Introduction
In the gaming industry, there are a few household names that bring forth a rush of feelings of both nostalgia and wholesomeness as soon as we hear their names. Today, we will be analyzing a company that played a major part in our childhoods and discussing whether we should let it play a major part in our adulthood as well.
With a legacy spanning over decades and a portfolio of beloved franchises around the globe, we bring to you an analysis of a name that requires no introduction – Nintendo ADR (NTDOY), a titan in the gaming industry.
Company Overview
Headquartered in Kyoto, Japan, in the late 19th century, Nintendo initially began their journey as a manufacturer of playing cards before venturing into various businesses including toys and electronic entertainment. They can be characterized as a global leader in the interactive entertainment industry, renowned for its iconic franchises, innovative products, and creative gameplay experiences.
Nintendo’s breakthrough came with the introduction of the Nintendo Entertainment System (NES) in the 1980s, which revolutionized the home video game console market and laid the foundation for the company’s future success. Since then, Nintendo has continued to innovate and captivate audiences with groundbreaking consoles such as the infamous Game Boy, Wii, and Nintendo Switch.
Key to Nintendo’s success are their beloved franchises like Super Mario, The Legend of Zelda, and Pokémon, which have garnered a dedicated fanbase around the globe. Additionally, Nintendo has also diversified its business through partnerships and ventures into mobile gaming and theme parks.
Financial Performance
Now that we have revisited our childhood memories attached to Nintendo, let’s dive into some numbers!
Stock Price Movement
As we have seen for various entertainment and gaming companies in our previous analysis’, the pandemic was quite friendly to firms operating in these industries. As lockdowns ensued and the world slowed down, the online gaming industry was booming, which translated into the stock price of these companies.
In between 2019 and early 2021, the NTDOY stock underwent an upward rally that allowed the stock to spike by more than a 100%, from trading around $7.5/share in 2019, the stock jumped to a peak of $16.27/share on coincidentally the Valentine’s Day of 2021.
Subsequently, as the pandemic slowly receded post-2021, the stock underwent a bearish phase which continued till the 3rd Quarter of 2023, as the black swan event (Pandemic) serving as a backbone for the boom no longer existed.
In the last Quarter of 2023, the stock finally started recovering and gained back 30% of its value. At the moment, the stock seems to be in an upward trajectory with no need for a black swan event providing it support this time!
Financial Metrics
We will be conducting the entire financial metrics analysis in JPY to make sure they are consistent with Nintendo’s financial statements.
Revenue Trend:
The company’s financial metrics indicate a generally positive trajectory over the past few years. We saw remarkable Revenue growth from 1.2 trillion in 2019 to 1.76 trillion in 2021, signaling strong top-line performance.
However, there was a slight dip in revenue in 2022 and 2023, falling to 1.7 trillion and 1.6 trillion, respectively.
This slight decline was primarily attributed to the world coming out of the pandemic as discussed above. However, factors like like market saturation, increased competition, and shifts in consumer demand also played a substantial role.
Net Income:
The Net income showed a similar trend to the firm’s revenue trajectory. Increasing from 194.01 billion in 2019 to 480.38 billion in 2021 (Rising by about a 147% in a span of two years).
Consequently, as the revenues faced a hit, so did the Net Income and experienced a slight decrease in 2022 and 2023, totaling 477.69 billion and 432.77 billion, respectively.
This shows that the operating margin of the firm is resilient and remains stable despite the varying performance in terms of Revenue which demonstrates effective cost management by the firm.
Earnings Per Share (EPS):
Earnings Per Share as well followed a similar pattern. EPS steadily rose in the past 5 years until 2022, peaking at 404.67, then slightly declining to 371.41 in 2023. This decline in EPS occurred due to two factors as both the earnings took a hit and the company diluted their shares (Stock split). With these two factors combined, the dip in EPS is not alarming.
Free Cash Flow (FCF):
Furthermore, free cash flow surged from 159.79 billion in 2019 to 605.1 billion in 2021, demonstrating the company’s ability to generate ample cash. However, there was a noticeable decline in 2022 and 2023, dropping to 282.07 billion and 300.65 billion, respectively. This recent decline was alarming and could pose challenges in funding future growth initiatives or meeting financial obligations for the firm.
In conclusion, while the company showed robust financial performance until 2021, the slight declines in 2022 and 2023 are noteworthy.
Investors Perspective
From an investor’s perspective, Nintendo’s recent bull run seems promising. However, that does not necessarily mean that the stock is a good buy at the moment.
As the legendary investor Benjamin Graham says “The intelligent investor realizes that stocks become more risky, not less, as their prices rise—and less risky, not more, as their prices fall.”
The current rise in the share price presents a contrary picture to the declining financial performance of the firm we have discussed above which further adds to the risk involved with investing in the company.
When it comes to dividend payouts, over the past five years, the firm’s dividend yield has shown some variability. Ranging from a minimum of 1.75% in 2020 to a maximum of 4.51% in 2021. On average, firm’s dividend yield has been around 3.00%. This average provides a more stable perspective, indicating the typical dividend payout relative to the stock price over this period has been modest.
Conclusion
To conclude, Nintendo ADR (NTDOY) holds a prominent position within the gaming industry. For those seeking exposure into the entertainment sector, the stock can serve as a midfielder and a good addition to their portfolio. With its rich history and brand name, the company shows resilience. However, on the flipside it’s imperative to realize a rich past does not guarantee a bright future.
The entertainment industry is a prime example of survival of the fittest and survival in this industry is only possible through continuous innovation. The firm has produced ground-breaking breakthroughs like the Gameboy in its early years. However, in recent years we have yet to see another such invention.
Based on our findings, Nintendo’s stock seems to be overvalued and until it reaches an equilibrium price it does not look a profitable investment, at least at the current entry point.
Article By: Hamza Bashir. An avid investor and strategic consultant with expertise in stock analysis. He has been investing, analyzing, and writing articles on the stock, cryptocurrency, real-estate, and commodities market for over 3 years.