nintendo investment thesis before the launch of switch
TRANSCRIPT
Nintendo (7974 JP / NTDOY) before Switch launch
Yui Nausicaa
2017/2/21, Last update 4/22
Reminder: this is an intellectual exercise
Updates: Feb.26; Mar.8,10,13, 14,15,16,18,23,24,25 29,30; Apr.6,9,22
Time Late March Late April Early May June Summer
Event TestFire FY17 Earnings release E3
Nintendo Title Android SMR FEE(3DS) & MK8 Deluxe Splatoon 2ARMS
Schedule (as of 3/15)
Thesis Nintendo Switch
Concerns/risks
• Less powerful and less price competitive than other home console competitors
• Software lineup at launch • Shrinking game console
market • Production/supply issue
• Bet on Nintendo Switch • The stage of first year
install base buildup is very rewarding for financial investors
• Improvements in smart device business after the release of FEH
Tracking
• 3 play modes with Joy-Con -> new user experience
• The mobility and physical interaction-> local network effect
• Unit per household might be higher than those of other home consoles
• Software lineup expansion since mid-January
• Better third party software support
• Better pipeline mgmt • TVCMs target demographic
groups suitable for initial adopters
• Nintendo: 2M shipment in 1Q17
• Won’t sell at loss
• Users’ feedback • Hardware and
software sell-through
• Information about supply/production
• Re-estimate TAM once results come in
Other
• Boom/bust?
Why Nintendo
Revenue/profit contribution
• Has experimented different gaming styles w/ different monetization methods
• Mario Run: huge downloads but less favorable conversion • FEH has decent downloads and grossing in JP and US -> show
capability to utilize its IP • 2-3 games on smart devices per year
Console Type Life cycle Install base (M) Plan Concern
Switch Hybrid About to start ??? Difussion
3DS Handheld PostMain/Later 65.3 Extension
Wii U Home About to end 13.56 Phase out
FC/NES Home End NM Fullfil demand
Cannibalization
• Product still has room to diffuse • Large install base to distribute software
Stable rev stream w/ growth potential
Sm
art
de
vic
e b
iz
Ga
me
co
ns
ole
biz
1-3QFY16 1-3QFY17 YoY
20.5 6.5 -68.3%
amiibo Figure Sell-In (M units) • Need time to destock? • Might be fueled by BotW
Nintendo Switch
Shrinking market size Features: Hybrid X Jon-Con Other players in the market
Software lineup has been expanding
3 play modes
Development
Dev kits: $450
Sharing/social/face-to-face
Potential demand side network effect driven by “local network”
Switch: less powerful and probably less price competitive than other home console competitors
Platform, network and product diffusion
1st Party 3rd Party
Nintendo Switch
Player
Star
t-u
p o
r
Ch
icke
n-e
gg p
rob
lem
Software
NX
NX NX
NX NX Global & virtual
Local & physical due to mobility
Co
nn
ecti
vity
Custom acquisition and initial diffusion
Young adults
• Reasonable to choose this demographic group as initial adopter
• TVCMs are aligned with diffusion plan
Age
Things to do 0. Start-up problem 1. Install base build-up 2. Software distribution
Characteristics unseen on other home consoles
1. Higher penetration per house hold . In other words, the average number of NX might be higher than those of other home consoles with statistical significance 2. Higher contact rate in diffusion due to mobility 3. Additional demand side network effect due to physical interaction in local network
Gaming console is a platform
1. Nintendo is a platform builder/governor 2. Control of hardware is key
What is the most lucrative part in the market for financial investors of a gaming platform builder?
Fiscal year 7-Mar 8-Mar 9-Mar 10-Mar 11-Mar
eps 1.45 2.5 2.79 2.46 0.93
Fiscal year 12-Mar 13-Mar 14-Mar 15-Mar 16-Mar
eps -0.51 0.07 -0.22 0.37 0.15
Nintendo's eps w/o non-recurring items
Probably not for value investor The build-up of install base in first year looks lucrative
Difficult to estimate
• Heavily depends on product cycle • Requires assumptions such as TAM, adoption
pattern , tie ratio … for console business and MAU, ARPPU, paying user… for mobile gaming
• Switch just about to launch and mobile gaming just about to take off : might be too early
• DCF-based or earnings multiple-based valuation method, timeframe will be relatively long
Installment Year1: lucrative and less risky to bet on the success of NX
Built up installed base or platform => gaining shares from other home console s
Avg eps last 10 years 0.999
P/E 20.0x
=Earnings power value 19.98
+Net cash per shr 6.78
Equity value per shr 26.76
Obsession w/ valuation? Some analysts maintain detailed models.
