Nintendo Co. Ltd.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Nintendo is a global video game company known for its iconic franchises, hardware innovations, and family-friendly approach.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Nintendo is a Japanese video game company founded in 1889. Though it started as a playing card company, it has evolved into a major player in the video game industry. The company is known for developing and selling game hardware, software, and related merchandise.

Nintendo’s business is inherently tied to its ability to consistently produce hit games and hardware. This is more difficult than it sounds.

Revenue Distribution

Nintendo’s revenue streams can be classified into the following categories:

  • Dedicated Video Game Platform Business:
    • Hardware sales: Nintendo Switch consoles (including the Lite and OLED versions) and related accessories. The Switch family of consoles accounted for the majority of their hardware sales in the past fiscal year.
    • Software sales: First-party and third-party game titles across all platforms. First-party titles (titles developed in-house or licensed by Nintendo) are major revenue drivers. Digital sales of games through the Nintendo eShop are growing.
  • Mobile and IP Related Business:
    • Mobile gaming: Sales from mobile games developed and/or licensed by Nintendo, such as Mario Kart Tour and Fire Emblem Heroes.
    • IP licensing and merchandise: Sales of merchandise, licensing income for its intellectual properties, and other revenue from film and other related activities. The new Super Mario movie has had an enormous impact on this revenue segment.
  • Other business: Other small services and products

The majority of Nintendo’s revenue is derived from console and software sales. However, the mobile and IP divisions are showing high potential and growth.

The gaming industry is a dynamic and fast-evolving market. Here are some key trends that impact Nintendo:

  • The growth of digital sales: Consumers are increasingly purchasing games digitally.
  • Live Service Model: Video games are shifting toward games as a service model, which involves frequent content updates and ongoing player engagement.
  • Increased mobile gaming: As smartphones become more ubiquitous, mobile gaming has increased exponentially and becomes a huge market.
  • E-sports and streaming: The rise of e-sports and game streaming provides another way to generate revenue from video games.

Competitive Landscape

Nintendo operates in a competitive industry where they face off against other large console manufacturers, mobile game developers, and independent game studios. Here are its main competitors:

  • Console market:
    • Sony (PlayStation): a primary competitor in the console space, focused on more powerful consoles that attract hardcore gamers.
    • Microsoft (Xbox): Another console competitor with a wide range of games, an online ecosystem, and its Xbox Game Pass Subscription Service.
  • Mobile market:
    • Google (Android) and Apple (iOS) are competing to own the gaming ecosystem in the mobile industry. Companies like Tencent and NetEase are also major players in the mobile industry.

What Makes Nintendo Different?

Here’s a summary of why Nintendo is unique:

  • Family-friendly games: While its main competitors try to cater to the hardcore gaming community, Nintendo is unique in the fact that its main audience is more casual gamers. They also have a broader appeal that makes them popular with a more family-friendly audience.
  • Iconic franchises: Nintendo has created numerous beloved franchises such as Mario, Zelda, Pokemon, Animal Crossing, and Metroid. These franchises have an incredibly high level of brand recognition.
  • Hardware innovation: Nintendo has shown its willingness to innovate, which has set them apart in the past. They have always been willing to move into a new area and try new concepts. The switch was a recent successful innovation.
  • First-party titles: Nintendo typically releases first-party titles that are major hits, and it helps generate sales across their platforms.

Financial Analysis

  • Revenue Trends:
    • The company reported revenues of ¥1,601 billion in fiscal year 2023 and ¥1,670 billion in fiscal year 2024. A small decrease, primarily related to software not performing as high as the previous year.
  • Profitability:
    • Operating profit for fiscal year 2023 was ¥504.4 billion, and ¥528.8 billion in fiscal year 2024. A small increase.
    • Nintendo’s operating margins average around 30 percent, a high level of profitability.
    • Profit margin can vary slightly depending on the release schedule and success of major titles.
  • Balance Sheet:
    • Nintendo has a solid balance sheet with over ¥1.6 trillion in cash and liquid investments, as well as a low level of debt.
    • Debt is less than 1/10 of their assets. The company is not financed through debt, rather by cash earnings.
    • Nintendo has extremely good solvency and liquidity.

