|Shares Out. (in M):||128,000||P/E||13.4x||0.0x|
|Market Cap (in $M):||3,397K||P/FCF||21.5x||0.0x|
|Net Debt (in $M):||0||EBIT||356,570||0|
*all figures in Japanese Yen
*FY ends on March 31
Nintendo Co is a Japanese company that develops and manufactures hardware consoles and video game software. It has a global operation and over 85% of FY2010 sales from outside Japan. Currently, most of its revenue is derived from consoles sales and software sales of the Nintendo DS (handheld) and the Wii (home-based console).
The recent success of Nintendo is entirely because of the popularity of DS and Wii. Both systems have passed their peak and are near the end of their respective product cycle. As a result, the stock has dropped off from its ¥71,900 (22x adjusted FY08 FCF) in Oct 2007 to its current price of ¥24,050.
Nintendo represents a compelling opportunity to invest in a company that
1) generates lots of free cash flow, with virtually no debt
2) a proven management team with a great track record (Wii, Wii Fit, Zelda, Brain Age just to name a few)
3) Most importantly, a free call option on the new 3DS which just went on sale 2 days ago and were sold out. If successful, earnings would increase significantly in FY12 and FY13.
4) is unloved today because the DS & Wii systems are in run-off mode
Additionally, with net cash represents 24.2% of its current market cap (based on ¥24,050 yen/share), no debt, and the fact that Nintendo is still generating FCF from the DS & Wii, investor should be able to exit the stock with minimal loss if the 3DS end up being a bust.
Video Game Consoles: Market Share is King
In this industry, market share in terms of number of units sold determines the winners and the losers. The manufacturer with the lead would attract 3rd party developers to develop games for its console. The more and better the games that are available would increase demand for the console. This turns into a self-reinforcing cycle as developers prefer to work with the leading manufacturer because the potential customer pool is bigger.
The link below describes what the 3DS is in detail. The selling point is it allows its users to play games in 3D without special 3D glasses.
I cannot predict what the future would look like, but I believe the 3DS would be successful because
"So after a marathon of features are we holding a device worth the 200 sheets you'll likely be paying? The answer is a resounding "yes". While some of the 3DS' in-built software is light on the ground, it's the tech it demonstrates that is really incredibly important."
I am assuming the 3DS would only be able to match 75% of the DS sales (I believe this is very conservative) and the DS & Wii are in run-off mode that will last 2 more years. Although sales, sales/unit and margins are front-loaded with peak earnings and margins occurring at the 2nd or 3rd year of new product launch, I am straight-lining the sales numbers and use "over the cycle" profit margins for my earnings estimate. Actual results in FY12 & FY13 should be considerably higher than my estimates.
Profit margin = adjusted FCF/sales
Adjusted FCF = CFO excluding working capital - capital expenditure
Nintendo should be able to sell at least 19.6m units of DS & Wii combined (It sold 29m in the first 9 months of FY2011) and 18m of 3DS in the 2nd year of 3DS launch (In the 2nd year of DS full launch Nintendo sold 23.6m of DS). Assuming a profit margin of 16%, adjusted FCF/share would be around ¥1,500/share. Current price implies a 12x FCF multiple. (¥24,050 - ¥5,860)/ ¥1,500 = 12.1x
Nintendo is not a buy and hold stock. Its revenue is based on products with 5 - 7 year life cycles. In other words, it has to come up with "hits" every 5 years or so, just like the car companies. Therefore, it is very difficult to "normalize" earnings and come up with a specific target price. However, I do know that if the 3DS is successful, a 12x FCF would be too low. During the DS & Wii cycle, Nintendo peaked at 21x of T12M FCF. Again, my ¥1,500/share number would be lower than the actual number. A 18x multiple + net cash would value the stock at around ¥32,800