Multiple expansion / trading “at premium”
Diffusion and total addressable market A
co
nce
ptu
al c
ausa
l lo
op
dia
gram
Total Addressable Market : Methods to Estimate a Company’s Potential Sales by Mauboussin and Callahan
A s
imp
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ay: B
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Wii Model Training
Wii installed base Estimate Wii installed base
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Wii U Model Training
Wii U installed base Estimate Wii U installed base
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DS Model Training
DS installed base Estimate DS installed base
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3DS Model Training
3DS installed base Estimate 3DS installed base
Home console Handheld console
Internal reference model to estimate p & q
Model Type p* q* Lifecycle Note
Wii Home 0.027 0.186 End
Wii U Home 0.000 0.236 End Weak p
DS Handheld 0.009 0.207 End
3DS Handheld 0.042 0.048 PostMain/Later TAM 80m assumed
Switch Hybrid 0.03 0.20 Initial stage Arbitrary p q
Seed 1Q17 2m Forecast by Nintendo
p 0.03
q 0.20
Assumptions in the model
* Assume no supply issue
Benchmark TAM 1st year 2nd year Growth
Wii U 13 4.2 3.4 -19.5%
20 5 5.1 2.2%
40 7.2 9.6 33.8%
60 9.3 14.0 50.5%
80 11.5 18.3 59.3%
Wii 100 13.6 22.6 66.3%
125 16.2 28.0 72.7%
PS2 155 19.4 34.4 77.4%
200 24.1 44.0 82.7%
Current street
estimates implied
TAM range
Implied TAM
1st year 8-10m 45-65m
By end of 2020 40m 47.5m
Analyst forecasts
Some results
Insights from this exercise Post-investment management: tracking
• If traction of NX to be : 2m/3m/3m/5m in 1Q/2Q/3Q/4Q17 -> very promising
• Local network effect might be detected by exponential growth and weak seasonality
• One year might be enough to determine TAM • Key risk: supply/production issue
• Get actual result to check p, q and TAM • Get user experience feedback and check social part
of news about NX after launch • Focus on information about supply/production if any • If it delivers better than expect, be prepared for a
boom-bust cycle
Stuffs not discussed in detail
Yui Nausicaa
Update 2017/2/26
Reminder: this is an intellectual exercise
Home-based Mobile-based
Gam
e co
nso
le
Spec
Tech
Teardown
Game
Even look into NVDA
Software lineup BOTW, GOTY???
AAA…
Positioning/Customer acquisition & reactivation
No
n-
con
sole
Supply-chain
Bu
dge
t
Number of developer
Pro
du
ct
per
form
ance
Time
High-end
Low-end
Performance demand/supply & constrain on software development
Advertising Pricing
Competitors
Most popular: tech/game/pricing
Valuation in concept
Yui Nausicaa
Update 2017/3/10
Reminder: this is an intellectual exercise
“Peripherals”
“Console” gaming
Online service
Nindies
Subscription
Console Software
1st Party
3rd Party
Mobile gaming
IP portfolio
NWC
Intangible
“Idle” “cash”
NPPE
LT-Investment
Talent
Brand & history
Fan base
Acc
ou
nti
ng
valu
e Ec
on
om
ic v
alu
e
“No
rmal
ized
” va
lue
of
op
erat
ing
asse
t
Other opportunities (just for example)
Growth opportunity from underlying biz
Val
ue
fro
m “
futu
re”
(str
ateg
ic)
Val
ue
pal
y w
/ ca
ll
So… What’s the value of Nintendo???
• Valuation for this company is difficult if possible
• Target price is possible, just check with your favorite analyst
• No TP for this thesis but a target horizon • Some might try to estimate private market
value, liquidation value or rebuild value. Nice exercise if you think those events will happen in the foreseeable future or you have a way to unlock the value …
• Value estimated above (liquidation value…) should only be used as upside potential rather than downside protection ( might become a value trap)
Mkt price close to or below NAV: value
investment for patient capital provider
Mobility & sharing: real life example
Yui Nausicaa
Update 2017/3/8
Reminder: this is an intellectual exercise
Mobility & sharing: higher contact rate with user experience
Next step: local network effect…
Tracking
Yui Nausicaa
Last update 2017/4/22
Reminder: this is an intellectual exercise
Initial sales result
Weekly traction: Japan only
3/3-3/5 3/6-3/12 3/13-3/19 3/20-3/26 3/27-4/2 4/3-4/9
Famitsu Week 1 Week 2 Week 3 Week 4 Week 5 Week 6
a Hardware sold 330,637 63,420 50,821 79,493 32,262 45,271
a_1 Cumulative HW sold 330,637 394,057 444,878 524,371 556,633 601,904
b Software sold within Top30 only 363,546 90,762 59,224 72349 42483 41671
c Nintendo software 275,452 70,387 46,382 57434 32750 32532
d=c/b 1st Party ratio 75.8% 77.6% 78.3% 79.4% 77.1% 78.1%
e Software ASP (before tax) Top30 only 6,340$ 6,274$ 6,255$ 6,036$ 6,243$ 5,994$
f Nintendo software ASP (before tax) 6,382$ 6,342$ 6,316$ 6,034$ 6,260$ 5,969$
g=(f*c)/(e*b) 1st Party sales % 76.3% 78.4% 79.1% 79.4% 77.3% 77.7%
h=sum(b)/a_1 Attach rate or Tie ratio (est only, only incl. top 30) 1.1x 1.2x 1.2x 1.1x 1.1x 1.1x
4/10-4/16
Week7
a Hardware sold 42,700
a_1 Cumulative HW sold 644,604
b Software sold within Top30 only 28,140
c Nintendo software 20,998
d=c/b 1st Party ratio 74.6%
e Software ASP (before tax) Top30 only 6,217$
f Nintendo software ASP (before tax) 6,285$
g=(f*c)/(e*b) 1st Party sales % 75.4%
h=sum(b)/a_1 Attach rate or Tie ratio (est only, only incl. top 30) 1.1x
Weekly traction: Sell-through Japan only
Source: ?
