R&D departments to maintain its competitive advantage of unique and fun experiences.
For years, Nintendo has dedicated entire departments to its R&D, notably Nintendo Research & Development 1, which has recently merged into Nintendo Entertainment Planning & Development. This strategic move has led to the creation of many popular series and the revitalization of legacy IPs. New releases from franchises such as Mario, Animal Crossing, The Legend of Zelda, the Splatoon series, Fire Emblem, and Kirby are testament to this effort. One must wonder how a small card manufacturer from 1889 became one of the three dominant video game console manufacturers, alongside Xbox and Sony’s PlayStation series.
One of Nintendo’s earliest achievements was a response to a regulation by the Japanese government, which banned playing cards with numbers and prohibited gambling. This led to a cat-and-mouse game with card decks constantly changing and evolving, and thus Hanafuda cards emerged in the late 1800s because they had no numbers. Nintendo was specifically created for producing Hanafuda, cards that are associated with gambling and Yakuza tattoos. [6] Even though Nintendo innovated with playing cards, such as by producing the first-ever plastic playing card [8], the popularity of Hanafuda had declined going into the 1950-1960s. Thus, Nintendo had to innovate once again.
Nintendo’s Innovative Culture
To tie this back to Nintendo, there is a recurring theme of the company constantly trying new things and experiencing failures. This was evident even under the leadership of Hiroshi Yamauchi, the third president of Nintendo in 1949. Yamauchi attempted to expand Nintendo into various new industries, recognizing the decline and limitations of Hanafuda cards. His ventures included taxi services, love hotels, instant rice, collaborations with Disney, vacuum cleaners, and so on. [9] However, all these endeavors failed. The turning point came when Yamauchi noticed the potential in Gunpei Yokoi, an assembly line maintenance man. Yokoi, who was bored one, had created a toy for his own amusement: a mechanical arm that could extend and grab objects. Nintendo created it into a Toy and named it the Ultra Hand, it became a huge success. [17]
Yamauchi viewed this as the future of the company. Consequently, Yokoi was promoted from maintenance to the newly formed ‘Nintendo Games’ division as a product developer. [17] That is innovation where leadership can recognize the potential of employees, Yokoi went on to develop a series of toys and games were developed under his guidance. However, Nintendo’s foray into video games began with their new game that incorporated a ‘light gun.’ This Opto-Electronic Gun, developed with Yokoi’s input, evolved into the ‘Laser Clay Shooting System’.
Nintendo poured millions of Yen into the project until tragedy struck with the OPEC oil crisis in the 80s. This prompted Yokoi to develop a new design philosophy called ‘Lateral thinking with withered technology,’ leading to a downsized version known as ‘Wild Gunman,’ a ‘light gun’ arcade game. [17] This philosophy persists today, suggesting that we don’t need the latest technology to develop products. Instead, we can use well-known or niche technologies to expedite the creation process. Using cutting-edge technology can be prohibitively expensive, making maintenance and distribution challenging. The Nintendo Switch exemplifies this idea: its hardware is outdated compared to competitors like the PS5 and Xbox, but this is advantageous because its hardware costs are lower, its price point is half that of its rivals, and its software performs excellently on optimized hardware systems. Nintendo is the only company to profit from its hardware sales. They don’t constantly race to adopt the latest technology but instead explore old or niche technologies that their competitors often overlook. [17] This approach has been central to their innovation, from early leadership to the present. They wait for new technologies and markets to mature, then capitalize on the remaining parts, taking them in entirely new directions. For instance, while Vision Pro is cutting-edge, Nintendo would not invest in it until it has fully evolved, similar to their approach with ChatGPT interactions.
Another cornerstone of their innovative culture is the principle that fun comes first. Constantly experimenting in pursuit of ‘fun,’ Nintendo ensures that their games are enjoyable before even considering story or character development. [7] Nintendo’s initial foray into the video game console market was in the 1960s involved TV consoles, named ‘TV-Game,’ and in the late 1970s, they ventured into video game arcade machines. [4]
Then, its first ‘home video game system’ was called the Family Computer System, or Famicom, which was later rebranded as the well-known and successful home console, the NES or Nintendo Entertainment System. [4] Nintendo has led the way in new innovations in user interaction with the first ‘Hands Free’ controller. [12] This idea of accessibility for everyone and having fun with anything is a common cultural motif in Nintendo’s leadership approach.
Even recent leadership has focused on the ‘quality of life’ that its products provide to users, reflecting a user-centric design philosophy. [13] Nintendo was one of the first companies to create portable video games, introducing the handheld ‘Game & Watch,’ an early precursor to the well-known Game Boy. This innovation was sparked by an observation made by Gunpei Yokoi: ‘It was during a mundane train commute when Yokoi noticed a bored businessman idly mashing buttons on a pocket calculator.’ [17] This observation by Yokoi gave inspiration to the portable game console “Game & Watch” later on to development of the well known Game Boy.
This is what sets innovative product developers apart. Yokoi turned ‘observed boredom into a product.’ [17] Nintendo’s creativity and innovation are distilled into its products, marking many firsts: touchscreens on the Switch, the attempt at virtual reality with the ‘Virtual Boy’ (which was a complete failure), analogue control sticks, wireless controllers and motion control for the Wii console, and portable gaming with the Game Boy. [14] The key to such innovations has been Nintendo’s ability within its R&D to foster collaboration between software and hardware development teams, aiming to create a better overall user experience in their continuous pursuit of fun.[14]
Nintendo’s Customer Touch Points
For years, Nintendo announced and released their products at E3, until recently, when they pulled out of the event last year. [10] However these E3 events has become a great touch point for its brand to engage with customers. For the past 30 years, Nintendo has made video game announcements and demonstrated its most innovative products at E3. This practice has long projected an image of a company constantly striving to improve and present new user experiences to its consumers, this what it means to stay relevant and competitive in the market keep excitement going with consumers. A notable example is how it presented its latest IP release at Nintendo Direct E3 2021, where executives, directors, and developers showcased the latest innovations. [11] Additionally, on the backend, Nintendo has released a series of blog articles titled ‘Ask The Developer’, where specific games and their developers are interviewed directly to discuss the innovative aspects and user experience of their products.
