TIVP011: NINTENDO (NTDOY): “SWITCHING” IT UP
W/ DANIEL MAHNCKE AND SHAWN O’MALLEY
16 March 2025
In today’s episode, Daniel Mahncke and Shawn O’Malley break down Nintendo (ticker: NTDOY), a global gaming powerhouse. With its legendary franchises, expanding digital services, and a growing presence beyond gaming, Nintendo is evolving into a broader entertainment empire. As the company focuses on building an everlasting ecosystem and shifting toward recurring revenue streams, it appears to be achieving greater financial stability while maintaining its reputation for innovation.
In this episode, you’ll learn why Nintendo is such a unique gaming and entertainment company, how it has built one of the most loyal fan bases in the industry, why its business model is evolving beyond traditional console cycles, what Nintendo can do to strengthen its long-term profitability, plus so much more!
Prefer to watch? Click here to watch this episode on YouTube.
IN THIS EPISODE, YOU’LL LEARN:
- How Nintendo evolved from a small playing card company into a global gaming powerhouse.
- Why Nintendo differs from competitors like PlayStation and Xbox.
- Why Nintendo’s consoles and games are unique in the industry.
- How the introduction of online services has changed the gaming industry forever.
- How Nintendo survived the Wii U failure and stepped up its game.
- How Nintendo is turning its consoles into an everlasting gaming ecosystem.
- How Nintendo is leveraging its IP to expand beyond gaming.
- What is Nintendo’s intrinsic value per share?
- Whether Shawn & Daniel add NTDOY to The Intrinsic Value Portfolio.
- And much, much more!
TRANSCRIPT
Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.
[00:00:00] Shawn O’Malley: Hey guys, welcome to another episode of The Intrinsic Value Podcast. On today’s episode, Daniel and I will dive deep into the creative and financial powerhouse that is Nintendo. This is a company that has really defined many people’s childhoods, including my own. From Pokemon to Donkey Kong, Mario, Super Smash Brothers, Zelda, Kirby, and Animal Crossing, Nintendo has many beloved franchises as anybody, rivaled only by Disney. And those brand assets have been incredibly accretive to shareholder value, with Nintendo averaging 40 percent plus returns on capital over the last five years. We’ll break down how Nintendo transformed from a 19th century playing card company into a global gaming sensation, why it’s business model is on the brink of a huge shift.
[00:00:47] Shawn O’Malley: And whether it’s stock deserves a place in our intrinsic value portfolio. I’ll be joined by my new colleague, Daniel Mahncke, who recently joined The Investor’s Podcast Network. Daniel is an incredibly smart investor, and he’s going to present the case for Nintendo today. I’ll introduce him here shortly. So with that, let’s get right into it.
[00:01:10] Intro: You’re listening to The Intrinsic Value Podcast by The Investor’s Podcast Network. Since 2014, with over 180 million downloads, we’ve learned directly from the world’s best investors. Now, we’re applying those lessons to analyze businesses and investment opportunities every week. Helping you uncover intrinsic value. Now for your host, Shawn O’Malley and Daniel Mahncke.
[00:01:45] Shawn O’Malley: So before we get into today’s company, let me just quickly introduce my new colleague and co host Daniel Mahncke. Each week I’ve been hosting this podcast and building the intrinsic value portfolio solo, but I’m very glad to have Daniel joining me to help with the mission of transparently constructing a portfolio of high quality and attractively priced long term stocks.
[00:02:06] Shawn O’Malley: As part of that, I’ve covered a different business every week, trying to find compelling opportunities to invest in. And so far only Ulta, Airbnb and Alphabet have really moved the needle enough to earn a spot in the portfolio. But that’s enough on that. Daniel is here today to pitch his own idea for the portfolio, and I’ll just be providing him some feedback and questions for him.
[00:02:27] Shawn O’Malley: So welcome to the show, Daniel.
[00:02:29] Daniel Mahncke: Yeah. Thank you, Shawn. I mean, that was a very kind intro of you and you know, best. I’m excited to be back on the show. I’m following The Investor’s Podcast since about 2017 and it still feels kind of surreal being part of the team now and especially being part of this great show.
[00:02:44] Daniel Mahncke: I think with you done in the last couple of months and with this show is phenomenal and I would have liked to listen to a similar show back when I started out, but I do know that people do not want to hear me rave about the show, so I don’t want to waste too much time and quickly get into today’s pitch.
[00:03:18] Daniel Mahncke: And in some ways, maybe it even turned me into the person I am today. To me, today’s pitch feels like it’s kind of a nostalgia trip, but it’s also obviously an investment case. Now, I couldn’t help myself though, and I went through some of my old stuff, and if you watched this on YouTube, you might see some of the stuff I found in the background today.
[00:03:40] Daniel Mahncke: It’s not very much, it’s just the original Nintendo DS that I played on, it’s the Wii, and some small selection of my favorite games and characters. And I could imagine, since we’re kind of the same age. That you have similar experiences with Nintendo, right?
[00:03:57] Shawn O’Malley: Yeah. It’s funny. Cause you’ve got the, I see the DS and the Wii behind you and it definitely brings back some memories, but.
[00:04:03] Shawn O’Malley: Yeah, I grew up with older brothers, two older brothers who were true, you know, truly nineties babies. And I guess I, I kind of feel like you probably have, even though, like you said, we’re kind of close to the same age, you probably have the newer and stuff, or grew up with like the latest stuff. Whereas, you know, I, I inherited all their old games.
[00:04:20] Shawn O’Malley: I had the original Game Boy with the first Pokemon games that ever came out, I think, which probably makes me sound prehistoric. And I know I had a Nintendo 64 console, which again, probably makes me sound ancient, but I remember playing for hours on those things before my brothers, you know, I guess while my brother said upgraded to X Boxes.
[00:04:37] Shawn O’Malley: So yeah, I totally get it. I’m excited for Nintendo today because there’s a ton of nostalgia associated with it. I remember being in high school when Pokemon Go came out, and you know, you might remember it was this huge viral sensation. Everybody’s like driving around with their phones out to catch Pokemon.
[00:04:52] Shawn O’Malley: And I was doing the same thing with my friends then too, so that was probably my last, you know, serious touchpoint with Nintendo, where it was like a core part of my childhood. It made this like redemption appearance in high school out of nowhere. And then, I don’t know, I haven’t done too much with the company since then, so I’m excited for you to teach me about the actual business behind this iconic brand and the set of franchises they own.
[00:05:16] Daniel Mahncke: I mean, for some reason, Pokemon Go didn’t catch me at that time, although I’m usually open, you know, to any nostalgia trip regarding Pokemon. I don’t think it makes you old playing on the Gameboy, but I do have similar experiences with my older brother. I mean, I wouldn’t call him a 90s baby because, I mean, technically he is, and he does let me know all the time, but we used to play on the same consoles and we both missed out on the Gameboy, unfortunately.
[00:05:41] Daniel Mahncke: But the fact that both you and me, you know, despite living in totally different parts of the world, still have the same memories about Nintendo and all of their games. I think that does say a lot about the reach and influence Nintendo had. And, and that’s kind of why I pitched it today because this huge reach is now coupled with a massive business transformation that could make Nintendo’s business behind all that nostalgia immensely better than it was back then when, you know, we used to play all the old Pokemon games.
[00:06:11] Daniel Mahncke: And it would be less cyclical. It would have higher margins. And the unstable revenues that were historically tied to console releases, they would turn into recurring revenues, which just makes the business a lot more stable and also attractive for investors.
[00:06:25] Shawn O’Malley: Less cyclical, more profitable is, is always promising.
[00:06:29] Shawn O’Malley: And it sounds pretty good. And you know, that that’s hard to do when your earning cycle has historically been tied to the releases of new games and consoles, which, you know, just due to logistics of, of how much work goes into. Designing the hardware and the software, you know, typically those come out every few years.
[00:06:45] Shawn O’Malley: So I guess before we get into all that, though, why don’t we just start at the beginning and why don’t you tell us Nintendo’s origin story?
[00:06:52] Daniel Mahncke: Yeah, sure. So the business was founded in 1889, which makes it over 135 years old. And although I’m not 100 percent certain on this, I do also believe that would make it the oldest gaming company in the world.
[00:07:06] Daniel Mahncke: Like I said, I mean, I wouldn’t bet money on that claim, but I’m pretty confident it’s true. And a funny anecdote in connection to this is that they actually number their fiscal years in the based on the company history. So if you would open up an annual report, right, then you would see fiscal year 2022, but you would also see that they label it their 82nd fiscal year.
[00:07:27] Daniel Mahncke: To me, that just shows how much they value their company and generally their history. So I think that’s maybe generally more valued in Japan, but I also looked at some other companies like Toyota, Sony, or Hitachi. And neither of them are reporting in a similar fashion. So I do still think it’s unique to Nintendo.
[00:07:48] Shawn O’Malley: Yeah, no, it’s funny. I it’s like a, it’s a way to almost kind of flex how, how old the company is and their durability. But I don’t think I’ve ever seen that specifically. Like I’m looking at the filing right now. That’s 80th, 81st, 82nd, 83rd, 84th fiscal year. And for people that don’t know, Red Japan is kind of famous for having some, some really old companies, which is cool.
[00:08:09] Shawn O’Malley: I know there’s at least one example of, I think, a construction company in Japan that has operated since something like the 1500s and is now still publicly, it wasn’t publicly traded back then, but is now publicly traded today. So this, this is a country with, with sort of a history of breeding some very durable businesses to say the least on another note, I guess I’ll be the first to admit that I’m not exactly great at math, but if Nintendo is 135 years old, how do we get to them being only on their 84th fiscal year?
[00:08:39] Daniel Mahncke: Yeah, yeah, no, I mean, I can assure you, your math is not the problem here, and I kind of asked myself the same question. And the reason is pretty simply, it’s just that Nintendo went through many, many company changes. So, it started out as a playing cards company. And allegedly, and that’s a kind of interesting part, it sold Hanafuda Cards to the Yakuza, and Hanafuda Cards are simply a version of Japanese Playing Cards.
[00:09:03] Daniel Mahncke: And the Yakuza, in case you don’t know them, is an organized crime organization that originated in Japan. And as far as I know, they are now kind of global, but you know, I connect the most to Japan. And anyway, this gaming connection is why Nintendo’s founder, Fusajiro Yamauchi, came up with the name Nintendo.
[00:09:22] Daniel Mahncke: So it has multiple meanings, and it’s not known which is the correct one but they are all loosely tied to luck, games, and fortunes. Yeah, well, and then the 1940s came and in the 1940s, I think we all know what happened It was World War 2 and Nintendo struggled immensely under World War 2 which obviously was a huge burden for almost all Japanese companies, right?
