Nintendo Analysis_1

Revenue & Profit Growth

The revenue growth of Nintendo is highly volatile depending on the new consoles and titles it released.

Nintendo has two big revenue growth records in the past 23 years. The first was in 2007, Nintendo achieved big sales in Wii and NDS Lite with their software worldwide after it released them in 2006. Wii was a success in the 7th console competition as it attracted more people to convert to players and expanded the whole game market, especially Wii has a high-profit margin compared with Xbox360 and PS3. But after that, Nintendo lost the whole next-generation competition. Nintendo's revenue and profit declined from 2010 to 2017, because the sales were full for Wii and NDS, and the successor Wii U failed in competition with PlayStation 4. Nintendo was too conservative in products, and its share price crashed in those years.

Nintendo released its new console Switch in 2017 and achieved big success in the market. Nintendo has had the highest revenue and profit growth in the past, but again, the growth only persists for 4 years, and the new OLED Switch cannot inject much fuel for Nintendo compared with PS5. Although the last half-year financial report showed Switch and its software still have growth in its seventh year, especially in software, benefitting the Zelda successor release and the hit Super Mario Movie, I think it's time to update the new console and open the next growth cycle.

The other good thing is Nintendo's revenue and profit growth are high

a positive relationship, which means its revenue growth can drive profit.?

From the growth data, we know we can invest in Nintendo when it releases new consoles and titles, but we don't know if the new console will succeed in the market. I hope Nintendo can bring us new fun in the future.

Revenue Quality

Nintendo's cash conversion rate is bad because most time the rate of operating cash flow to net income is below 1. And this ratio has been around 0.5 in the last 2 years. The reasons are an increase in inventory and profit, and gains in equity investment and foreign exchange. I know some of them are not regular things, but this conversion rate is not good for me.

Margins

Nintendo's profit profit-earning ability enhanced after Switch was released in 2017. Its gross margin climbed to 55% and its operating margin jumped to 31% in 2023, much higher than the average of the past 20 years.

I think Nintendo's margin is volatile too, not like Bandai's stable expansion, its margins are high related to new consoles and titles released. I don't like much volatile margin for a company, which means its advantage is thin and weak.?

Nintendo finds a way to compete with Sony and Xbox. Not just the console's functionalities, it is the integration of console, IP, and games, and keep expanding user scale to enter their IP world. Of course, Nintendo has seen the fuel in the console and game sales through its IP expansion strategy.

I still notice the total tiles sold in the Switch platform has declined from last year, even though it is a high number compared with years before COVID-19. Nintendo must think about new drivers for the next generation competition, although they want to break the rules of console life. I believe the Switch will perform well in its eighth year as a scale console sold and keep releasing new titles in 2024. I would like to see some news about the new console from Nintendo this year, not only from the player but also the investor.

Turnover

Nintendo has a good cash turnover rate which expresses its dominant role in game title issuing before 2010. But things changed after Sony and Microsoft entered this sector. Nintendo's cash and inventory turnover has declined in recent years, which is the second-highest level in its history. I think this is some affected by capex increase recently. Although this number is good for game developers, I would like to see more efficiency in cash use.

Asset & Capital Structure

After Nintendo's domination breakdown by Sony and Xbox, Nintendo's AR increased in the last ten years but declined recently, and inventory climbed in the Covid period, similar to peers.

I think Nintendo's operating and fixed assets are stable with business and PPE will increase in the following years as the new R&D headquarters develops.

As a Japanese company, Nintendo has very low financial leverage with strong solvency.

Returns & Valuation

Nintendo has had good investment returns in the past as most time its ROIC exceeds its WACC. Equity return is not outstanding, most times below 12%, but moved better in recent years, I think it's benefitted the Switch sale and IP expansion.?

Nintendo's return data is express cycle character too and decline slowly in the past 2 years. This is another signal of the need to refresh its product portfolio.

Nintendo's valuation is good as its profit increased around 6x and the price has just increased 1.8x in the last seven years. I think Nintendo's price is fair, but maybe expensive after its price soared after the second-quarter results were released.?

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Conclusion

Nintendo is a great company with high innovation ability, evergreen IP, and an expanded client base. However, its financial result is highly volatile and relies on its console and title release. This makes Nintendo like a cycle stock. The Switch has given Nintendo the confidence to say no to the console life rule in this sector, and it achieved another strong sales half year. This is impressive but I am still concerned about some data, like declined equity returns and cash turnover, and its low cash conversion.?

As 2024 is the eighth year of Switch and many rumors about the Switch2 release plan, I think Nintendo has a high probability of opening a new growth tunnel if it new console is released this year. Maybe this is the right timing to build some positions and wait for that, compared to Wii, Switch's long life and good performance have declined many investment risks.