What is Next for Nintendo?
Nintendo is currently pursuing the development of the Switch 2, which is rumored to be released in 2025. [14] However, Nintendo’s current president, Shuntaro Furukawa, has downplayed this, stating that they are constantly researching and developing. [16] In the 2024 Q&A for investors, it was mentioned that Nintendo has applied its IP to movies, mobile apps, and theme parks. This initiative aims to ‘invigorate’ the video game platform business within the Switch ecosystem.” [16]
Overall if you invest into Nintendo you need to know who are getting in bed with, if you expect Nintendo to bring the cutting edge and follow trends into mobile and follow the hyper bull market this company is not for you. Nintendo will benefit from these technologies later in the form of well designed products and great consumer experiences in the many years to come, this is a company that will be around for many years to come, its low PE, lot of cash ready for M&A, and great IP and Moats.
What can we learn from Nintendo
- Have a mission or design philosophy like “design for fun.”
- Collaborate between departments and internationally with other companies.
- Seek out the potential in employees promote and direct them for opportunity.
- Give small teams a chance to experiment and innovate.
- Realize that your IP can sometimes extend beyond its current industry.
Work Cited
[1] Wilde, T. (2024, February 15). Console wars aren’t over yet — but Xbox is shifting its strategy against Sony and Nintendo. GeekWire. https://www.geekwire.com/2024/console-wars-arent-over-yet-but-xbox-is-shifting-its-competitive-strategy/
[2] Tom Peters Innovation is Actually Easy! https://www.youtube.com/watch?v=ADNuqkGcmZ8
[3] Porter, M. E. (1998). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press.
[4] Laurie Takeda. “The History of Nintendo: the Company, Consoles And Games” ART 108: Introduction to Games Studies (2020).
[5] Google. (2024). Nintendo ADR (NTDOY) stock price. Retrieved February 25, 2024, from https://www.google.com/finance/quote/NTDOY:OTCMKTS?sa=X&ved=2ahUKEwirsvmE5caEAxV8kIkEHYJKDykQ3ecFegQIMhAg
[6] UnmissableJAPAN.com Hanafuda Retrieved February 25, 2024, from http://www.unmissablejapan.com/etcetera/hanafuda
[7] Chung, Y. (2019, November 4). Nintendo Mindset and Culture. Medium. Retrieved from https://jadechung414.medium.com/nintendo-mindset-and-culture-335481135346
[8] Before mario. (2020, June). Nintendo’s washable playing cards from the 1970s. Retrieved from http://blog.beforemario.com/2020/06/nintendos-washable-playing-cards-from.html
[9] Faller, C. (2003, September 12). Nintendo history lesson. Digg. Retrieved from https://web.archive.org/web/20180505151700/http://www.n-sider.com/contentview.php?contentid=34
[10] Bailey, K. (2023, January 30). Exclusive: Xbox, Nintendo, and Sony Won’t Be Part of E3 2023. IGN. Retrieved from https://www.ign.com/articles/xbox-nintendo-sony-skipping-e3-2023
[11] Nintendo of America. (2021). Nintendo Direct – 06.15.2021. Retrieved from https://www.nintendo.com/us/nintendo-direct/06-15-2021/
[12] Good Trouble Games. (n.d.). Accessibility Spotlight: The Nintendo Hands-Free Controller. Good Trouble Games Blog. https://blog.goodtrouble.games/accessibility-spotlight-the-nintendo-hands-free-controller
[13] GameSpot. (n.d.). Nintendo president — We are not just a video game company. Retrieved from https://www.gamespot.com/articles/nintendo-president-we-are-not-just-a-video-game-company/1100-6419254/
[14] Stuart, K., & MacDonald, K. (2018, April 25). Nintendo’s Secret Innovation Lab: ‘Ideas Are Cheap, Execution Is Key’. The Guardian. Retrieved from https://www.theguardian.com/games/2018/apr/25/nintendo-interview-secret-innovation-lab-ideas-working
[15] Murty, M. (2024, February 8). Nintendo Switch 2: 2024 Launch Rumors Dismissed by President Shuntaro Furukawa. IGN. Retrieved from https://in.ign.com/nintendo-switch-2-unofficial-name/201860/news/nintendo-switch-2-2024-launch-rumors-dismissed-by-president-shuntaro-furukawa
[16] Nintendo Co., Ltd. (2024). Nine Months Financial Results Briefing for Fiscal Year Ending March 2024 (Online) Nintendo Co., Ltd. Q&A Summary (English Translation of Japanese Original). Retrieved from https://www.nintendo.co.jp/ir/pdf/2024/240207e.pdf
[17] Locke, H. (2012, September 25). Promoted blog: Gunpei Yokoi remembered. Destructoid. Retrieved from https://www.destructoid.com/promoted-blog-gunpei-yokoi-remembered/
Videos worth watching for Nintendo
https://www.youtube.com/watch?v=I_DtS73ta1o
https://www.youtube.com/watch?v=q6S7VOi3E5k&t=1054s
https://www.youtube.com/watch?v=kNiIspelPlQ
why people don’t like Nintendo