[00:09:46] Daniel Mahncke: But Nintendo made it through all these struggles because they had financial support from some family members and they did not only survive that phase, they actually came out stronger and they kind of turned from a family owned business to, to a more modern and a larger company structure.
[00:10:03] Shawn O’Malley: That’s a cool backstory, right?
[00:10:04] Shawn O’Malley: Anytime you can invoke the Yakuza and a company breakdown and a stock assessment. That’s that’s pretty, that’s pretty good stuff. I’d say this is about as unique as it gets for, for a gaming company. I guess as I’m thinking back though, my first introduction to Nintendo was with the playing cards, right?
[00:10:21] Shawn O’Malley: It’s specifically the Pokemon trading cards. I remember. You know, maybe just when I was on the brink of being too young to, to even inherit my older brother’s Game Boy, right, to play Pokemon on, I, I was, I was, you know, collecting Pokemon cards, trading them with friends. It was a very like early 2000s thing to do.
[00:10:40] Shawn O’Malley: And as we think about how this company has, you know, gone from, let’s say that backdrop of, of trading cards, which is still part of the identity today, but that was their core focus, you know, as latest in 1940s to being the, the truly console based video game company with this vast array of powerful franchises fill in the gap there. How do you get from point A to point B and this huge makeover that the company gets?
[00:11:05] Daniel Mahncke: The 50s and 60s like you said they were still a little too early for gaming consoles. So in that time Nintendo was still primarily focused on playing cards And then in the early 60s, they even landed a partnership with the Walt Disney Company. Nintendo then started diversifying. So they started with playing cards, and then they started diversifying also into toys.
[00:11:27] Daniel Mahncke: And they ended up having a collaboration with a company called Magnavox. I don’t know exactly what it was. I think it was some kind of a light, a light shooting gun, which they ended up collaborating on. And that’s not really the point. The point is that Magnavox was the company that built the first ever game console.
[00:11:46] Daniel Mahncke: That was back in 1972. And the game console was called Magnavox Odyssey. And it’s kind of fascinating. I just stumbled across it a couple of weeks ago. And it was the original TV commercial that Magnavox Odyssey has filmed. And I think it just shows how far consoles have come. And that’s also kind of why I wanted to show it to you today.
[00:12:08] Daniel Mahncke: And that’s why we’ll play a short 20 second clip and then we’ll come back.
[00:12:13] Families who are content to let television do its thing often find themselves at its mercy for a choice of entertainment. While people who want television to do their thing entertain themselves with Odyssey.
[00:12:28] The electronic game of the future and the family’s best fall weather friend.
[00:12:35] Daniel Mahncke: So since then there have been about nine generations of consoles and generations is a term that is used in the industry. just to describe the cycles in which new consoles are released. For example, if there are three players in the industry, each of them release a console and they don’t necessarily do it in the same year, but they do it kind of at the same time.
[00:12:56] Daniel Mahncke: And those cycles usually last 10 just seems like that’s probably the time they need to have significantly improved the console and also turn profitable on it. Because in contrast to what I used to believe, consoles do not sell at a profit from the get go. They mostly sell at a loss and then they only turn profitable because of the games they then sold later on.
[00:13:20] Daniel Mahncke: So the second generation featured a console called Atari 2600 and that was kind of the first ever console to use a joystick. And as simple as that sounds right now, this has been a huge leap of innovation back then. I mean, if, I don’t know if you could imagine that, but I didn’t count. I think every console I ever used and every console after that used a joystick.
[00:13:42] Daniel Mahncke: So that was a huge leap of innovation back then, but naturally each generation comes with less and less innovation. So I’d like to use an iPhone comparison here, just, you know, because everyone in the world knows the iPhone. And I often say the first iPhone, it kind of changed the world, right? But the second and third iPhone, they changed the iPhone itself more than anything.
[00:14:05] Daniel Mahncke: And everything after that, I mean, I know I’ll probably get a bit of hate from the Apple fanboys here. I feel like the iPhones coming after that didn’t change that much. I feel like I hear for 12 consecutive years now that the camera is better than before, but there’s no actual leap in technology concerning the iPhone or it’s not changing the industry.
[00:14:25] Daniel Mahncke: Right? And there’s a similar development kind of because of that in the console business. Although it obviously helps if you just have to release a new console every 10 to 15 years and not have come up with a new phone every year. And there’s another industry dynamic that is kind of tied to that, which is the concentration of competition.
[00:14:46] Daniel Mahncke: And in the console business right now, you only have three major players, and that’s PlayStation, it’s Nintendo, and it’s Xbox. Those three players kind of have the market for themselves. And in the smartphone business, it will probably be the iPhone and Samsung. And all other players Over time, they just disappeared.
[00:15:06] Daniel Mahncke: I don’t know if you still know Sega, or if you ever owned a console. I mean, maybe you did because of your older brothers.
[00:15:12] Shawn O’Malley: Well, I guess first I just want to quickly say, I thought that point on the consoles was really, really interesting. I it would almost be like, I had never considered that, that, that they weren’t profitable.
[00:15:22] Shawn O’Malley: It’d almost be like if iPhones were sold at a loss and then they tried to make it back with just the app store, right? And take commission on that. So that’s an interesting point. But to your question on the Sega consoles, I had to actually Google what that looks like. I’m not familiar with it. So I don’t know if you want to tell us about that.
[00:15:39] Daniel Mahncke: Yeah. Well, just as you said, there’s not too much to tell because nobody knows the Sega anymore, right? It used to be probably a player like PlayStation is nowadays. And it was probably three generations that Sega was a pretty dominant player in the industry. And then they had one flop after another. And in the console business, that’s actually enough to go broke pretty soon.
[00:16:00] Daniel Mahncke: So for the last 20 years, the market is, like I said, dominated by three players. That’s Sony’s PlayStation, the Microsoft Xbox, and Nintendo. And the main difference between Nintendo and the other two, so PlayStation and Xbox is what kind of games they focus on. And in that regard, obviously what customers they attract.
[00:16:20] Daniel Mahncke: So, to keep it simple, there are games that have the highest possible quality in graphics and gameplay, and they more often than not also have pretty advanced multiplayer functionality. Those games are usually called AAA games. And well known examples include Call of Duty, Grand Theft Auto, or The Witcher.
[00:16:40] Daniel Mahncke: I don’t know if you have played any of those games, but I know Call of Duty and Grand Theft Auto are pretty much in every living room in the US, probably.
[00:16:48] Shawn O’Malley: I definitely have.
[00:16:49] Daniel Mahncke: Yeah, I imagined that. I imagined that. Well, and then you have games that are simpler. They do not necessarily have the best quality graphics and they have relatively simple gameplay.
[00:17:00] Daniel Mahncke: And those are usually called single or double A games. And of course, they also come with a lot less costs, right? Which is pretty obvious. So, the AAA game Call of Duty, for example, costs between 500 and 700 million dollars in development. I think the title that is soon to be released is at the higher end of that, so close to 700 million.
[00:17:22] Daniel Mahncke: And maybe even more dramatic is Grand Theft Auto, Grand Theft Auto 6 to be precise, which is probably the most awaited release ever for a video game. And they allegedly have a budget of up to 2 billion. Maybe to put that into perspective, Star Wars The Force Awakens, which released in 2015, I think, especially they did release when it was a franchise of Disney and not just Lucasfilm anymore.
[00:17:49] Daniel Mahncke: They had a budget of roughly 450 million dollars, which made it one of the most expensive movies ever. And that’s only a quarter of the budget that Grand Theft Auto 6 was allowed to spend. Now, maybe you’re like me, and you ask yourself, how are you ever supposed to turn profitable on a game that costs 2 billion dollars?
[00:18:09] Daniel Mahncke: But most of those games actually turn profitable. I mean, sure, not all of them do. That’s the nature of being in business. But most of them do turn profitable, and the reason is that games are totally different from what they used to be when you and I played them as a kid, right? There’s a term to describe that, and that is GaaS.
[00:18:27] Daniel Mahncke: Maybe you know the term SaaS, which is Software as a Service, now they simply decided to put a G instead of an S, and now you have GaaS. Which means games as a service and the whole idea behind games as a service is that you no longer have single sale products. So for example, if you buy a movie or if you watch it in cinema, you go there once you pay for the movie you watch it and then you go home and games used to be the same way, but nowadays you do not finish a game like you did back then. Today games aim for longevity They do so to upsell and that can happen in many different ways.
[00:19:06] Daniel Mahncke: Some games need you to pay a monthly subscription. I’ve never played one of those but I think important ones or like famous ones include World of Warcraft or Final Fantasy. Others have in game objects that cost money, and we could talk about skins then. I mean, I used to love to play Counter Strike, which obviously might be one of the first players who integrated skins on that high level.
[00:19:29] Daniel Mahncke: And then obviously Fortnite did it as well, and probably Fortnite turned it into this huge global way of making money with games, right? And then again, others have additional chapters or prolonged stories that you can buy. These are often called DLCs, which just stands for downloadable content. You could imagine it like a book.
[00:19:50] Daniel Mahncke: Maybe a book has 200 pages, but then when you’re about to finish it, there’s another chapter that you have to buy for 5. And that’s basically what a DLC is, just in a video game format. So very generally, the higher the quality of a game is, the more upsell potential you also have. You know, it’s just a lot easier to sell an additional chapter of The Witcher than it is to sell an additional chapter of of a game that only has two functions.
[00:20:17] Daniel Mahncke: I don’t know, maybe you ever played a farm simulator? It’s not that easy to sell an additional chapter of the farm simulator. And PlayStation and Xbox. They are known to focus on these AAA games, like Call of Duty, Grand Theft Auto, but also FIFA or Madden. And Nintendo, they kind of took another round. So they don’t have a real focus on what games they create.
[00:20:41] Daniel Mahncke: You can play AAA games, but you can also play Nintendo’s in house games, or just simpler games in general. So they do not focus on these blockbuster titles. Instead, what they’re doing is they go for a more diversified audience. Nintendo took the second route. I think that’s because up until now, you kind of had to decide, do you go all out on your hardware and then you can offer these blockbuster titles or are you diversifying games and therefore also your audience, for example, be more appealing to the younger audience.
[00:21:14] Daniel Mahncke: And Nintendo took the second route and then especially focused on this younger audience.
[00:21:20] Shawn O’Malley: Yeah, I definitely remember. I guess I alluded to it earlier, but as I got older, it felt like Nintendo went from being a core part of my childhood experience to something that was like almost very dramatically, no longer a part of the picture, which, you know, in hindsight strikes me as.
