Company Reports

While wide-moat Nintendo’s operating income in the December quarter was in line with our expectations, we lift our fair value estimate to JPY 7,700 from JPY 7,000 as we have raised our console and game shipment assumptions. According to management, a relatively large number of new users purchased Switch consoles during this holiday season, which we believe is unusual for a platform in its seventh year. We believe that Nintendo is succeeding in expanding its user base as a result of its long-standing efforts to increase the population of those who are familiar with Nintendo’s characters, such as the release of The Super Mario Bros. Movie in April 2023. In fact, management commented that the areas where the movie was released are larger than the areas where Nintendo operates its game console business, and thus, the movie provided Nintendo with an opportunity to strengthen sales channels in Latin America and Southeast Asia.

We believe that Nintendo’s policy change in 2014 is offering the firm a new growth opportunity, through not limiting its popular characters to game consoles, but expanding them to other platforms—such as launching smartphone games, allowing Universal Studios to use its characters, launching animation movies, and selling figurines.

Although Nintendo’s September-quarter revenue and operating income were below our expectations due to the lower shipments of first-party games, we are not changing our fair value estimate for Nintendo of JPY 7,000, as total game and console shipment numbers were largely in line with our forecasts. While the quarter lacked strong title launches that directly impact Nintendo’s earnings, the announcement of the development of a live-action film of The Legend of Zelda was a highlight. The Legend of Zelda is one of Nintendo’s most iconic IPs, with the first game released in 1986, and the latest game, The Legend of Zelda: Tears of the Kingdom, having shipped 19.5 million units since its launch in May. Although the movie is not expected to be released for several years and will not have a direct impact on Nintendo’s earnings, we expect it to play a role in expanding the fan base of Nintendo’s characters in the long run, as did the Super Mario Bros. Movie released earlier this year. We view Nintendo’s shares as fairly valued.

We believe that Nintendo’s policy change in 2014 is offering the firm a new growth opportunity, through not limiting its popular characters to game consoles, but expanding them to other platforms—such as launching smartphone games, allowing Universal Studios to use its characters, launching animation movies, and selling figurines.

We upgrade Nintendo’s moat rating to wide from narrow and raise our fair value estimate accordingly to JPY 7,000 from JPY 6,000. Nintendo has been in the game console business for 40 years, and we believe the franchises it has established throughout its history, including Super Mario Bros., Pokemon, The Legend of Zelda, Mario Kart, and Animal Crossing, will help the company to generate excess returns over the long term. Over the past decade, Nintendo has been focusing on actively leveraging its characters on nongaming platforms to increase user touch points, a strategy we believe has successfully enhanced the brand power of Nintendo’s characters. Nintendo’s June-quarter sales and operating income, reported on Aug. 3, reached historical highs due to the contribution of The Super Mario Bros. movie and robust sales of first-party games, even though the Switch platform is nearing the end of its console cycle. We view this strong financial performance as evidence of the success of Nintendo’s strategy of effectively leveraging its characters. We believe Nintendo’s shares are currently slightly undervalued.

We believe that Nintendo’s policy change in 2014 is offering the firm a new growth opportunity, through not limiting its popular characters to game consoles, but expanding them to other platforms—such as launching smartphone games, allowing Universal Studios to use its characters, launching animation movies, and selling figurines.

We maintain Nintendo’s fair value estimate of JPY 6,000 as its full-year guidance for fiscal 2023 (ending March 2024) is largely in line with our expectations. Although Nintendo guides to 9.5% revenue decline and 10.8% operating income decline for the new fiscal year due to the slowdown in Switch shipments, it is noteworthy that the Switch still maintains a high level of shipments and more than 100 million active users, even as it enters its seventh year after the launch. We believe that Nintendo’s shares are currently fairly valued. While a solid user base and game sales will support Nintendo’s profitability, the Switch is nearing the end of its cycle and the shares lack catalysts until the new console arrives. How Nintendo successfully moves its massive user base smoothly to the next-generation console will be the challenge.

