Bottom Line: How Healthy is Nintendo’s Financial Position Ahead of Earnings & NX?

 

Ahead of Nintendo Co., Ltd (7974) earnings release and investor conference this week, let’s take a look at the gaming firm’s financials: how healthy is it really right now before the pending formal reveal of its latest hardware piece dubbed “NX” and its move into mobile?

If internet chatter and market sentiment are to be believed, Nintendo is struggling badly. Its stock is down 30% over the past 6 months, indicating investors are nervous. But is this warranted given its current situation and future prospects?

Perhaps, but I think it’s overblown. Compared to competitors Sony Corp (6758) and Microsoft Corporation (MSFT), Nintendo has smaller market capitalization and sales/income figures. But I’d argue it’s also a much more focused company that’s pure-play gaming, whereas the other two are broader corporations. When looking at strictly gaming-related figures, Nintendo’s sales are in fact lower than both though operating margin is comparable to Sony’s (Microsoft is better than both here) which indicates it doesn’t sell as well but it is actually more efficient from a profitability standpoint.

 

 

Edit: Caveats to above table is that Microsoft includes the following in its Computer & Gaming Hardware segment: Xbox gaming and entertainment consoles and accessories, second-party and third-party video game royalties, and Xbox Live subscriptions (“Xbox Platform”); Surface devices and accessories (“Surface”); and Microsoft PC accessories.

Additionally, it does not directly report Operating Income at its segment level but rather Gross Margin, so I have taken this figure out of the table for now. I would like to get a better estimation of Operating Income before updating again.

The main knock on Nintendo lately is that the Wii U console, released in late 2012, has been a failure. Below shows Wii U lifetime sales each fiscal year compared to both Wii and Nintendo 3DS, aligned for their launch timings. It’s true that sales of the console have been lackluster compared to recent consoles and Nintendo’s handhelds, but the success of the Nintendo 3DS in particular has supporting sales and earnings since its release in 2011.

 

 

Still, you’ll notice below that from a monetary standpoint, Nintendo is actually not trending downward. In fact, it turned an operating profit in 2015 for the first time since 2011, just after peak success of the Wii (released in 2007). Its net income was also positive in 2015 compared to losses in 2014 and 2012. Sure overall sales have declined a bit over the past five years, but last year’s figure of ¥549 trillion (~$5 billion) is only around 15% lower than 2012. Additionally, taking into account its liabilities, the firm has around just under ¥100 trillion ($1 billion) of cash available which it can use to invest in future endeavors.

 

 

And Nintendo is also a software company, which is a key component of its overall business. Software sales have softened a bit over the past five years, but I expect a bump once NX is released in time for 2017 financials.

 

 

Which brings me to the key going forward, as most gamers understand: Nintendo’s new NX hardware has to be a hit, its foray into mobile needs to be monetized and it needs great games in order to achieve a financial rebound. It has to differentiate NX from Wii U, similar to how Wii separated itself from its predecessor in GameCube. The way Wii had motion controls, NX needs to stand out.

Common speculation has it that the NX is a cross-over between a console and handheld, and that it will bridge the gap between home and mobile gaming plus offer an online infrastructure that is superior to the Wii U and Nintendo 3DS. But Nintendo has yet to commit to any sort of messaging on the new console yet. The firm did release its first mobile game, Miitomo, this month however has yet to show any sort of monetization. It’s more of a foundation upon which to build future mobile games.

All in all, Nintendo’s current financial situation is somewhat concerning compared to recent years and its big competitors, but it’s not as dire as its stock performance or internet message boards will have you believe based on profit rebounding and cash on hand to invest in its future. Do you agree?

Sources: Nintendo Co., Ltd, Sony Corp, Microsoft Corporation, Google Finance.

Note that all figures above are based on today’s exchange rate between JPY and USD.

-Dom