[00:21:37] Shawn O’Malley: A real loss of opportunity would seem like, you know, I think it was like, it was like a light switch to, I remember hitting like maybe, you know, fifth or sixth grade and it was, you know, okay, no one’s playing DS anymore. You’re not like, you know, you’re not playing super smash, but it was, everybody’s playing call of duty.
[00:21:53] Shawn O’Malley: And maybe that was just like, you know, my moment in time growing up. And it felt like everybody had migrated pretty quickly to PlayStation or Xbox to do that. And all of a sudden, you know, it wasn’t cool to have the Wii anymore. And, you know, I remember when the Wii first came out, it seemed so groundbreaking, right?
[00:22:12] Shawn O’Malley: That you could physically interact with games by, by swinging the controller around. Like I, we thought we were living in the future and, and just those Wii’s now seem laughably outdated. And like I said, when people kind of hit their teens and preteens. The interest switched really dramatically to more mature games that were mostly available in PlayStation or Xbox.
[00:22:33] Shawn O’Malley: And there was definitely, I mean, there was a huge rivalry between PlayStation players and Xbox players.
[00:22:39] Daniel Mahncke: You know, it’s funny because you tell the story now and it’s basically the same story I had too. And it’s interesting, but it also has so many business implications because it has been the same throughout every generation and every country that at a certain age, it just seemed that Nintendo was appealing anymore to any of the audiences.
[00:22:59] Daniel Mahncke: And then PlayStation and Xbox kind of took over. And as you said, they, you know, kind of had a rivalry, but I think that was mostly about some branded communities. And I mean, if your friends are on the PlayStation, then you bought a PlayStation as well. And if they owned an Xbox, you also bought an Xbox.
[00:23:15] Daniel Mahncke: And once again, that’s not just a side comment here, but that has business implications. Because it was the upcoming importance of multiplayer functions in games and the longevity of games that had a huge impact on the entire industry. Xbox 360, which was the console in the seventh generation and probably the one you were talking about when you said there was this light switch when nobody was interested in Nintendo anymore.
[00:23:40] Daniel Mahncke: Well, that was the generation of the PlayStation three and the Xbox 360. And what Xbox did is they launched a service called Xbox life, which basically they launched it in, I think 2002, but it didn’t have any implications for the actual business until that moment. And this service costs about 8 per month.
[00:24:00] Daniel Mahncke: And PlayStation later on released another one, I think about five years later, they launched PlayStation Plus, which kind of is the same premise. What these services are doing is they put playing games online, so the multiplayer function, behind a paywall. And that has been a huge shift. Now, fast forward 10 years, there are multiple tiers at different prices.
[00:24:21] Daniel Mahncke: I think the standard one, which stands at 10, offers playing games online, which is obviously the core of it all. And then it also offers cross gen gameplay, which means that old and new generations of players can play together. So if I own a PlayStation 4, and you own a PlayStation 5, and the game is compatible with this, we can still play together, which was not possible before.
[00:24:45] Daniel Mahncke: And you have limited access to an online game library. And the more expensive tiers, they also include backward compatibility, which means that you can play games that were released on old consoles and not on new ones. So for example, if you used to own a certain game that you liked on the PlayStation 4, you can now still play that game on the PlayStation 5 without needing to buy it again.
[00:25:11] Daniel Mahncke: And that development really marked a major shift in the industry because that’s where it started, that stable earnings countered the cyclicality that businesses like PlayStation or Xbox had before.
[00:25:24] Shawn O’Malley: Correct me if I’m mistaken here, but obviously Nintendo did not follow suit and never really had a similar service.
[00:25:31] Shawn O’Malley: So why do you think? Nintendo didn’t take the same path at that time.
[00:25:36] Daniel Mahncke: Yeah, I mean, that’s kind of why I’ve given such a long intro, right, to the industry and the dynamics between PlayStation, Xbox, and Nintendo. Because the main difference is in the customer base, which evolved differently because of, like I mentioned before, the different games they used to focus on.
[00:25:53] Daniel Mahncke: So if you wanted to play GTA or Call of Duty, you bought a PlayStation or an Xbox. If you wanted to play Nintendo’s in house games, like Super Mario, The Legend of Zelda, or Animal Crossing, then you were just happy with playing these simpler games, and you probably just bought a Wii. When others improved graphics, Nintendo wanted to innovate how games are played on their console.
[00:26:18] Daniel Mahncke: So I think Nintendo’s CEO, Satoru Iwata, once famously said, When we considered what to do with the graphics capability of the Wii, we put more attention and focus on the ability to create new experiences rather than the quality of the graphics. The Wii therefore never really competed with the PlayStation 3 or the Xbox 360.
[00:26:41] Daniel Mahncke: Many people, including me, they owned a Wii and a PlayStation 3, or an Xbox if you were an Xbox kid. I think you mentioned it before, and it’s completely right if you say that in some ways Nintendo operated in its own niche because of that.
[00:26:57] Shawn O’Malley: Niche is probably a little bit of an understatement, right? I mean, we are still talking about a nine figure player base, but I mean, this has been, you know, I did my own research on the company a little bit just because I knew you were going to pitch it.
[00:27:08] Shawn O’Malley: And I saw that this has been a setback, right? You know, the release of the Wii U was by far the worst release I think Nintendo ever had for a console. You know, the, the number is better than me, but you know, like maybe 13 million units were sold, whereas the original, we had, I think over a hundred million units.
[00:27:28] Shawn O’Malley: So, I mean, that’s just a huge gap. And it is a question of like, how do you recover from that? And maybe the question is, maybe Nintendo really hasn’t recovered from that. You know, my impression is that there was several years of underperformance, even like some difficulties paying staff. I think I read somewhere that the CEO had a 50 percent pay cut for a number of months.
[00:27:48] Shawn O’Malley: And then, you know, other executives are taking pay cuts at the same time too. So, I mean, this is a rough period for Nintendo that we’re talking about. And I guess the question is, what was it that changed about the switch when it came out that made it such a big success in light of the failure with the Wii U.
[00:28:05] Shawn O’Malley: You know, it’s not easy to recover from something like that, but you could imagine that customers lost trust in the brand and they had to, they had to bring that back, bring those people back.
[00:28:14] Daniel Mahncke: The numbers suggest Nintendo didn’t have any problems with it after selling, I think, 146 million units of the Switch.
[00:28:21] Daniel Mahncke: That’s mostly because bouncing back from the Wii U debacle wasn’t too difficult, since the Wii U failed mostly because of bad marketing, and second, it’s not too difficult to recover from a console that nobody bought. So there weren’t really customers that were disappointed in the Wii U because there were just so few units sold.
[00:28:43] Daniel Mahncke: And that might actually have been an advantage or a tailwind because if you have skipped an entire generation of consoles, there were a lot more people who were willing to buy the Switch after 10 or 15 years of not upgrading after the Wii. Despite bad marketing though, there were obviously also other reasons for the failure of the Wii U.
[00:29:02] Daniel Mahncke: So there was the bad integration of new features, such as the touchpad, which was a good idea and was later also integrated into the Switch, but it wasn’t successfully integrated into the Wii U. It just didn’t work out well with most of the games that came out. And the second factor is the online function.
[00:29:22] Daniel Mahncke: Which was of pretty little use, since games that could make the best use of it, like FIFA, GTA, or Call of Duty, were never playable on the console anyway. And for many other games that were playable, the online function just wasn’t necessary at all. So, game developers actually ended up stopping production for the Wii U entirely.
[00:29:42] Daniel Mahncke: Which is why it only ended up offering, I need to get this number off the back of my head, but, I think about 600 third party titles. While the PlayStation 4 had about 4, 000 and the Xbox one was like 3700 so significantly more third party titles and Nintendo’s in house games i mean they were always great and they were also great for the Wii U i think there were legendary titles like mario kart 8 or super smash brothers released specifically for the Wii U But no matter how great those games were, they are not the kind of titles that push console sales, right?
[00:30:16] Daniel Mahncke: It’s not a GTA, which many people would just buy a PlayStation to play Grand Theft Auto there. So the Switch basically improved on all the weaknesses the Wii U had. It had way better marketing, which is mostly just about telling people what the console is doing. So they had these people in the marketing campaigns outside playing on the handheld part, which never happened with the Wii U.
[00:30:38] Daniel Mahncke: You didn’t even know why there was a handheld part for the Wii U out there, right? So better marketing was one point. Then you had a better integration of the touchpad. Like I said, when people sat outside on the handheld, the handheld of the Switch. And it was possible because the touchpad was integrated way better than it was before.
[00:30:57] Daniel Mahncke: And you also had more third party games, which benefited the online function immensely. And although those third party titles were not the likes of GTA or Call of Duty, you still had a lot of very great indie games that many, many people enjoyed. And therefore you could say that the Switch was kind of like Nintendo’s Xbox Live moment, which changed the entire business model.
[00:31:23] Daniel Mahncke: And since then, Nintendo started building on that and kind of developed an Apple like ecosystem.
[00:31:29] Shawn O’Malley: I find myself in these situations where I’ve, you know, studied a business. And then it keeps reminding me of another business, right? We’ve invoked Apple a few times at this point. Right? And at some point, maybe the takeaway is like, you know, hey, go buy Apple.
[00:31:42] Shawn O’Malley: And not to say that I’m recommending that, but like, you know, when the gold standard, right, the golden goose of, of like, Oh, you know, Nintendo found, found the light and it was because they kind of started following a model that Apple’s been doing. And then the question is like, okay, well, what’s more compelling, Nintendo or the company that has been the gold standard that, that everybody references against.
[00:32:00] Shawn O’Malley: And that’s another conversation I don’t want to get into, but you know, I think that there is something very compelling from a user perspective about, you know, just being able to pay for a virtual subscription and that granting access to this vast game library with backward compatibility and, you know, cross gen support to use all kind of the gaming lingo.
[00:32:20] Shawn O’Malley: But then, you know, assuming this is like an Apple like ecosystem. Yeah, I guess that sounds maybe great on the surface, but my question is, doesn’t this kind of fundamentally mean that Nintendo is at risk of selling fewer consoles going forward? Because, you know, I guess at least previously the main reason to upgrade your console for the latest generation of games is, is kind of gone, right?
[00:32:44] Shawn O’Malley: So how does this change things for Nintendo?
[00:32:47] Daniel Mahncke: Technically, that’s a risk. And I also thought about that, but maybe, I mean, you referenced iPhones and I did it. And people still buying them, right? So I think there’s just something about upgrading that people generally like, but that’s a weak argument. So we should go into the numbers as well.