Based on the lower-than-expected shipments of Switch consoles and games in the December quarter, we estimate that software and hardware shipments over the past three years had been pushed slightly higher than normal due to the pandemic, amid a lack of variety in entertainment. Looking ahead, with the reopening of businesses and the possible economic slowdown, we expect consumer spending on games to be more selective. In addition, PlayStation 5 shipments, which have been sluggish since launch due to supply shortages, are expected to finally increase, which may also affect Switch console sales. As a result, we revise our fair value estimate for Nintendo to JPY 6,000 from JPY 7,000 due to the lower software shipment assumptions. Nevertheless, we believe that the sharp drop in the share price after the earnings announcement was somewhat an overreaction, as Nintendo still has over 100 million playing users and strong game titles such as Pokemon, which posted record sales in the December quarter, to generate solid sales. We believe that Nintendo’s shares are currently fairly valued.

We believe that Nintendo’s policy change in 2014 is offering the firm a new growth opportunity, through not limiting its popular characters to game consoles, but expanding them to other platforms—such as launching smartphone games, allowing Universal Studios to use its characters, launching animation movies, and selling figurines.

Nintendo’s September quarter operating income was JPY 119 billion, 19% up from the previous year and above our expectation of JPY 102 billion. While hardware shipment of 3.25 million units was below our 3.57 million forecast partly due to the components’ shortage, software shipment of 54 million units exceeded our expectation of 45 million, driven by the attractive first-party games such as Splatoon 3, which sold 7.9 million in just three weeks. We are encouraged that the game shipment in the quarter was 11.1% up from the previous year, improving from an 8.6% decline in the June quarter. While we had been concerned about the slowdown of the video game industry, Nintendo proved that it could bounce back from headwinds such as economic slowdowns with its attractive game pipeline. We will review our earnings forecasts after the earnings conference and meeting with the company, but we retain our view that Nintendo’s shares are undervalued.

In light of the slowdown in the gaming industry, we lowered our fiscal 2022 software shipment assumptions for Nintendo and Sony. We believe that consumers' spending is becoming less active due to the uncertain economic outlook and that spending is becoming more skewed toward outdoor activities as the coronavirus begins to abate. As a result, we forecast that game shipments in our five-year forecasts for both platforms will not exceed the peak they had recorded during the pandemic. Nevertheless, we view both shares as undervalued and believe Sony has a larger upside to our fair value estimate as the market is underestimating solid growth of digital content and improving product mix of image sensors.

We believe that Nintendo’s policy change in 2014 is offering the firm a new growth opportunity, through not limiting its popular characters to game consoles, but expanding them to other platforms—such as launching smartphone games, allowing Universal Studios to use its characters, launching animation movies, and selling figurines.

Although narrow-moat Nintendo’s operating income guidance for fiscal 2022 (financial year ending March 2023) is below our expectations, we believe that the numbers are conservative in two respects. First, despite the increased user base, Nintendo guides for a 10.7% decline in game shipments, which is too pessimistic in our view. Second, its foreign exchange assumptions are JPY 115 per USD 1 and JPY 125 per EUR 1, implying a stronger yen than we see currently. Overall, we believe that the company can achieve our operating income forecast of JPY 630 billion, which is 6.3% up from the previous year, driven by the larger user base and attractive game pipeline. While Nintendo’s shares are in 3-star territory, they are more than 10% below our fair value estimate of JPY 65,000. Therefore, we suggest considering accumulating shares on dips. Nintendo announced a 10-to-1 split, which should be welcomed by the market by offering more flexibility to investors, as the split reduces Nintendo’s minimum trading amount to one-tenth.