Global traction: different sources
NX shipment target Note
Nintendo 2m
Rumor 2.5m+
NX sell-through Zelda Date in press Source
SuperData 1.5m 1.34m 2017/3/14 gamesindustry.biz
SuperData 2.4m 2017/4/14 venturebeat.com
Ace Research Institue 2.3m 2017/4/14 WSJ
NX sell-through Zelda Date in press Sourse
NPD 906,000 925,000 2017/4/13 businesswire.com
US traction
by end of Mar17
Global traction
by end of Mar17
Google trend comparison as of 2017/4/9
E3
Holiday season
Chart
Yui Nausicaa
Last update 2017/3/29
Reminder: this is an intellectual exercise
For those who love charts
• If Nintendo does nothing and stays at 25000 Yen, MA25 will reach MA75 on 3/29
• Information and events during this period that might make price depart from 25000 Yen: • Sell-through • Management interview • Splatoon 2 Global TestFire 3/24-26 • Restock at My Nintendo Store 3/27
Revisit after 3/29
Fund flow from specific firm
Yui Nausicaa
Update 2017/3/23
Reminder: this is an intellectual exercise
LT confidence enhancement from established investor
Next day: mkt participants taking profit?
ADR was relatively strong
Comment
• Large long position from active management firm (are they?) is generally positive • As they need more time to accumulate and then to distribute, they are more likely to focus on longer term • The stock should be well researched (hopefully) before building meaningful position so it might be an
opportunity to free ride their work • However, large position might be viewed as stock price driver before disclosing so stock price might be volatile once
specific manager’s position is reported. This might attract more buyers or signals short term profit taking opportunity to sellers
Beginning of TAM consensus revision
Yui Nausicaa
2017/3/18, Last update 4/6
Reminder: this is an intellectual exercise
WSJ as the first one to report the “production expansion”
• Apr17-Mar18 Production plan: 8m->16m at least Suggesting Nintendo believes to sell significantly
more than 10m in this period First year 10m is regarded a threshold Production plan beats most analysts’
expectation • Mar17 shipment might be 2.5m or more
Takeaway
Comment
• “First year”(depending on definition) estimation ranges from 5m-10m clustering around 8m-10m
• First year sales consensus gets moved by this news. After incorporating positive sell-through and business briefing in April, consensus will quickly gravitate to a new one. Might be described as following the Wii path and eventually leading to TAM consensus revision
• Information sources -> first year consensus -> TAM consensus. Upward revision is more likely but should focus on actual execution and adoption
DIGITIMES gets information from TW supply chain makers
Potential supplier and assembler
• Hon Hai Precision Industry • Misumi Electronics • Hosiden • Advanced Semiconductor Engineering • Jentech • Delta Electronics • Nanya PCB • Foxlink • Realtek • Alps Electronic • Richwave • STMicroelectronics • Cypress Semiconductor • Macronix • Nvidia • JDI • Toshiba • Samsung • Maxim • Broadcom • MegaChips Corporation • Pericom Semiconductor (Diodes) • Texas Instruments
Fomalhaut estimates Nintendo Switch to sell 30M by 2018
Color from retailer
Yui Nausicaa
2017/3/24, Last Update 2017/3/30
Reminder: this is an intellectual exercise
GameStop's (GME) Q4 2016 Results - Earnings Call Transcript
GameStop's (GME) Q4 2016 Results - Earnings Call Transcript
GameStop's (GME) Q4 2016 Results - Earnings Call Transcript
Note: Vu should be Wii U
Game Digital’s (GMD) Interim Results – Presentation
Before earnings release
Yui Nausicaa
2017/4/15
Reminder: this is an intellectual exercise
@yuinausicaa pinned tweets
@yuinausicaa pinned tweets
@yuinausicaa pinned tweets
Tools used
Yui Nausicaa
Update 2017/3/10
Reminder: this is an intellectual exercise
For those who are interested in business theory
Note: Nintendo is NOT a value investing target for me