[00:33:02] Daniel Mahncke: If we look at what happened at PlayStation, for example, because they did it already like many years ago, and we see that it didn’t impact their sales at all. I think the PlayStation 5 sold about 75 million units until now, and it should be about 17 quarters it’s on the market. And the PlayStation 4 sold about one and a half million more in the same timeframe.
[00:33:22] Daniel Mahncke: Now that’s a difference of about 2 percent and 2 percent could be caused by many different factors. I don’t think and I haven’t read anything that would suggest it’s about the cross gen support and with only two consoles per decade and maybe sometimes even less, there’s still enough room to make significant upgrades that should attract new customers, especially since Nintendo focuses on actually innovating the consoles.
[00:33:48] Daniel Mahncke: So they are not just, I mean, the Wii U and the Switch, they were kind of alike, but if you consider the Wii, the first generation Wii before that, you know, it was a complete innovation and a leap of technology, just as you mentioned, with all the motion control and those features. And since Nintendo is focusing on that, I think there should always be enough arguments for buying the new console.
[00:34:07] Daniel Mahncke: And even if volume should drop slightly, more stable earnings and the higher margins such an ecosystem can provide to you would definitely compensate for that. And we also, and that’s the most important part, you keep your customer base. And with the customer base, you have tremendous upside potential because of all the upsale opportunities that you have.
[00:34:29] Daniel Mahncke: So that’s pretty much the main objective for all those three players who transfer to this new model. You enhance the customer lifetime value instead of just selling a new console. And as I said before, the console itself is often even sold at a loss anyway, you now have the opportunity. To be a lot more profitable on the customers and that’s where the big money is, right?
[00:34:50] Daniel Mahncke: It’s in selling games and other content through the online ecosystem, no matter the generation of the console. I think it’s about a 30 percent share they all take from a game sale, which is to have another connection here. Also about the share that Apple takes in the Apple app store.
[00:35:07] Shawn O’Malley: To keep the Apple comparison going, that sounds like Apple’s app store, right?
[00:35:12] Shawn O’Malley: I mean, you just mentioned it. So How do you think about that?
[00:35:15] Daniel Mahncke: Yeah, it’s pretty much the same premise. You have high margins once the ecosystem is up and running. And those margins seem also to be pretty safe. There’s the anecdote of Epic Games and Apple, where Epic Games, which is the developer behind Fortnite, tried to create its own in game mobile payment system integrated into Fortnite so they could bypass the 30 percent fee that Apple is taking through its App Store.
[00:35:41] Daniel Mahncke: Now, I could elaborate on the whole story, but to make it short and get to the point that is important for us, Apple won in court and that kind of showcase the potential to not only have high margins in that business model, but also to defend them if any developer or any game tries to bypass them.
[00:35:59] Shawn O’Malley: I mean, it is a promising model, right?
[00:36:01] Shawn O’Malley: I mean, it does sound like there’s considerable earnings potential there. And you also mentioned that Nintendo’s Wii U did not offer many third party games though that could generate in game revenues. So I guess while I think this has already changed with the switch, the third party games available there are maybe less demanding than the typical PlayStation or Xbox titles.
[00:36:23] Shawn O’Malley: And therefore also offer less upsell potential, right? And if that’s the case, do you expect that to change?
[00:36:30] Daniel Mahncke: Yeah. I mean, you just mentioned it. The switch already offered like 11, 000 third party titles, which is a huge amount, but there were mostly single a and double a titles. So not the likes of GTA, call of duty, et cetera, but mostly simpler games.
[00:36:45] Daniel Mahncke: So they’re relatively cheap to develop, which also causes this huge number, like 11, 000. I think I mentioned 4, 000 for the PlayStation 4 before, so it’s a lot more, but also games where you cannot make the same amount of money off as with these huge titles. But those are games that just fit Nintendo’s system and style pretty well.
[00:37:05] Daniel Mahncke: They work great for the handheld part as well. So with the Switch being used in handheld mode pretty often, it’s important to have games that actually make sense on the handheld. As I said, they do come with lower in game revenues and add ons that can be sold. So there’s not too much that Nintendo can take a share of.
[00:37:23] Daniel Mahncke: So it’s important for them to maybe also upgrade the kind of games that you can play on the Switch 2 so that Nintendo can sell more. And insiders expect the Switch 2 to be a lot more powerful than the Switch 1. And that means that the Switch 2 could potentially play even the most ambitious titles like Grand Theft Auto, Call of Duty, or The Witcher.
[00:37:45] Daniel Mahncke: Although I personally would have my doubts that we see titles like Grand Theft Auto, but even if we see something like The Witcher, which is a pretty ambitious AAA title, I do think that would drive significantly more sales, also at the customer base that usually, and historically, belongs to PlayStation and Xbox.
[00:38:03] Daniel Mahncke: We will talk about some technical details later, but if it’s true, and I do think it is true, it will make the Switch 2, like I said, appeal to a whole new audience. So AAA adoption can be a game changer if either Nintendo creates demand within their current customer base, or if the games do perform on such a high level that Nintendo could actually take market share from PlayStation or Xbox.
[00:38:27] Daniel Mahncke: And I think Xbox is especially vulnerable. They decided to no longer offer any exclusive titles. I think one of the titles I love most ever is the Halo franchise, which used to be an Xbox exclusive, and they do not sell those anymore. And instead what they do now is they sell all the ex used to be exclusive titles also to PlayStation, if the Switch 2 is able to play them, also to the Switch 2.
[00:38:53] Daniel Mahncke: And this decision probably came because they have a decline in sales and subscriptions for quite some time now. And I still don’t think that Xbox would stop making consoles, but they do seem to be hurt. And maybe that’s a chance for Nintendo, you know, to grab some of their customers.
[00:39:11] Shawn O’Malley: Two questions come to mind for me, right?
[00:39:13] Shawn O’Malley: So firstly, with the Xbox business decreasing, and we’ve already talked about maybe how consoles are not even necessarily what make money for these companies. Is there a scenario where they would ever just stop releasing new consoles and, and, and break that release cycle and, and just like, you know, this is the console as it exists and, and it’s not worth our time to continue to, to, to, to launch these things every single year.
[00:39:36] Shawn O’Malley: And secondly, I guess, coming back to Nintendo, do you think the release of Xbox games on Nintendo consoles could also drive Xbox players to Nintendo consoles longer term?
[00:39:49] Daniel Mahncke: To the first question. The subscription model is just so great that Xbox doesn’t want to lose it. I think they currently have 34 million subs, and if they would stop making consoles, those subs would probably be gone.
[00:40:02] Daniel Mahncke: And Nintendo and PlayStation won’t sell their game pass. So Xbox could might say, okay, you have games here that you can sell for me. And Nintendo and PlayStation, they will like to take those games because it’s an extension to their library. But if Xbox stops making consoles, Nintendo and PlayStation will not sell the subscription service of Xbox, right?
[00:40:23] Daniel Mahncke: That just wouldn’t make any sense. So, I do not think that Xbox will stop making any consoles. They also didn’t initiate anything that would make you seem they would stop eventually. And maybe it’s even just a short term slump in the subscription numbers, because PlayStation kind of has the same. I mean, it’s not like there’s a decrease.
[00:40:43] Daniel Mahncke: But there’s definitely a slowdown for PlayStation as well in the subscriber numbers in recent months.
[00:40:50] Shawn O’Malley: I mean, it seems like there could be maybe some subscription fatigue there. And, and this is kind of something we saw sort of famously with Netflix two or three years ago when there was all this concern of, you know, they have these high content costs.
[00:41:03] Shawn O’Malley: Are people going to continue to stay subscribed to the service coming out of the pandemic? Is it something that people still want to use when they’re not locked down and you know, how much demand got pulled forward? Obviously, you know, I think Bill Ackman famously exited his position after a really bad Netflix quarter, but here we are today and Netflix is arguably doing better than ever.
[00:41:21] Shawn O’Malley: And so, you know, there, there’s this question of whether there is subscription fatigue and how much that is a real thing with a brand and service as robust and compelling as, as Nintendo. So considering, I guess that, that slowdown you mentioned around PlayStation. Could it be that Nintendo missed the right moment to start a subscription service?
[00:41:41] Daniel Mahncke: I don’t think so. I don’t think that would happen, because Nintendo has a very different audience, like I said before, and that’s mostly untapped. I think I mentioned that Xbox had 34 million subs, and Nintendo has the same amount. So they have 34 million subs, but on a much larger player base. They have about 130 million active players.
[00:42:00] Daniel Mahncke: So if you put that into comparison, I think there’s a lot of untapped potential, which shouldn’t be explained by subscription fatigue, because it’s just so many people who never even had a subscription in the first place, that they could benefit from if they should start doing that. And with even more benefits coming to the subscription and the potential release of some of these blockbuster games, I think there’s just so much leeway left for Nintendo that I don’t see them having any problems in the near future.
[00:42:28] Daniel Mahncke: There’s also a huge potential for their own titles. If they would keep leveraging the brands they already have, there should be a huge conversion possible from the audience they have right now. Because everyone loves those franchises. If they would have something more about the Mario brand or even Pokemon or something like that, I could imagine there would be a huge wave of new subscriptions, if they use it correctly.
[00:42:50] Daniel Mahncke: Now, I lack a bit of creativity to say you exactly, okay, this is what you should do and it will work out. But I think, while I lack creativity, I do not think at any second that Nintendo is a company that would lack creativity to do that.
[00:43:04] Shawn O’Malley: If we were to assume a more conservative scenario in which AAA adoption of the Switch 2 is not the success that is expected, despite that, does Nintendo have any other advantages that could support a subscription model going forward?
[00:43:22] Shawn O’Malley: And if so, do those advantages differ materially from PlayStation or Xbox? I guess another way to put that is, you know, the bigger picture question here that I think is really important to understand Nintendo and their earnings power going forward is how can they leverage their IP?
[00:43:39] Daniel Mahncke: You’re totally right.
[00:43:40] Daniel Mahncke: I mean, that’s kind of the most important question when talking about Nintendo. And I think there are quite a few options. Now, AAA is something, so games like Grand Theft Auto, Call of Duty, etc. is more like an immediate catalyst, whereas if you would be able to play those games, and you would be able to play those games on a high quality, maybe there’s a huge wave, a short term wave of people coming and buying the Switch 2 to play those games.
[00:44:06] Daniel Mahncke: While leveraging the IP is something more long term and we shouldn’t forget that people who bought Nintendo consoles historically, but also the switch, they didn’t buy that console to play call of duty, right? They bought the console because they wanted to have the innovation that the switch is offering, which Xbox or PlayStation are not.
