Thursday, December 9, 2010

Smartphones Crushing Nintendo

According to a new survey released by market research firm Interpret, one-time fans of portable gaming systems like the DS and PSP are ditching them in favor of smartphones like Apple's iPhone.

The news comes amid heightened rumors that Sony, and its joint mobile phone venture Sony Ericcson, is about to unveil an Android-based smartphone that'll integrate PSP game functionality.

"Gamers appear to be defecting from their handheld gaming devices to phones to get their gaming kicks," says Interpret's report, which polled 9,000 U.S. consumers. "A full 27.2% of consumers who indicate that they play games on their phones only (and not on the DS/PSP) actually own a DS or PSP, but do not actively use the device(s)."

Those defectors are being joined by some of gaming's biggest names. John Carmack, legendary designer behind classics like Doom, has been an advocate of the iPhone as a gaming system for several years and has released several high-profile titles via Apple's App Store. And Epic Games subsidiary ChAIR is set to release an iPhone/iPad exclusive game this week, Infinity Blade, that could well outshine anything we've seen so far on purpose-built portables.

"The proliferation of highly multifunctional smartphones and messaging phones is a very real threat to the dominance by the DS and PSP of the handheld gaming market," Courtney Johnson, Interpret's Manager of Research and Analysis, said in a statement. "Devices which satisfy a variety of entertainment and utility are fast outstripping single-function devices as consumer favorites."

Are you leaving your DS or PSP at home in favor of a gaming-capable smartphone? Let us know why in the comments.

Wednesday, September 29, 2010

Nintendo Issues Dismal Forecast

Nintendo today announced that it expects to report a loss of 15.64 yen per share for the six months ending September 30, 2010. Previously, they had forecast net income of 547.38 yen for these six months.

The company also revised downward its forecast for the full year ending March 31, 2011. Instead of earning 1,563.94 yen per share for its fiscal 2011, it now expects to earn 703.78 yen.

This sharp reversal in Nintendo's expected financial performance means that its own forecasted net income per share is expected to drop by 60.6% from the 1,787.84 yen it earned in fiscal 2010.

Very little seems to be going well for Nintendo. The stock seems very overvalued at over 40 times earnings and shareholders should seriously consider selling their stock.

Cut and paste the following URL into your browser to read Nintendo's complete press release on its revised forecast.

Friday, July 30, 2010

Nintendo Reports Quarterly Loss

Nintendo reported its first quarterly loss in more than two years due to a strong Yen and lower demand for DS players. The net loss was 25.2 billion yen ($291 million) in the three months ended June, compared with a 42.3 billion yen profit a year earlier. The game maker said it booked a foreign currency-related one-time loss of 70.5 billion yen.
The company yesterday said the euro weakened to 107.81 yen in the quarter, from 124.92 yen as of March 31, while the dollar fell to 88.48 yen from 93.04 yen. A stronger Japanese currency reduces the value of Nintendo’s overseas sales and assets. Nintendo maintained its full-year exchange-rate estimate at 120 yen for the euro and 95 yen for the dollar.
First-quarter sales of DS hardware dropped 47 percent to 3.15 million players, while those of software dropped 23 percent to 22.4 million units, the company said. Nintendo released 168 titles for the handheld player in the period, compared with 278 games a year earlier.
Nintendo’s stock price is down 23 percent this year, while the benchmark Nikkei 225 has declined 14 percent.
For the full fiscal year ending March 2011, Nintendo continues to forecast a net profit of 200 billion yen and an operating profit of 320 billion yen on revenue of 1.4 trillion yen.

Wednesday, October 29, 2008

Battered Shareholders Await Nintendo Forecast

Nintendo shareholders are skittishly awaiting tomorrow’s scheduled earnings forecast. On August 29th the company raised its forecast fiscal 2009 sales by 11.1% and its net income by 26.2%. A large part of the forecast growth in net income occurred because Nintendo management revised expected exchange rates to 105 yen per U.S. dollar from 100 and to 160 yen per euro from 155. As of today the actual rates are 97 yen per dollar and 125 yen per euro.

The surging value of the yen and the rapidly deteriorating economic conditions spell trouble for Nintendo. Shareholders now need to hope that Nintendo has not lost money by investing its cash hoard in financial instruments that have collapsed in value.

The recent precipitious decline in the price of Nintendo stock to 22,000 yen on October 28th strongly suggests that shareholders need to brace themselves. The stock reached a high of 73,200 yen on November 1, 2007; therefore, it has fallen 70%.

Nintendo has no debt and had $12.5 billion in cash as of March 31, 2008, so it is well positioned to survive this worldwide economic collapse. In fact, there is probably not a company in the world with as strong a balance sheet as Nintendo.

