Nintendo Stock Down 40%, Future Hinges On Wii U [Game Trader]Today, the Big N slashed their FY 2012 earnings guidance by 82%. They also announced a huge price cut on the 3DS system from $250 to $170. These are the moments that value investing is made for. Was I wrong to buy NTDOY, Nintendo’s ADR, at $33/share? Well it is trading below $20/share today, so the answer has to be yes. Was I wrong to buy Nintendo at $28/share? Yes again. Was it wrong to buy Nintendo at $22/share? Time will tell. My investment time horizon on Nintendo is 3-5 years and the case for revenue growth will become more compelling as the Wii U rolls out. This coupled with more releases of quality 3DS titles could stem the bearish tide.
What investors must ask themselves is if they believe Nintendo may have just reported the kitchen sink quarter? Most high flying tech companies would have crashed 50% if they announced a negative revision to earnings guidance of 80%. Nintendo, NTDOY, is currently down slightly more than 11% on this news. In my opinion, Nintendo has priced in a large part of this bad news and we are at the trough for their earnings.
"If Wii U is a failure, and doesn’t sell well at all, this company could just be at the beginning of its troubles."
Nintendo is down nearly 40% in 2011. It has underperformed the Nikkei since the disaster on March 11. One would be hard pressed to find anyone in the gaming community that has a good thing to say about the company’s future and that is why I think it remains a great contrarian buy. At their current share price, they are being valued at 2 times their cash account. With a current market capitalization of $20 billion dollars, they are smaller than Zynga’s purported IPO valuation. I do not think that Nintendo is a takeover target, mainly because insiders own a large amount of the shares and will be reluctant to sell at such depressed levels.
The bear argument is that Nintendo will hemorrhage its remaining cash hoard over the next few years as 3DS and Wii U fail to keep up with the iOS/Android momentum. While it is undeniable that there may be a secular shift away from dedicated handheld gaming devices towards smart phone based casual games, the real question is if there is still room for consoles in the consumer electronics ecosystem. I think so. As iOS and Android bring in more casual gamers, the gaming industry’s pie can grow.
There are a few things that give Nintendo a moat that most jaded gamers and media reporters gloss over without even mentioning. Nintendo has some of the best brands in the entire world and they have a reputation of making great controllers and pushing innovation further. I am not sure if any of our IndustryGamers readers can honestly say that they felt the same level of accomplishment after beating Angry Birds or Plants vs. Zombies that they felt after beating Mario 64. Try playing a first person shooter on a smart phone and then tell me that you think consoles are dead. There is value in having buttons.
Nintendo's fall has not been pretty...
Nintendo has given shareholders great returns in the past if you could time your entry and exit properly. If you bought Nintendo at the bottom of the tech bubble in May of 2003 for $8.55/share and sold it at the all-time high of $78.50/share in October of 2007, you could have returned 818% in less than 5 years. I am not saying that the next console cycle has any chance of producing those types of returns, but as I said previously, the case for strong year over year revenue growth at the company is becoming easier to make. I see a potential gain of 100-200% in a 3-5 year time horizon from the current levels at which the stock is trading. It can be lonely on this side of the trade and I have been here before. I made contrarian investments in banks and biotechs in 2008-9 that have paid off, and I was wrong before I was right in those cases as well.
It comes down to Wii U. If it is a failure, and doesn’t sell well at all, this company could just be at the beginning of its troubles. If this stock rebounds as I expect it will, investors could do worse than buying up a great franchise like Nintendo (NTDOY ADR) below $20/share.
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Investors should do their own research or consult their advisor before acting on this information. Panoptic Management Consultants, Inc. is a Registered Investment Advisor that was founded in 2008. Please go to our website www.panopticinvesting.com for more information about fundamental investing as well as technical analysis. For prospective client inquiries please contact us at panopticmc@gmail.com
Full Disclosure:
At the time of this article our CEO, Asif A. Khan, CPA, his family members and/or Virtue LLC had the following positions:
Long Nintendo
At the time of this article, clients of Panoptic Management Consultants Inc. had the following positions:
Long Nintendo