[00:44:25] Daniel Mahncke: And they wanted the titles that they love and know from Nintendo. And I know I repeat myself here. But, the biggest level Nintendo has, is it’s customer base. I just said, they sold 146 million Switches. They have about 130 million of those players to be active. And when I say active, active means they’ve played at least once in the last 12 months.
[00:44:47] Daniel Mahncke: So you could argue with me that’s not that active if you really just played one time in the last 12 months. But still, it’s counted as an active player. And like I said, they only have 35 or 34 million subscribers on that huge player base. And I just mentioned that Xbox has the same level of subscriptions on a much lower player base.
[00:45:07] Daniel Mahncke: So the biggest level really is focusing on the IP and we’ll get to it later, but Nintendo is really doing that. They are really taking part of Disney’s flywheel concept of Disney’s playbook and they’re trying to leverage what they already have to get into this new business transition. But the second strategy would also be to increase digital distribution further.
[00:45:30] Daniel Mahncke: So Nintendo is still the king of physical copy sales. And I could imagine that’s a crown or a title they would want to pass on because it’s not very much a profitable business. I mean, it’s profitable, but if you compare it to digital sales, it’s a lot less profitable. And they’re going in the right direction.
[00:45:49] Daniel Mahncke: Nintendo is currently on the path to reach more of a 60 40 split in favor of software sales and that has multiple advantages. So, digital sales can firstly drive subscriptions to Nintendo’s online service. Because it would build a habit of buying in Nintendo’s online store, right? Which makes it more likely that at some point you feel the urge to want access to all those games you see in the library all the time, right?
[00:46:16] Daniel Mahncke: I mean, if you go in and you see a game that you like and you buy it online, maybe you already saw two or three other games that you also like. And I think the more games you see in the library, the more appealing it becomes to actually end up having the subscription one day and get access to all those games.
[00:46:32] Shawn O’Malley: I think that makes sense. I could also imagine that this is somewhat of a self reinforcing cycle where you’re more likely to play more games and be more active in general because Getting the games online removes a lot of that friction you have when buying a game offline, right? You know, you don’t have to drive to a local game shop anymore or even order it online and wait for it to be delivered It’s just a much cleaner process.
[00:46:57] Shawn O’Malley: So if you see a game that looks interesting you quickly download it Give it a try and there’s no frictional kind of transactional costs and there’s no waiting time or other risks involved In case you don’t like it
[00:47:09] Daniel Mahncke: Yeah, sure. And it’s kind of like a win win, which is always the best value proposition, right?
[00:47:14] Daniel Mahncke: It’s a win for Nintendo and it’s a win for the consumer because it’s way more comfortable for the players and Nintendo makes a lot more money on those digital sales. Maybe I should also mention because it’s not that intuitive. Why do digital sales make more money than physical ones? Well, the margin on digital sales is a lot better because there’s not a middleman involved, right?
[00:47:35] Daniel Mahncke: Nintendo doesn’t have to pay the GameStops or the Walmarts of the world a share because of the sale that happened in their store. So, and then you have the online subscription itself, which can also work as a teaser to drive more game sales later on, because when games are taken away from the library, because the general idea is that a game might get added to the online game library and you can play it for about two or three months.
[00:48:01] Daniel Mahncke: And then it can take it away again. And when that happens, you might’ve played that game for two or three months, and you might’ve played it with a couple of friends and you liked that game so much that you all decide to just buy it and keep having your progress and keep having all the fun that you had before.
[00:48:14] Daniel Mahncke: Right? So it’s kind of also like a teaser function to sell more subscriptions in the longterm. And then you would have a third strategy. Which would be about the blockbuster titles like Call of Duty or FIFA. But I think we went through this so often again. You, you must have to tell me if I should stop talking about those type of games, right?
[00:48:33] Shawn O’Malley: No, I think it’s fine in the end, right? If it is such an important driver of subscriptions for the business and the success of this new model that Nintendo is trying to push forward with, I think it would be wrong to, to just ignore it for the sake of doing so. Also, I think your last point there was on Nintendo’s IP.
[00:48:51] Shawn O’Malley: So you can make one more last point on the triple A games. I give you permission, but I am excited to hear more about the IP.
[00:48:58] Daniel Mahncke: What I’m talking about now are hardware and online infrastructure investments. So after high quality games didn’t look too good and we’re kind of shaky on the switch one This is supposed to be a big change now on the switch to and therefore Nintendo uses a new and video hardware And I know whenever you drop in video right now, it seems to be a pretty good sign. So I’m apparently doing this also to show the audience.
[00:49:22] Daniel Mahncke: They really trying to get somewhere right?
[00:49:24] Shawn O’Malley: It’s a hot name.
[00:49:25] Daniel Mahncke: Exactly. And this new Nvidia chip is called T239. And it’s a processor that allows the Switch 2 to reach over 3 teraflops when docked and 1. 7 teraflops in handheld mode. I know, if you’re like me, those numbers won’t tell you anything.
[00:49:42] Daniel Mahncke: And even if I tell you that teraflops are a unit of computing speed, it doesn’t change anything. You have no idea what’s going on. And I don’t have either.
[00:49:50] Shawn O’Malley: I had never heard of a teraflop before this for the record.
[00:49:53] Daniel Mahncke: Me neither. Right? I went to do this research. Then I saw those numbers and I was like, you kind of have to integrate them because maybe there are five to 10 people out there who understand them.
[00:50:02] Daniel Mahncke: I’m not one of them, so I will explain it now. I think the best way to do that is putting them into perspective. The Switch 1 only managed to work with 0. 5 teraflops when docked. So that’s a six time increase now for the Switch 2. And the standard version for the PlayStation 2, for the PlayStation 4, which might be the best comparison because I think people who played those high quality games mostly did so on a PlayStation 4, that PlayStation 4 reached about 1. 8 teraflops. So it’s still a little more than a double for the Switch 2, but generally the expectation is that the Switch 2 level is now comparable to a PlayStation 4 Pro or an Xbox Series S. And that’s why all the big game developers, like EA or Ubisoft, decided to come back and start producing games for the Switch 2 again.
[00:50:53] Daniel Mahncke: After they kind of, I mean, there’s no other way to rephrase it, but they kind of abandoned Nintendo when the Wii U fiasco happened, right? In my opinion, the Switch 2 shouldn’t compare to its predecessor, so the Switch 1. If it actually wants to attract customers that play games like Grand Theft Auto, Madden, or The Witcher, then it needs to compete with PlayStation and Xbox.
[00:51:18] Daniel Mahncke: And if the new Nintendo console is still weaker than the PlayStation five, I’m just not so sure it’s actually doing that job well enough. And although I’ve watched some of The Witcher gameplay actually on the switch one, I think it was 30 frames per second, which is the industry standard for how fast a game should run, but with relatively low graphics.
[00:51:39] Daniel Mahncke: The game was playable, which made me kind of hopeful since if it’s playable on the switch one, it’s unquestionable that it should be a lot better. And massively outperformed the Switch 1 on the Switch 2. So I do expect ambitious games like The Witcher to work on a high level and without any shakiness on the Switch 2.
[00:52:01] Daniel Mahncke: I just don’t know if it’s good enough or if the disadvantage is so huge that no PlayStation player would say, I give the Switch 2 a try. And a total unknown for me. is what part the handheld console could play here. Imagine you could play blockbuster games sitting on the bus or sitting on the train. I think that would kind of be like mobile gaming on steroids, right?
[00:52:26] Daniel Mahncke: I mean, that would be a great thing for the switch and definitely an argument to buy the console right out of the gates. I would never consider this a base case though. So for me, it’s more like an, I don’t know, like an asymmetric option. If it works, it will be phenomenal. But if it didn’t, I never expected it to work anyway.
[00:52:45] Shawn O’Malley: Not that I’m a huge video gamer, by any means, but I would think that if you could play Madden, FIFA, maybe on the bus, or the train, commuting to work, or whatever it is, I mean, that’s hard to beat. That mobility aspect, it’s kind of the best of what mobile gaming promises to offer and what console gaming can deliver in terms of graphics and that sort of thing.
[00:53:07] Shawn O’Malley: So, I mean, that seems unbeatable, and that’s a real differentiator that maybe we’ve stumbled across here with Nintendo.
[00:53:14] Daniel Mahncke: To be totally honest, just like you, I kind of feel like the person teaching people here about gaming. And I’m out of the gaming sector for like, at least five or six years. And I have a lot of friends who still play.
[00:53:24] Daniel Mahncke: So I also asked them, okay, how big of a leap would it be if you could play? I mean, we are in Germany. So I asked him how big of a leap would it be if you could play FIFA on the handheld console on the bus, but they would all say, that’s kind of like a home run. There’s nothing comparable and nobody would actually expect it to happen.
[00:53:42] Daniel Mahncke: I do know that you can play FIFA on the handheld of the switch one, a legacy version of it. They call it a legacy version. I would call it a dumbed down version because there’s no multiplayer functionality. And the game is basically a FIFA 18 version, which is sold to you as a 2025. So nobody would do that.
[00:54:01] Daniel Mahncke: And you know, that’s kind of what it depends on something like FIFA. If I could definitely imagine playing something like FIFA, if that will be playable on the handheld console and not as a legacy version, but like, As an attractive version of the current game. I think that would be a huge, huge thing for Nintendo.
[00:54:21] Shawn O’Malley: Yeah, it’s hard to do that with a game like Call of Duty, right? Because like it’s such a big there’s so much information you’re trying to process. You just like fundamentally need a bigger screen. To see everything that’s happening, but I don’t want to, I don’t want to go down this rabbit hole too much more, and I guess I’m kind of insisting we go back to Nintendo’s IP, because I do think that is the crux of what I find potentially most compelling about Nintendo as a business, and I know that you’ve researched Disney before, and I had you on five or six months ago now at this point, whatever it was, and we, we did do a whole episode on Disney together previously.
[00:54:58] Shawn O’Malley: So there’s some obvious parallels here and I’m curious to hear, you know, how you think of the similarities between brand power that is behind Nintendo and how it compares with Disney in Red, at least with the movie release of Super Mario Brothers in 2023 and it’s huge success. That was a real great kind of test run of how Nintendo can make good use of their IP outside of just video games and kind of step on Disney’s toes in the world of, of movies and TV.
[00:55:28] Daniel Mahncke: I’m sure the answer is maybe yes, but I’ll just ask it for you. Is that something they want to focus more on in the future?
[00:55:34] Daniel Mahncke: Well, as you said, I mean, the answer is obviously yes, but we do have to say that I feel like it’s not only. People outside of the company or like the general customer base, but it’s also Nintendo itself were a bit surprised by the phenomenal success that they had with the movie, right?
