Deep dive into Nintendo $NTDOF $NTDOY

Saved by the Mafia to Become a Gaming Giant

1.0 Introduction

Nintendo is one of the brands known by multiple generations.

It also has a vibrant history, from selling cards to Yakuza-run gaming parlors in Kyoto to having 5 of the top 10 best-selling game consoles.

The Nintendo Switch and Play Station 4 consoles, highlighted in green, are currently on the market.

Let’s start from the very beginning.

---

2.0 History

2.1 The card era (1889-1950)

In 1889, Fusajira Yamauchi started producing handmade hanafuda playing cards (a type of Japanese playing cards).

You might wonder, why Nintendo? What does that mean?

The truth is, nobody knows. None of Fusajiro's descendants knows the precise intended meaning. The literal translation would be “Leave luck to heaven.” One theory is that the name was chosen because it sounded elegant and modern for the era, especially for a company that wanted to appeal to sophisticated (for that time) markets.

These playing cards became popular in Yakuza-run gaming parlors. Other card manufacturers didn’t want to be associated with its criminality, but Yamauchi persisted and became the primary producer within a few years. Without the demand from the mafia, Nintendo would not have been around.

However, this wasn’t an easy business to run. The manufacturing process was slow and expensive, which meant a high product price. The higher card quality also meant a low replacement rate.

There were two strategic solutions:

• Manufacture Tengu - A cheaper and lower-quality line of playing cards, that come with higher margins; and

• Form a distribution partnership with Nihon Senbai (later Japan Tobacco) to market its cards to nationwide cigarette stores.

The Japanese tradition required businesses to remain within the family, so Fusajiro Yamauchi adopted his son-in-law, Sekiryo Kaneda, who took the Yamauchi surname and took over the business in 1929.

The operations were expanded, but not diversified. During World War II, the Japanese authorities restricted foreign card games, and Nintendo survived thanks to the financial support of a relative. Leave luck to heaven.

In 1950, Sekiryo’s declining health led his grandson, Hiroshi Yamauchi, to take his role, marking the beginning of a transformative era for the company.

2.2 The Diversification (1950-1980)

Hiroshi was just 22 years old but brought a bold, modern vision to the company and was willing to take risks that would fundamentally transform the business. Under his leadership:

• Nintendo centralized the manufacturing facilities across Kyoto to increase efficiency;

• Started mass-production of plastic playing cards, making the cards more durable and cost-effective;

• Struck a deal with Disney, securing the rights to incorporate Disney characters into Nintendo’s playing cards. This allowed the company to tap into the children’s market and significantly increase sales, with over 600,000 card sets sold in a single year. It not only helps improve the company’s profitability but also diversifies demographically;

But maybe most importantly, in 1965, Nintendo hired Gunpei Yokoi, who, as of 1969, was running the newly created R&D department.

In 1970, Nintendo released Japan’s first electronic toy, the Beam Gun, an optoelectronic pistol that sold over 1 million units.

In 1973, the company launched the Laser Clay Shooting System, a light-gun arcade experience that became more popular than bowling at the time.

By the late 1970s, Nintendo was established as the leading innovator in toys and electric games. Its portfolio was diversified, and it targeted a wider audience.

2.3 The rise of video games (1980-1990)

Nintendo entered the handheld gaming market with the Game & Watch, designed by Gunpei. This simple device with an LCD screen sold over 40 million units worldwide.

In 1981, Donkey Kong was released. It was one of the first video game platforms for the player character to jump. The “Jumpman” character would later become Mario and Nintendo’s official mascot.

The Family Computer (“Famicom“) was launched in 1983. This home video game console quickly became a massive hit. A few years later, it was rebranded as the Nintendo Entertainment System (“NES“) and released in North America.

In 1985 and 1986, Super Mario Bros., The Legend of Zelda, and Metroid were released, marking the birth of Nintendo’s most iconic franchises.

In 1989, the genius Gunpei designed a portable console called Game Boy. Bundled with Tetris, it became a massive global hit. Its affordability, durability, and vast game library dominated its market. By the end of its production, almost 120 million units worldwide had been sold.

2.4 The Console Era (1990-2000)

The next decade was golden for the consoles, as many iconic games were introduced:

• Super Mario World;

• The Legend of Zelda: A Link to the Past:

• Donkey Kong Country;

• Super Mario Kart;

• Star Fox;

• Pokemon, and many others.

The Super Famicom, the Super Nintendo Entertainment System (“SNES“), Nintendo 64, Virtual Boy, Game Boy Pocket, and Game Boy Color were all consoles released during this decade.

One event deserves more attention. Nintendo partnered with Sony to develop a CD-ROM add-on for the SNES called the “Play Station.” However, Nintendo abandoned the deal due to licensing disagreements, and Sony developed it independently. Sony would later become a dominant force in gaming and eventually erode Nintendo’s dominance.

2.5 Challenges and Reinvention (2000-2010)

Sony introduced the Play Station 2, and Microsoft introduced the Xbox. Nintendo’s response was the GameCube introduction in 2001, which, by the end of its lifecycle, sold around 21 million units, far less than its competitors. One of the key reasons is the use of its proprietary mini-discs instead of the DVDs. This decision pushed the third-party developers to favor Sony and Microsoft instead.

Without new offerings, Nintendo couldn't attract new audiences. On the other side, games like Grand Theft Auto III and Helo were released during this time, and critics viewed Nintendo as falling behind in technological innovation compared to its competitors.

In 2002, Hiroshi Yamauchi, Nintendo’s longtime president, retired, and Satoru Iwata became the company’s first president, not from the Yamauchi family.

The launch of the Nintendo DS in 2004 marked a critical turning point. Although the dual screens and touchscreen controls were initially met with skepticism, by the end of the decade, over 145 million units had been sold, far surpassing its competitors in the handheld market.