Moat Analysis: 3/5

Nintendo has an identifiable moat, primarily stemming from the following competitive advantages:

  • Intangible Assets (Brand): The company’s iconic franchises (Mario, Zelda, Pokémon) and their recognizable characters have a very strong brand that is not easily replicated. This brand recognition gives Nintendo significant pricing power and helps drive sales of its products. This type of advantage is extremely durable over a long period of time.
  • Network Effect: The network effect is prevalent through the various Nintendo online experiences, such as Animal Crossing, because the more people use the company’s systems, the more valuable they are to their users. This effect is not strong but still exists and can be a point for future growth.
  • Switching costs (to some extent): This is the strongest point for Nintendo’s moat and should be noted as such. Once someone buys into the Nintendo ecosystem (and especially if they don’t have an alternative platform) they are likely to continue purchasing its games and consoles. The costs for a switch (new console, new games) are likely to deter most customers from leaving their well-established ecosystem.

Though their brands are powerful, they are still highly vulnerable to the whims of their consumers, and so the moat is not as deep as some other companies. Competitors can certainly try to capture customers with similar characters or worlds, or try to copy Nintendo’s formulas and win over their fans. The company’s current success is also largely tied to the Switch, whose eventual decline could hurt its sales if the next console isn’t as popular.

Therefore, I would rate Nintendo’s moat at 3 out of 5. A sustainable moat, but with vulnerabilities.

Though Nintendo is iconic, its moat is still vulnerable. As a company based primarily in gaming, they can have issues that are quite unique.

Risks to the Moat and Business Resilience

Despite its advantages, Nintendo faces several risks:

  • Technological Disruption: The pace of innovation in the gaming industry is extremely rapid and unpredictable. New platforms and technologies can render existing hardware obsolete, causing Nintendo to lose out on sales. Examples include VR headsets and cloud gaming.
  • Shifting Consumer Preferences: Changes in consumer tastes and preferences can quickly erode a game developer’s competitive advantages. A game that is popular now could be out of favor within the next 3 years. This means that if the game company doesn’t have the right games, its sales will decrease accordingly.
  • Dependence on First-Party Titles: A large portion of Nintendo’s profits stem from its first-party titles. Failure to deliver hits and new franchises can quickly affect its profits.
  • Intense Competition: Nintendo faces stiff competition in the video games industry. A successful competitor could make a device or game that supersedes Nintendo’s offering.
  • Economic Downturn: Since the gaming industry is a luxury product, it is vulnerable during an economic downturn, as a luxury good is typically the first thing cut from expenses.
  • Geopolitical Risk: Nintendo has the majority of its sales overseas. Unfavorable conditions in the local economies (such as inflation) can decrease its profitability.

While the company has historically been very resilient due to its diverse revenue streams, these risks represent the areas of vulnerability. Furthermore, Nintendo is famously secretive with its business plans, meaning investors have to trust the company’s past actions to extrapolate into the future. Therefore, there is inherent uncertainty regarding the future of Nintendo.

Understandability: 2/5

Nintendo’s business model is relatively easy to grasp on the surface: they sell video game hardware and software and license out their IPs. However, when one analyzes the complexities, it becomes more difficult:

  • Product Development is unpredictable: Predicting the success of a new game or console is difficult, therefore forecasting sales and profits in the future may be challenging.
  • The financial statements are different from other industries. As a Japanese company, the accounting is different, the currency differences also add a layer of complexity, but most importantly the way the company structures its profit and losses is unlike most other businesses in other sectors. As such, understanding the company’s financials may be difficult.
  • Consumer tastes are volatile: Predicting what game will be popular can be hard. As such, a change in consumers can disrupt a successful company’s growth.

I would rate understandability a 2 out of 5. It’s difficult to forecast and understand the future.

Balance Sheet Health: 4/5

Nintendo has a great balance sheet.

  • The company has a large cash position compared to its debt.
  • They are very profitable and financially stable, and capable of withstanding financial downturns.
  • The company has high levels of liquidity.

There are minor issues when you consider the assets (such as goodwill), but that is not likely to cause an issue and affect the overall positive score.

Overall, Nintendo has a very healthy balance sheet. I would rate the balance sheet a 4 out of 5.