[00:55:50] Daniel Mahncke: I mean, it was the second most successful animated movie of all time beating Frozen 1, but getting beaten by the sequel, so Frozen 2, but still it’s a huge, huge success for them and also one of the very few successful game adoptions. Actually one, if not the first game adoption, was also a Mario movie and was made in 1993 and was a huge flop.
[00:56:14] Daniel Mahncke: I think both the production and the movie itself were a huge chaos. There were like nine writers for that movie before the filming even started. I mean fortunately, Nintendo tried again. Even if it apparently took, like, 30 years to gain the courage to do so, I think everyone would now say it was worth it, both Nintendo and definitely also the fans.
[00:56:34] Daniel Mahncke: The movie generated 1. 36 billion dollars in revenues, and it might, as you mentioned, also be the start of many more movies to come. You have a Mario sequel announced anyway, for 2026 already, so that’s definitely in the works, and you also have a Zelda movie coming, which is another franchise that could get a lot more adoption, not only with the movie, but maybe, you know, in the future, something else too.
[00:56:59] Daniel Mahncke: This time it will be a live action movie and they do not even have a cast yet. So I wouldn’t imagine it to come out anytime soon. Maybe we are two or three years out. So that’s promising. And they also, and I think that’s the most important part. They have Shigeru Miyamoto, and I hope I didn’t butcher that name on board.
[00:57:19] Daniel Mahncke: And he’s the original creator of Zelda. And I think the most important part, if you have movies like that, or if you have game franchises in general, is to get the people who are actually into the game and who are developing that game into the same boat, right? To have all that, what they usually pay attention to and what the fans love also in the movie.
[00:57:39] Daniel Mahncke: And just generally, as you mentioned. I think we will see Nintendo now making much better use of its IP in the years to come. And I expect many similarities to Disney’s Flywheel concept. Although, of course, for Nintendo, the focus will be on video games and despite this huge success as a movie, they will not suddenly switch into Disney 2. 0 and focus on making movies as the core of their business.
[00:58:05] Shawn O’Malley: It is funny because Disney is sort of a company that’s in hot water right now. Its returns over the last few years are pretty uninspiring. You know, and you have these activist shareholders trying to make change at the company. But that said though, we all recognize that there are some really compelling economics behind Disney and some, some features of what have made it such a enduring part of, of entertainment culture globally. Right?
[00:58:32] Shawn O’Malley: And so, you know, if Nintendo can just tap into maybe some of the best of what Disney has been able to do without getting distracted by like the cruises and the theme parks and some of the other stuff that are way more capital intensive.
[00:58:44] Shawn O’Malley: If they can specifically harness their IP in the right way. That is a, that is a really compelling narrative for maybe why Nintendo would be a good company to buy today. And I guess just briefly that it took a step back. I am guilty of throwing the flywheel concept around as this kind of buzzword that, you know, never really gets explained.
[00:59:04] Shawn O’Malley: And people in the audience might not even have any idea what it means. So why don’t you just take a moment and tell us what is the flywheel concept?
[00:59:11] Daniel Mahncke: I mean, first of all, maybe it’s important to say that while Disney does have its struggles right now, the flywheel concept is not part of that, right? I think it’s more of a cultural thing, and that’s something that Nintendo does not necessarily have to experience too.
[00:59:26] Daniel Mahncke: But coming to the flywheel itself. At the core of it, you have creative talent and theatrical films. So that’s what everyone knows Disney for, right? The movie releases and all the phenomenal franchises they built through it. And then you have many other business segments surrounding that core. So that’s Disneyland, which everybody knows.
[00:59:46] Daniel Mahncke: You have TV or merchandise licensing. You have some, you know, historical relics like comic strips, which is not a big business anymore, but used to be. And then you have also something like music and music is actually an important part that is mostly underappreciated. And I would like to take the music and movie release connection to kind of explain how Nintendo used the same concept.
[01:00:13] Daniel Mahncke: So I don’t know how many people here watch the Mario movie, but maybe if it didn’t even watch it, you could have heard about a song that was played in the movie and also released before the movie. Which was by bowser and was called peaches and this song got hundreds of millions of views online I think was about 120 million on YouTube alone.
[01:00:35] Daniel Mahncke: I know. Have you listened to it?
[01:00:36] Shawn O’Malley: No.
[01:00:37] Daniel Mahncke: I mean I first listened to it a couple of days ago to be honest But I did see it before and I know that many many people especially younger kids Heard this song like for about a year now. So it was a huge thing It definitely brought a lot of attention to the movie, and the movie itself has been watched about 170 million times as well at the box office.
[01:01:01] Daniel Mahncke: So besides being very profitable, I mean, profitable in terms of, I think the budget was about a hundred million compared to 1. 3 billion in revenues, you know, that sounds like a pretty good profit, but it also put many, many eyeballs on the entire world and on the Mario franchise. And the movie and the music kind of did it in a similar fashion, but they benefited from each other.
[01:01:24] Daniel Mahncke: So maybe you’ve watched the song before, and maybe you’re a parent, right? And you’ve heard the song before, and then you showed it to your kids, and your kids got all excited and they wanted to go to the cinema. That’s kind of how music is a teaser for the movie that’s supposed to come out. And then you also have this other connection, which is that after you watch the movie, the content of the movie mostly doesn’t stick in your head for too long.
[01:01:48] Daniel Mahncke: I mean, you probably watch Star Wars. I watched Star Wars. I couldn’t tell you what happened in movie four, right? But if you would play me any soundtrack of Star Wars, I would immediately recognize it. And that’s what Disney did in almost all of their franchises. They created iconic movies, iconic characters, but also iconic music.
[01:02:06] Daniel Mahncke: And it’s kind of what Nintendo is doing now too. I just think that’s a fascinating, because you never think about it. You just have these soundtracks in your mind and Nintendo is actually trying to benefit from that even more because they released an app, which is kind of like Spotify for Nintendo, where they release all these soundtracks of those movies.
[01:02:24] Daniel Mahncke: I mean, I don’t know where exactly they want to go with that. But it’s just an interesting thing because it shows how much more they want to leverage therapy than they used to like 10 years ago, you know, and the movie itself, I talked now about music and the movie, and of course you have the core of Nintendo’s Flywheel, and that wouldn’t be the movie, it would be game sales.
[01:02:46] Daniel Mahncke: And there’s an interesting anecdote here as well, because immediately after the movie released, they also released a game called Wonders, which was a Super Mario game. And that game became the fastest ever selling Mario game, it was 4. 3 million units sold in the first two weeks. And it just shows the huge impact a movie can have, because everyone knows Mario, right?
[01:03:09] Daniel Mahncke: There’s, it’s not like a surprise if a game comes out and you are asking yourself, what do I get here? Everybody knows what they get. But this movie just created such a big hype that people thought, now I also got to get the game. And then it became, you know, the fastest ever Mario game setting. And then you have like, kind of the last pillow, which are the Mario attractions in the Universal Studios.
[01:03:32] Daniel Mahncke: So that’s Super Nintendo World in Japan and also in California. There are no official financials because Nintendo doesn’t report on them. I mean, it’s not the same as Disney where they own the parks. But for Nintendo, it’s just that they do have attractions in the Universal Studios, but obviously the Universal Studios are owned by Comcast and not by Nintendo.
[01:03:52] Daniel Mahncke: So what I did do is I looked into Comcast financials and they reported 17 percent revenue growth in the first quarter after the opening of the Super Mario Nintendo World and 12 percent in the second quarter after the opening. And they even said themselves that it’s mostly attributable to the Mario attraction.
[01:04:12] Daniel Mahncke: So it kind of had a serious and tangible impact on Universal Studios .
[01:04:17] Shawn O’Malley: A few minutes ago, on the one hand, I said theme parks are very capital intensive, and they are. I would imagine the success with the Mario attraction here sort of implies that Nintendo is going to be pretty tempted to lean more heavily onto theme parks as a way to leverage its IP, and I mean, I do see how it factors into the flywheel, even if it gives me pause, and if I’m not mistaken, I think another attraction has already been announced in Florida pretty soon, is that correct?
[01:04:46] Daniel Mahncke: Yes, that should be the Nintendo World at the new Universal Epic Universe, which opens in about three months, and it should feature the Super Mario Land and the Donkey Kong Country. I think a huge difference in Disney and Nintendo at the capital intensity is Disney owns its own parks, right? And Nintendo only has attractions in the Universal Studios, or maybe eventually they will have attractions at other parks.
[01:05:12] Daniel Mahncke: Now, you could think that Nintendo might be tempted to also own their own theme parks, but I wouldn’t be so sure if that actually happens. And if so, how much or how far into the future that would happen. So right now I wouldn’t assume they will get a lot more capital intense because they build attractions like that.
[01:05:32] Daniel Mahncke: So it’s more of the, it’s more like they make money of it, but all the risk and the capital intensity lies with the Universal Studios. And Nintendo, also more or less quietly, owns the highest grossing media franchise of all time. And I think most people are not even aware it’s that big. At least I wasn’t.
[01:05:52] Daniel Mahncke: And we’ve talked about it at length today already, and the franchise I’m talking about is Pokemon. Since inception in 1996, Pokemon has generated about 140 billion in total revenues. And another surprise might be that video games for which we all know in Pokemon, I mean, you and me, we both spent like five minutes talking about Pokemon games, but they’re actually just a relatively small part of those revenues.
[01:06:18] Daniel Mahncke: I think it’s about 28 billion of those total 140 billion. The biggest chunk by far is merchandise value, which stands at over 100 billion. So it is huge for the Pokemon brand. And actually, just because you mentioned it, Pokemon cards should have been about 12 billion, which is also a lot more than I would have thought.
[01:06:39] Daniel Mahncke: Maybe to give one size comparison, because that always helps. I mentioned Call of Duty today, repeatedly. I mentioned Mario even more often than that, and I would think you all also know about Marvel. Now, if you would combine all those three franchises, you would get a combined value of 105 billion. So only to match Pokemon, you would need to add the entire Harry Potter franchise and Looney Tunes to get to the same amount, to like 140 billion.
[01:07:10] Daniel Mahncke: It’s insane, right?
[01:07:12] Shawn O’Malley: That’s a really cool way to think of it. I like the way you put that. And Pokemon is just such a powerhouse. Like I, it brings back so much nostalgia for me. I immediately, I think everybody probably thinks of different things when they hear Nintendo. For me, it’s Pokemon, right? That, that like, you know, some people it’s Mario or, you know, whatever it is, but like for me, it’s, it’s Pokemon.