In 2006, Nintendo released the Wii, a console focused on simplicity, motion controls, and accessibility. This made it appealing to non-gamers and families and sold over 100 million units globally.

The company’s success is due to Satoru Iwata, who embraced the “blue ocean strategy,” focusing on innovation and underserved markets instead of directly competing with Sony and Microsoft.

2.6 Modern Nintendo (2010-present)

In 2012, Nintendo released the Wii U, one of its worst-performing consoles. There were many challenges:

First, there was confusion. Many consumers thought it was an add-on for the Wii rather than a new console. It had weak third-party support, as developers preferred Playstation 4 and Xbox One. That led to a fairly limited game library.

Following disappointing sales and declining profits, Satoru Iwata announced a 50% salary reduction for himself. Other top executives at Nintendo also agreed to salary cuts ranging from 20% to 30%.

This decision demonstrated his leadership accountability and commitment to the company’s employees and stakeholders. He famously prioritized avoiding layoffs, stating that it would damage employee morale and ultimately hurt Nintendo’s innovation ability.

Over the next decade, a lot has happened:

A subscription-based online service that included classic NES and SNES games was introduced.

In 2016, Nintendo entered the mobile gaming market with Miitomo, followed by hits like Pokemon Go, Super Mario Run, Fire Emblem Heroes, and Mario Kart Tour;

In 2017, Nintendo released the Nintendo Switch, a hybrid console that could function as a handheld device and a home console. To date, it has sold almost 150 million units.

Diversified into theme parks, as in 2021 the Super Nintendo World at Universal Studios Japan was opened, followed by a Hollywood counterpart in 2023;

The Super Mario Bros. Movie, co-produced by Universal Pictures and Illumination, grossed over $1.3 billion worldwide, becoming the highest-grossing video game movie ever and one of the top animated films of all time.

Now, the next exciting part is Switch 2. The trailer was recently released and had almost 20 million views in its first week.

The teaser has been well received, although one comment worth noting is the following:

Around 50% of the consoles were sold in the quarter ending December, which was a strategic announcement. Many would have deferred their purchase if the Switch 2 had been announced in November.

On April 2nd, 2025, Nintendo will host a Nintendo Direct presentation and provide details, including its specifications, release date, pricing, and game lineup.

Each console has a cycle, and eventually, its demand decreases. The chart below illustrates that the Switch console is nearing the end of the cycle; hence, it was time for Switch 2.

Here are some impressive statistics related to the 3 top-selling Switch games, assuming ~150 million consoles are being sold to date:

1. Mario Kart 8 Deluxe - 64 million

2. Animal Crossing: New Horizons - 46 million

3. Super Smash Bros. Ultimate - 35 million

These numbers only represent ~10% of all the games sold.

---

3.0 Historical Financial Performance

Before we discuss the financials, it is essential to note that Nintendo’s fiscal year ends on March 31st.

So, the 2024 fiscal year is between April 1st, 2023, to March 31st, 2024.

There are three key points to note:

1. The impact of the Switch console release in 2017 (2018 fiscal year) led to a revenue re-acceleration, further supported by the pandemic.

2. The introduction of mobile games and subscriptions improved the gross margin immensely.

3. As the Switch console nears the end of its cycle, Nintendo’s future profitability is highly dependent on the success of Switch 2.

Nonetheless, this has been an impressive decade, given the competition.

One mistake many retail investors make is focusing on the last few years in isolation. This can lead them to conclude that Nintendo is a dying company, which isn’t the case. The revenue decline over the last 5 years is comparable to the decline between 2012 and 2017, just before the launch of Switch.

This is why studying the company in detail and understanding the underlying business is crucial.

When it comes to the company’s capital allocation, I am not a big fan of it.

Many Japanese companies are well known for being run conservatively, keeping a lot of cash, and having little or no debt. Nintendo is no exception. It has no debt and over $16 billion in cash and investments.

In the last quarterly presentation, management hinted at using the excess cash to acquire “software assets,” so it wouldn’t be a surprise if Nintendo announced acquisitions of game development companies.

However, there’s no certainty. Once in a while, it does buybacks; there are dividends that haven’t been stable over time, all while keeping a lot of cash on its balance sheet.

---

4.0 Valuation

Before we look into the valuation, it is crucial to highlight that if anyone is investing in Nintendo, it is a bet on the success of Switch 2.

This product will determine the company's profitability over the next 5 years.

Here’s my DCF model, which assumes that the demand for Switch 2 will be comparable to the demand for Switch.

In that case, there will be a significant revenue increase in the first year, and a large part will translate into its operating margin.

Based on my input, the company's fair value is ~$64 billion ($55/share), slightly below today’s share price of $62.

The company is trading on the Tokyo Stock Exchange, so its fair value in Japanese yen would be ~8,800 (compared to the current share price of JPY 9,900).

It is also available over-the-counter through two tickers in the U.S.

• $NTDOF - representing direct shares of Nintendo

• $NTDOY - representing an American Depository Receipt (“ADR“), which is not managed by Nintendo but by financial institutions. Each NTDOY represents 1/4 of a single Nintendo share.

---

5.0 Alternative data source

There is a NintendoSwitch dedicated subreddit with 7.6 million members.

This might be the best place to follow updates on this topic, potential leaked information, and how loyal customers feel about Switch 2.

The announcement had over 5,200 comments.

The comments are positive, and the community is excited.

As I always get follow-up questions if I’m investing / on what terms I’d be investing, my answer is the following:

With all the unknowns, I am not comfortable investing in Nintendo.

However, I will follow the company and invest if:

• The excitement within the community remains after the April 2nd event;

• The share price decreases below $50/share.

---

If you enjoyed this post, consider sharing it; it helps the newsletter immensely.