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Dillon Jacobs

21 Aug, 27 tweets, 10 min read

1/ $NTDOY's price has been getting pummeled recently...and I couldn't be happier!

I already thought $NTDOY was cheap prior to the recent decline, but now it's an absolute bargain.

This thread will cover my thesis $NTDOY's immense value potential.

#valuestocks #videogames

2/ $NTDOY is one of the most beloved companies by gamers, and also one of the most misunderstood by investors.

Recurring comments about the company for almost a decade are things like “highly cyclical”, “archaic management”, “missed the opportunity”, “unable to adapt”.

3/ The console market is notoriously cyclical, especially at the level of individual companies.

Nintendo is the poster child of this pattern, with an almost perfect track record of a super successful console launch followed by a relative commercial failure for the next model.

4/ The GameCube disappointed after the N64, the Wii U was a disaster after the gigantic success of the Wii.

5/ And the successor to the Wii U, the Nintendo Switch was a huge success,

It's almost the largest in Nintendo history (for now, the Wii still holds this title, probably not for long).

After releasing a Switch lite last year, a Switch OLED is planned for October 2021.

6/ There is no hiding from it.

After the successful Switch console, a shadow of historical failure looms over Nintendo near future.

Here’s the good news: $NTDOY is very aware of this fact and are adapting their business model accordingly.

7/ $NTDOY has one demographic captivated: children.

This is especially key now that parents know more about video games having been gamers themselves.

It will include some games that are more “adult” focused, but mostly, its target audience is 5-14 years old.

8/ Most gamers will have fond memories of their Nintendo games and are now transferring them to their children.

Their kids might want more action-oriented during their teenage years but are still likely to want to share Mario, Zelda, and Metroid with their own children.

9/ The other key element to Nintendo’s culture is a cult of perfection.

A central person in Nintendo's history, Shigeru Miyamoto, created both Mario and Legend of Zelda (LoZ).

He was famous for saying:

“A delayed game is eventually good; a bad game is bad forever”

10/ The consequence of this obsession for quality is very tight control.

Most of the games on a Nintendo console are made by Nintendo.

Because of a stream of bad games in the 90's, $NTDOY was permanently convinced that having ONLY good games means doing the job by themselves.

11/ Nintendo’s most visible section is the console business, but a lot more of it stays immersed and invisible to the casual observer.

Having been the center of so many childhoods, $NTDOY is sitting on a stash of beloved IP like few other companies ($DIS).

12/ And so far, this resource has essentially been unused.

Video game IP has been used to make … more video games. And not even that many of them:

One Zelda game every 3-5 years (just 18 games in 3 decades+).

A Mario or Pokémon every 2-3 years.

13/ And sometimes, beloved IP either went for a 19-year hiatus, like Metroid, or simply got left behind, like Star Fox, Kirby, and many more.

14/ This is finally changing.

A new Mario movie is planned for 2022, after the success of Detective Pikachu.

And, more importantly, a series of theme parks is being created and managed by Universal.

Finally, the company is opening more than one retail shop for merchandise.

15/ It is very hard to overstate how much potential Nintendo has unused so far.

Markets have realized the potential after $DIS went on a purchasing spree with Marvel and Lucasfilm and turned relatively dormant IP into cash machines!

16/ I think it is unlikely that deals as “low” as the $4B sales each for Lucasfilm and Marvel would happen today.

In the long run, I would not be surprised that a large, diversified, and all-public IP like Nintendo’s could be worth anywhere between $10B-$20B alone.

17/ This would include content from evergreen success franchises of LoZ , Mario and Pokémon.

But also, a lot other well known by games, like the sci-fi action shooter Metroid, the kid-friendly Kirby, the futuristic high speed licenses of F-Zero and Star Fox.

18/ Beyond this, there are so many possibilities for $NTDOY to grow revenues and profitability.

I dive into this in the full report but here are a few ideas:

New Consoles

Retail Stores and Collectibles

AR/VR

Remasters of old content

Digitalization

19/ There are many value creation opportunities here for $NTDOY.

I think that all the things that Nintendo is attempting to do with their IP can be incredibly valuable for the company, and its shareholders.

The likelihoods of the outcomes are also high, in my opinion.

20/ All this is made easier since $NTDOY has a fantastic financial position.

Debt is at $417M, almost non-existent compared to a cash cushion of $10.7B.

21/ The P/E ratio is at 13.3, and P/FCF is at 9.9.

The dividend yield is a healthy 4.5%, and growing.

The market is not pricing $NTDOY for future growth and cling to the idea of an outdated, cyclical, and capital inefficient company.

22/ Nintendo seems to consider its share price undervalued, with a repurchase of 1.5% of the total shares planned in September.

Together with the comfortable dividend, it does not seem like a company unwilling to give cash back to shareholders.

23/ Regarding valuation, FCF grew explosively in 2019 and 2020.

We are at a high with the success of the Switch, and a short-term decline is likely.

Even with pessimistic growth rates and multiples, I have estimated a return of ~30%!

And with buybacks and dividends!

24/ $NTDOY is one of these companies that fit very well the Warren Buffett style of investing.

$DIS has shown the way on how to monetize dormant IP to both management and investors.

Interestingly enough, Buffett bought 5% of $DIS for $4M (yes, million!) in 1966.

25/ I think the future for $NTDOY is somewhat similar, even if I would be fine getting “just” a 100-bagger from it by the time I retire.

This is the kind of stock to keep forever, ignoring the market fluctuations, except to buy some more in a period of weakness.