[01:07:31] Shawn O’Malley: And that was, you know, I’m probably embarrassed to say that I was playing those games at an older age than maybe I should have been. I think I was probably, you know, ended well into middle school and maybe even parts of high school. I was. You know, whether it was the actual games or I remember sitting in class and like you could download these, these pro technically illegal, these simulators where you can play the, like the original games entirely for free.
[01:07:54] Shawn O’Malley: So Pikachu is at this point as famous as Mickey Mouse, I would argue. And if that sounds crazy to anyone older than the audience, I would just say like. It’s a generational thing, but I would almost guess with pretty high certainty that the average Gen Alpha and maybe some like Gen Z probably relate more to Pikachu than Mickey Mouse.
[01:08:17] Shawn O’Malley: And I did just want to ask why does Nintendo have a share in the Pokemon company? Right? Cause I don’t think they were the ones who originally created it. So maybe we could just paint some color on that, but how did they acquire it at some point? And, and, and do we know how valuable that share is or how big it is?
[01:08:34] Daniel Mahncke: That’s a good question. Nintendo was actually involved pretty much from the get go. So they technically did buy a share, if you want to say so, but they were involved quite from the get go when Pokemon was not really a thing, but more of an idea. And they were never on the development side, so the original idea and the game development came from a Japanese company called Game Freak.
[01:08:57] Daniel Mahncke: And Nintendo’s part was more of the publisher and distributor for those games, and Nintendo and Game Freak were even joined by a third party a bit later, which developed Pokemon’s trading card game, you know, the one that you were talking about and the one that’s 12 billion of the revenues. And that company that came in for that is called Creatures.
[01:09:17] Daniel Mahncke: So together, those three created a joint venture called The Pokemon Company. And for that company, the shares were split evenly between all three parties. So Nintendo’s share there is reported with 32%. However, Nintendo owns all the trademarks involved in the game. And holding your hand over the trademarks is kind of like owning the keys to the franchise.
[01:09:42] Daniel Mahncke: You know, I cannot phrase it differently. It’s a huge thing. Because trademarks, they include everything. All the names included in Pokemon. The name of Pokemon itself, I mean, you just mentioned Pikachu. Pikachu can only be named Pikachu because Nintendo allows it to. Right. Otherwise it would be, I dunno, yellow Mouse.
[01:10:01] Daniel Mahncke: I mean, sure they would come up with a better name than that. But just to give you an idea, they own everything. I mean, even the iconic Pokemon ball that you see in the background here, everything is owned by Nintendo. If you wanna say, if gotta catch em all. Nintendo has to allow you to say that.
[01:10:16] Shawn O’Malley: We’re not gonna get sued for that, are we?
[01:10:18] Daniel Mahncke: Probably not. If Game Freak or Creatures would do it, they would get sued for it by Nintendo. So you know, it’s just, it’s a really, really powerful tool to have, to have those trademarks. So, regarding Nintendo’s stake in Pokemon, it is also likely a lot larger than just a third. Since the Pokemon company, it is not equivalent to the Pokemon franchise.
[01:10:39] Daniel Mahncke: And I know this might sound a bit complex now, but listen to me, I think in two minutes or maybe three, I should break it down pretty concisely. I think you could imagine it as the Pokemon company being somewhat of an agent that works for the Pokemon franchise. So what does that mean? They are managing all the licenses.
[01:10:59] Daniel Mahncke: They are organizing third party collaboration. So for example, if Lego says, Hey, we want to build a set for Pokemon, then they could do it. They have to talk to the Pokemon company, and then they can say, you’re allowed to do it, or you’re not allowed to do it. If McDonald’s says, Hey, we want some Pokemon toys and the happy meals, then they go to the Pokemon company and they say, you’re allowed to do it, or you’re not allowed to do it.
[01:11:22] Daniel Mahncke: And they also do all the marketing and publishing for the video games. So that’s basically their job. But the Pokemon franchise itself, that is what at the end of the day generates all the money. You know, that’s what we all know. And that’s what generates the revenues. And Nintendo’s share in that franchise is very likely to be much 32%.
[01:11:44] Daniel Mahncke: Many people who understand the industry a lot better than I do, expected to be closer to 50 percent or even beyond that. Now, the reasoning is pretty simple. When Nintendo and Game Freak entered into their deal in somewhere in the late, late nineties, Nintendo was this huge global and successful company.
[01:12:03] Daniel Mahncke: And Game Freak was just a small independent developer. So just by that, you probably know the leveraging power was obviously on Nintendo side and Game Freak also just had a lot more to gain than Nintendo had. Nobody would know how big Pokemon became, right? So Game Freak had this idea and if it works out, it’s huge for the company.
[01:12:24] Daniel Mahncke: And Nintendo had many franchises that were already working pretty well, so they weren’t reliant on Pokemon working out. I think what I want to say in the end is, as long as the Pokemon company is private, we will probably never really know the detailed stake each company has in the Pokemon franchise.
[01:12:41] Daniel Mahncke: Unfortunately, you can also not reverse engineer it by looking at Nintendo’s financial statements, because on its balance sheet, the stake is pretty much valued at zero. And on the income statement, They kind of did the trick of putting all the profits into one basket and kind of hide it away that way.
[01:12:58] Daniel Mahncke: So they report the Pokemon profits with all the other profits made by companies where Nintendo has a stake in. That way, you can never really know how much of those profits actually come from Pokemon and how many of those come from totally different companies that nobody of us knows.
[01:13:17] Shawn O’Malley: Obviously, I feel that the Pokemon franchise is kind of the anchor of a lot of Nintendo’s IP here.
[01:13:23] Shawn O’Malley: And it could really, it was arguably significantly increase the subscriptions they’re able to sell and just generally increase customer lifetime value as a part of that flywheel we’ve described. And I think there are a lot of ways, you know, with these new games and everything they’re doing now to include more micro transactions in game or sell battle passes or whatever it is to just, you know, Juice as much money as possible from everybody who interacts with the content.
[01:13:51] Shawn O’Malley: We’ve been going on for a while now. So, so it’s probably a good moment to just summarize, take a step back and say, this is where we are. And that is to say, you know, Nintendo has the largest active customer base. They have this trend toward digital distribution that is high margin, right? Because you’re, you’re not only are you cutting a middleman, but you were reducing the hardware costs.
[01:14:13] Shawn O’Malley: You have these software investments that will hopefully make the switch to powerful enough to actually enable direct gameplay for the call of duties of the world or whatever it is. Maybe not called it. It’s a bad example, but these, these big, more robust AAA games on their console. And we’ve already discussed the importance of third party games.
[01:14:33] Shawn O’Malley: And now we know about Nintendo’s IP and flywheel. So that’s a pretty holistic picture of everything with Nintendo. Is there anything else that you think deserves mention as we consider it for the intrinsic value portfolio?
[01:14:46] Daniel Mahncke: There’s one more thing and that’s the generational aspect of Nintendo’s customer base.
[01:14:51] Daniel Mahncke: And I’ve mentioned it before and it’s kind of also visible in Nintendo’s IP and franchises. But they do focus on younger players than PlayStation and Xbox, and that’s part of the reason why they are not in this big blockbuster segment. It’s not that they couldn’t be. I believe if they wanted to, they could have a new console, which definitely plays all those games.
[01:15:11] Daniel Mahncke: But every decision comes with a trade off. And when Nintendo faced that trade off, they decided to go for a more diversified audience. not necessarily geographically diversified. They are just a global company like PlayStation is also, but generationally, you know, they have a lot of young customers, but I would say they also have a lot of old customers, not the 30 to 40 year old people PlayStation has, but it’s more like Maybe parents play together with their kids on a Wii, but they would not do it on a PlayStation 5 and call, play Call of Duty with their son, right?
[01:15:44] Daniel Mahncke: At least maybe not as often. And of course, a younger audience also has implications for the business. So PlayStation’s older audience has a lot more purchase power. If you have players who are in their thirties or forties, they have a full time job. It’s probably one of their main hobbies to, after work, play some games and they want to spend a lot of money on them.
[01:16:05] Daniel Mahncke: But the switch initiated this huge change that I first realized in, I think it was 2020 because there was the pandemic and it drove like a huge increase in console sales. Many people did buy a switch as well. It was the first time that I realized that people in my age are starting to buy Nintendo consoles again.
[01:16:27] Daniel Mahncke: I mean, you said it, it was like this light switch and Nintendo was just out of our head. And then suddenly in 2020 it came back and I was like, this could be a huge change that I just never expected. And the Switch 2, if anything, I would expect that trend to continue. And then you suddenly have Nintendo with complete dominance in the kids space.
[01:16:48] Daniel Mahncke: And suddenly also competing for the grown up segment, right? And as we mentioned repeatedly now, this would be huge for Nintendo. Their business transformation does not depend on it, but it will be a huge catalyst to see immediate increases in subscriptions, in digital assets, and just in the overall business.
[01:17:10] Shawn O’Malley: I want to get to Nintendo’s valuation next. Though, I think it is important to cover some of the qualitative risks facing Nintendo. Can you just elaborate on some of the risks before we get into the valuation for thinking about what can go wrong with this investment?
[01:17:26] Daniel Mahncke: I mean, there are some exceptions when, you know, there’s a huge mispriced opportunity where you can take a little more risk on that side.
[01:17:33] Daniel Mahncke: But in this case, Nintendo has a phenomenal balance sheet. They have like 15 percent of the market cap just in cash and they have no debt. So there’s no risk on that front. And when that’s the case, the next thing I’m looking for is the price. And I tried to figure out what the market is currently pricing in.
[01:17:52] Daniel Mahncke: And if I see a disconnect to what I think will happen. So what could the market currently be pricing in that I would consider uncertain? Well, first, the market could price in higher margins than I do. And they could expect to leave cyclicality behind completely in a matter of a couple of years, or maybe just in a matter of this generation of the switch to cycle.
[01:18:15] Daniel Mahncke: As you will see in my evaluation in a minute, those are two things. where my assumptions are probably below the average Nintendo bull. I think my margins will end up lower than they would expect them. And I still do think that you will have some sort of cyclicality in the business. So I do think that, for example, at the end of the switch to cycle, revenues will come a bit down.
[01:18:38] Daniel Mahncke: And maybe some boards would disagree with me on this. But I think this is a more conservative scenario that also includes the risks of, for example, the AAA adoption, so games like Call of Duty not playing out as well on the Switch 2, and maybe even digital sales not arising as fast as we want to. Like I said, Nintendo is still the king of physical copy sales, and maybe it’s just about their customer base wanting to buy games physically, which just makes it more difficult to go into this Apple like ecosystem with more digital sales and higher subscriptions.