We raise Nintendo’s fair value estimate to JPY 65,000 from JPY 60,000 as we lifted our game shipment forecasts, driven by the attractive first-party pipeline. We also slightly revised our foreign exchange assumptions. Given the robust launch of Pokemon Legends Arceus in January, followed by Kirby: Discovery of the Stars, Splatoon 3, and the sequel of the Legends of Zelda in the rest of the year, we forecast that Nintendo’s game shipments in fiscal 2022 will reach 250 million, up from 240 million in our previous forecast, surpassing its historical high number for the single platform. In addition, we raised the digital sales assumption due to the launch of the Mario Kart 8 deluxe booster course pass. Mario Kart 8 Deluxe is the best-selling game on the Switch, having shipped more than 40 million in the five years since its release, and thus, its add-on content should be widely accepted by the users. As a result, we raise our fiscal 2022 operating income forecast to JPY 630 billion from JPY 590 billion, and we maintain our view that fiscal 2022 will be the peak of Switch’s game shipment and Nintendo’s profits. Our new fair value estimate of JPY 65,000 yields 17 times 2022 price/earnings and 4.5 times 2022 price/sales. We believe Nintendo’s shares are currently fairly valued.

We believe that Nintendo’s policy change in 2014 is offering the firm a new growth opportunity, through not limiting its popular characters to game consoles, but expanding them to other platforms--such as launching smartphone games, allowing Universal Studios to use its characters, launching animation movies, and selling figurines.

We revise narrow-moat Nintendo’s fair value estimate to JPY 60,000 from JPY 66,000 as we trim Switch’s console shipment assumptions, due to the chip shortage and weaker-than-expected demand. Meanwhile, we retain our view that software shipments will peak in fiscal 2022 (financial year ending March 2023), driven by the attractive game pipeline. Nintendo’s share price has declined approximately 25% from June, as the market is concerned about the slowdown of console shipments. However, we believe that Switch’s lifecycle will be much longer than the past consoles’, underpinned by the rich game line-ups from both Nintendo and third-party publishers, and thus, we view Nintendo’s shares are slightly undervalued.

We believe that Nintendo’s policy change in 2014 is offering the firm a new growth opportunity, through not limiting its popular characters to game consoles, but expanding them to other platforms--such as launching smartphone games, allowing Universal Studios to use its characters, launching animation movies, and selling figurines.

We believe that Nintendo’s policy change in 2014 is offering the firm a new growth opportunity, through not limiting its popular characters to game consoles, but expanding them to other platforms--such as launching smartphone games, allowing Universal Studios to use its characters, launching animation movies, and selling figurines.

Nintendo’s first-quarter (ending in June) revenue was 9.9% down from the previous year as hardware and software shipments dropped 22% and 10%, respectively. While the numbers look somewhat weak, we note the previous year’s shipments were temporarily boosted by the pandemic, as people had spent a longer time at home and enjoyed playing video games because of the stay-home measures implemented in various countries. Overall, we view 2020 as an exceptional year; even without strong first-party games and without using rich marketing costs, people purchased games anyway. That said, we believe the game console business has now come back to the traditional business model where the attractiveness of the game pipeline determines console demand. From this point of view, we believe the pipeline from the second half of this year through 2022 is solid, driving game shipment for the next few quarters. We will review our earnings forecast after meeting with the company this month, and maintain our fair value estimate of JPY 66,000 for now. We retain our view that Switch console shipment has hit the peak in fiscal 2020, and for software shipment to reach the peak in fiscal 2022.

As a result of revising the Switch console’s shipment forecast, we lift Nintendo’s fair value estimate to JPY 66,000 from JPY 60,000. While Nintendo’s typical consoles shipment peaks in the second or the third year, Switch has entered the fifth year, but we believe it is still in the middle of the console cycle. By integrating two consoles (home and portable) into one, Nintendo has been able to offer more attractive games on one platform and has succeeded in building up a larger user base than before. Going forward, we believe the company will be able to stimulate the console demand by: 1) its attractive game pipeline from 2021 to 2022; and 2) the expected launch of the upgraded Switch console. As a result, we pushed back the peak in profits of the Switch cycle to fiscal 2022 (financial year ending March 2023) from fiscal 2020 previously. Our new fair value estimate of JPY 66,000 corresponds to 15.8 times price/earnings on a fiscal 2021 basis.