All investment strategies have the potential for profit and loss, capital is at risk. Past performance is not a guide to future returns.
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Fusajiro Yamauchi may not be a familiar name to you, but over 130 years ago, he founded a company that now has one of the world’s most widely recognised brands: Nintendo.
Despite its longevity in an industry where success is fleeting and failure frequent, market pundits are pondering Nintendo’s prospects. They are questioning where the Switch – a hybrid console allowing users to play at home or on the go – is in its cycle and if gamers will substitute it for other forms of entertainment, post-pandemic.
Our investment case is different and is based on two main assumptions:
1. Nintendo owns some of the best and most recognisable brands and franchises in gaming
The company is unparalleled in possessing immensely strong intellectual property (IP) in the form of character franchises. The moustachioed Italian plumber, Mario, is an excellent example of Nintendo’s cross-generational appeal. The lovable tradesman has featured in over 200 games since his first appearance as ‘Jumpman’ in the Donkey Kong game released in 1981. Mario is also the best-selling video game franchise of all time, having sold more than half a billion copies worldwide. Other Nintendo games, The Legend of Zelda, Donkey Kong and Pokémon, add to this strong string of compelling franchises.
The best-selling video game franchises
Video game franchises with the most worldwide unit sales (as of 2021*)
*Or latest available. Tetris + physical sales and paid mobile downloads as of 2014.
Source: https://www.statista.com/chart/26129/best-selling-video-game-franchises/
Nintendo's characters emerge out of a unique entrepreneurial corporate culture. The company is known for its eccentricity and secrecy, partly due to its fiercely protected IP. A strong corporate culture that is a celebration of work and play, that encourages ‘idle chatter’ among employees is said to have helped produce this series of hits.
Nintendo also has a much better understanding of the whole process of brand-building than most competitors. Its family-friendly content lends itself to successful merchandising, which keeps the characters fresh, regardless of their 30-plus years on our screens and consoles. For instance, there is a Super Nintendo World amusement park in Osaka, and two more are being developed in the US.
Nintendo has also created a range of ‘toys-to-life’ merchandise (Amiibo) that consist of figurines that can affect gameplay when connected to consoles. There’s also a new animated Mario film slated for release next year. All of the above helps to reinforce brand loyalty and amass new users, particularly among younger generations. This creativity helps avoid the risk of Nintendo becoming a ‘nostalgia brand’, confined to a limited but loyal player base.
2. It operates within an industry enjoying growth
Over the last decade and a half, online gaming has grown from oddity to enormity. Cloud gaming or streaming may become equally commonplace, where users can play on multiple devices without localised computer processing power (ie without a console or gamer PC) as games are accessible remotely from the cloud.
This development may be the latest part in the progression of gaming from arcades, to PCs, to laptops, to phones. Just as videos went from VHS to DVD and then Netflix. This change could dramatically increase the user base as games become more immersive and engaging. Digital delivery would also allow the cheap back catalogue of games to be sold, creating a new source of profits for Nintendo. Greater connectivity and user engagement would ensure smoother earnings cycles through updates and add-ons.
There are questions as to whether this will make the industry less of a content oligopoly dominated by a few big companies. However, like the situation in music-streaming with Spotify, it appears to be far more favourable to the existing big brand players, like Nintendo. Its strong character franchises would help guarantee discovery (amid abundance of new content) and provide pricing power to negotiate better platform fees as distributors vie for access to the best characters.
There is also an argument that democratising access to content could kill the need for consoles. However, the raison d’etre of its proprietary hardware is not necessarily to generate additional revenue itself but, as Nintendo states, to be: “the most effective way of allowing our software to be played”. This suggests that an experimental approach to software is imbued within its creation of consoles and will likely lead to further complementary innovations.
The Switch console, its add-ons, the Ring Fit (which allows users to roleplay and exercise with its Pilates ring and leg strap) and the cardboard Labo (that allowed gamers to craft game kits) are examples of Nintendo’s ingenuity. Right now, deep in the Nintendo labs, engineers will be working hard on the next console intended to out-innovate the Switch – no mean feat, given it ranks as the company’s most successful console to date. The prospects for further success seem strong, which should result in substantial value creation.
Nintendo Switch extends lead over its predecessors
Lifetime unit sales of Nintendo's home video game consoles (as of 30 June 2022)
Source: https://www.statista.com/chart/12750/nintendo-home-console-sales/
Having navigated changes within the industry for over a century, we believe that Nintendo’s unrivalled and attractive portfolio of gaming characters will remain core to its competitive advantage and allow it to capitalise on the advent of changes to content delivery. This opportunity helps us to overlook short-term consensus concerns while also discounting additional upside from its cashed-up balance sheet and its attractive opportunity within China.
Risk factors
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in October 2022 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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