[01:19:14] Shawn O’Malley: All right, well, shall we do the the valuation? I think to some extent, this is what everybody’s been waiting for. And I’ll be curious how you approach it because you know, you’re taking this company that has previously been very cyclical. And it reminds me of the episode I did on John Deere a few weeks ago, where it’s like you have this very cyclical business that’s trying to transition away from that.
[01:19:35] Shawn O’Malley: And there’s this question of how well can they do that? And then how does that change? If you have a more stable business, typically you would expect people to pay a higher premium for that because there’s just less uncertainty around it. And I don’t know the picture around Nintendo seems anything, despite all the wonderful things we’ve had to say about it.
[01:19:52] Shawn O’Malley: It’s anything but certain, right? You know, they have this big switch to release and we’re not really sure how it’s going to perform. And we don’t know how this bigger business model transition is, is going to unfold. So tell me, Daniel, did you come up with a good way to value Nintendo stock? I apologize for putting you on the spot, but I want to hear what you have to say.
[01:20:11] Daniel Mahncke: That’s kind of the most important question of the episode, right? I mean, many different outcomes are possible and nobody really knows how it will all play out. And that uncertainty always makes it difficult. You’re forced to make many assumptions. That’s just the nature of it. But still, I want to go further than just stating that, you know, margins will generally improve and revenues will generally grow with the Switch 2 release, because that doesn’t really help anyone who wants to understand Nintendo’s intrinsic value, and that’s what the two of us are here for.
[01:20:40] Daniel Mahncke: So I’ve decided to take the following path. First I identified the main drivers for Nintendo’s financial success, which ultimately is also the success for investors. And the most important one would be margin expansion, obviously. Because even if we assume that Nintendo’s revenues will still be tied to console cycles, I believe that margins will increase steadily going onward.
[01:21:05] Daniel Mahncke: So they will not just come back after the end of the cycle. And history shows that Nintendo went from 39 percent gross margins in 2015 to close to 60 percent in 2024. And operating margins improved from only 7 percent in 2015 to the high 20s and sometimes even the low 30s now. I expect 2 percent annual growth for both the gross and the operating margins over the entire switch 2 cycle, which would give us 43 percent operating margin at the end in 2032.
[01:21:39] Daniel Mahncke: I want to say the switch cycle, then I’m talking about an 8 year period in which the peak is reached in 2029 or 2030. I come to that conclusion by analyzing the switch 1 cycle, which started in March, 2017, and it immediately more than doubled the year on year revenues.
[01:21:59] Daniel Mahncke: But as I said, it came from the Wii U and the Wii U basically sold no consoles. I mean, 13 million compared to other Nintendo releases is nothing. So there was a huge tailwind where many people just upgraded the console for the first time after 15 years until 2021. And that’s when sales peaked. And after that, revenues and profits were actually quite stable.
[01:22:21] Daniel Mahncke: And they only more dramatically decreased in 2024, which I expected given it was known that the Switch 2 would be released soon. And even though Nintendo says the impact is not that big, the impact of the Switch 2 release, I do think it’s the major factor for less demand in recent months. My valuation model suggests that Nintendo is actually pretty much exactly fairly valued at its current price.
[01:22:47] Daniel Mahncke: So if that’s the case, your returns would mostly depend on the multiple investors are willing to pay for Nintendo at the end of the cycle. Right now, the PE stands at 40, which is pretty expensive. However, if one believes that Nintendo can go on the path that you and me discussed today, this model is pretty conservative.
[01:23:09] Daniel Mahncke: And that would suggest that there’s still a lot of room for upside, especially long term. Now, in terms of an investment decision, I feel inclined to wait for a price somewhere in the low 60s. I think it’s not too unrealistic that Nintendo’s price is coming down slowly, but steadily, after the Switch 2 release, even if it’s successful, as you know, stocks trade on expectations.
[01:23:36] Daniel Mahncke: And expectations right now, they’re pretty high for Nintendo. Of course, that comes at the risk of missing out on some potential gains for the sake of more certainty. But in my opinion, I think that’s worth it. I would be interested in your take.
[01:23:51] Shawn O’Malley: I see a company that is becoming increasingly capital light, which is actually kind of the opposite of Disney in some ways, but you know, we keep bringing up Disney because it is the closest pure comp, even though, you know, they do make these massive investments in their streaming platform and they have a whole division of theme parks and, and cruises that soak up capital in a way that just isn’t the case with Nintendo, or at least not yet. And I think Disney is sort of an inspiring comp because, you know, we’ve talked about how Disney stock has had some trouble, but all in all, it is one of the first things people think of as the epitome of a really high quality company.
[01:24:29] Shawn O’Malley: It’s not like we’re comparing it to some dying media brand, right? Like if Disney is Nintendo’s pure comp, I mean, there are a lot worse things out there in the world. And, you know, generally I’ve been starting to get really excited about the Japanese market, which is also why I was really excited for this episode on Nintendo.
[01:24:48] Shawn O’Malley: And in part, that’s just because the valuations are, are so much lower than in the U S and also, as you know, very well. And probably a lot of listeners now, Buffett has become increasingly bullish on Japan. And I think there are five conglomerates there in particular that he’s built pretty sizable stakes in.
[01:25:06] Shawn O’Malley: You know, Japan has certainly long had these issues around corporate governance where, you know, you had a management culture that was very risk averse coming out of the real estate and financial crisis they had there in the late eighties, early nineties. And people just didn’t want to take on debt. And, you know, debt is kind of a dirty word, but in a lot of ways, or, you know, at least in some cases, it is critical to the growth of a business.
[01:25:32] Shawn O’Malley: And there has to be some amount of risk taking, right? Like if you don’t want to take any risks, we’ll just buy corporate bonds or government bonds. And in that same fold, there’s this risk averseness, they’re, they’re, they’re not necessarily inclined to take on debt, to feel growth and they’re not really prioritizing shareholder interests.
[01:25:47] Shawn O’Malley: Or again, at least historically, that was the perception of, of, you know, Japanese companies over the last 20 years. And I don’t want to go too far down that rabbit hole and like in completely distract from the conversation on Nintendo, but in short. A lot of those things are showing some, some early hints of, of structurally improving in Japan.
[01:26:05] Shawn O’Malley: And in some ways, maybe that was all for nothing, because Nintendo is probably more like a typical American tech company than truly a Japanese business. At least if we’re going off of stereotypes and actually see that as a good thing. And also why the stock is so richly valued even by us market standards, but especially by Japanese standards.
[01:26:27] Shawn O’Malley: So to me, Nintendo falls in the basket of being something like an auto zone where it’s probably a really compelling hold longterm. And you know, it’s, it’s a really high quality business with really, really great assets on his balance sheet that have probably been under monetized, but I think there’s just enough uncertainty and the shares are priced just richly enough.
[01:26:52] Shawn O’Malley: That I don’t feel that it’s a screaming buy to go add to The Intrinsic Value Portfolio today, but that’s just my two cents.
[01:27:01] Daniel Mahncke: Yeah. You know, I agree with almost everything you said. I mean, I love the business as you probably could have heard today. And I would like to be a shareholder. And if the stock were to drop to the low 60s again, while the long thesis obviously remains intact.
[01:27:15] Daniel Mahncke: I would revisit it again in an instant and I would most likely also open a position. I think at that price, surprises are just much more likely to the upside. While today, I also see surprises to the downside. And one of those positive surprises could be caused by Nintendo’s substantial cash position.
[01:27:34] Daniel Mahncke: And you just, you know, you just elaborate on it. Over 15 percent of the market cap is currently held in cash. While you could argue that buybacks or special dividend would make better use of that cash, historically I do think it made sense for Nintendo to hold a larger cash position considering the industry’s cyclicality.
[01:27:53] Daniel Mahncke: Who knows what would have happened after the Wii U disaster without that cash. With less cyclicality going forward though, and even the Japanese government now encouraging companies to increase buybacks or dividends. Nintendo could change that strategy. And one last thing to consider, we mentioned it like multiple times today, is also Nintendo’s stake in Pokemon, because as I mentioned, it’s not valued on the balance sheet yet.
[01:28:20] Daniel Mahncke: So maybe it makes sense to do a quick and dirty valuation to see just how much value that could also add to Nintendo. And assuming Nintendo holds a 50 percent stake, and I will just say, I will just act as if that’s a fact right now. And we value the Pokemon business at a PE of 20, which to me seems pretty conservative.
[01:28:43] Daniel Mahncke: I mean, it’s the highest grossing media franchise of all time. That would imply a total brand valuation of 8 billion. So that’s an extra 4 billion for Nintendo. I mean, I wouldn’t bet too much on it because I don’t expect this day to materialize and add tangible value besides the profit share at any time soon.
[01:29:03] Daniel Mahncke: I mean, maybe that’s somewhat of what you said about Japanese companies in general. I think an American company would just make a lot more of such a stake. I mean, they would tell you they own the biggest media franchise of all time. Nintendo seems to kind of hide it away. And I just don’t think that is a positive net for investors.
[01:29:24] Daniel Mahncke: But anyway, I’m really glad I researched this business. Now before we close it for today, let me quickly mention that you can actually track the intrinsic value portfolio that Sean and I build on the show every week. You can see our position sizes and holdings in our newsletter and you can sign up for it for free in the show notes below or at theinvestorspodcast.com slash newsletters to get weekly outlines of our company breakdowns, our portfolio, and even the valuation models that we do for each stock that we cover. Now, last but not least, Shawn, without giving too much away about the company you will be pitching next week. Maybe you can just give us a little teaser on what the audience and me can expect.
[01:30:11] Shawn O’Malley: Yeah. What did I tell you guys? Daniel is a, a savvy investor. And I think he showed that today and I’m glad you’re on our team. We’re going to be continuing to break down a ton of compelling companies going forward, but next week we’ll sort of alternate roles and I’ll be pitching to Daniel on a brand that is arguably as iconic.
[01:30:32] Shawn O’Malley: As Nintendo, but sort of operating in a totally different realm. And that’s all I’ll say for now. But despite being such a powerful brand, the company is much more of a value play than Nintendo is. So I think that is going to be interesting, but listeners will just have to tune in to see my pitch and Daniel will give me his feedback and questions on it.
[01:30:52] Daniel Mahncke: All right. Now let me close with a quote by Nintendo CEO Satoru Iwata. On my business card, I am a corporate president. In my mind, I am a game developer. But in my heart, I’m a gamer. With that said, we’ll see you all again next week.
[01:31:10] Outro: Thank you for listening to TIP. Make sure to follow The Intrinsic Value Podcast on your favorite podcast app and never miss out on our episodes. To access our show notes and courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permissions must be granted before syndication or rebroadcasting.
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BOOKS AND RESOURCES
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