Tuesday, August 19, 2008


It is time for Nintendo of Japan to address the weakening price of its shares by taking meaningful action. Its stock price closed at 48,700 yen on August 19, 2008, representing a decline of 33.5% from its November 1, 2007 peak of 73,200 yen and just slightly above its 2008 low of 45,600 yen. While some of the decline in its stock price is attributable to general market weakness, fear of recession, a strong yen, Wii supply shortages, topping out of sales of the DS, and game console price cuts by Microsoft and Sony, the fact is that Nintendo management has done nothing to curb the decline in its stock price.

The market value of Nintendo has fallen from a peak of about $85 billion to about $56.6 billion, a decline of $28.4 billion. It is now trading at a PE multiple of 19.2, a PEG ratio of 0.57, and a dividend yield of 2.6% based on its forecasted net income per share for its fiscal year ending March 31, 2008.

What Needs Done

Nintendo’s annual general meeting of shareholders was held on June 27, 2008 and no meaningful action was taken either prior to or at that meeting to maximize shareholder value. Among other things, Nintendo management continued to ignore the crying need to split its stock.

At present, a 20 to 1 split seems to be appropriate. Such a split would, other things being equal, cause Nintendo’s share price to drop to about 2,435 yen or about $22.13 per share versus the current $442 per share price.

Stockowners who currently own 100 shares would end up owning 2,000 shares if Nintendo did a 20 to 1 split.

Remove 100 Share Minimum

Nintendo also needs to drop the current 100 minimum share purchase and allow people to buy a single share. These two actions alone would bring share ownership within the reach of a significant number of new shareholders who have been prevented from buying Nintendo shares by the exhorbitant cost. Given its current share price and 100 share minimum, purchasers are now required to shell-out about 4.87 million yen or $44,273 to own a piece of Nintendo and that is simply unreasonable.

Microsoft has about 150,000 shareholders and Sony has about 630,000. Nintendo should be embarrassed by the fact that it has only 34,315 shareholders as of March 31, 2008. After all, in early 2007, Nintendo supported the secondary offering by Banks Shareholding Service Corporation of 1.987 million shares of Nintendo and company officials stated they were supporting the offering because it would help widen its shareholder base and encourage shareholding by individual investors. Nintendo stated that it had experienced a growing interest by individuals in owning Nintendo stock, which it attributed to the growing popularity of its DS handheld player and Wii console.
Given these expressions of individual interest in owning Nintendo stock and the company’s desire to broaden ownership, it is disconcerting that Nintendo maintains its 100 share minimum purchase size on the Tokyo Stock Exchange (TSE) and/or fails to split its stock.

Following the Nintendo 2007 annual meeting, company officials acknowledged they were aware of the need to make share ownership more affordable. At the same time, they mentioned that the Tokyo Stock Exchange was requiring all its listed companies to convert to book-entry securities by June 2009. Nintendo officials then went on to say that a stock split would be too expensive, therefore, they had decided to do nothing until January 2009.

The explanation offered by company officials as to why they had decided to not split the stock is absurd given that Nintendo has less than 35,000 shareowners and there is nothing to prevent them from moving to a book-entry system before 2009. Furthermore, their inaction reveals a cheapness that is unacceptable, inappropriate, and unnecessary for a Topix 30 corporation with more than $10 billion in cash. Nintendo shareholders know that the benefits of a stock split and an increase in the number of shareholders far outweigh any short-term costs. This is not the time for shareholders to allow Nintendo to revert to its legendary penurious ways.

Increase Dividend Payout Percentages and Frequency

A third step that Nintendo needs to take is to increase the size and frequency of its dividend. At present, Nintendo pays out the greater of 33 1/3% of its operating income or 50% of its net income. Its dividend is comprised of a paltry interim dividend of 140 yen paid to shareholders of record as of September 30th and a year-end dividend paid to shareholders of record as of March 31st. In recent years the year-end dividend has dwarfed the interim amount. Given Nintendo’s abundant cash position, it needs to adjust its payout to the greater of 50% of its operating income or 75% of its net income.

The unusual nature of the small interim and large year-end dividends causes confusion and inaccurate reporting. For example, E*Trade Financial shows that Nintendo’s dividend yield is 0.14%, which is totally wrong. The actual yield on Nintendo for the past 12 months, at its recent price of 48,700 yen, is 2.6% since an interim dividend of 140 yen was paid to stockholders of record as of September 30, 2007 along with a 2008 fiscal year-end dividend of 1,120 yen that was paid to stockholders of record as of March 31, 2008.

It could be argued that the current dividend yield on Nintendo is really 2.8%, which is the interim dividend of 140 yen already paid plus the company forecasted 1,230 yen year-end 2009 dividend divided by the current price of 48,700 yen. Nintendo’s dividend yield is 5 times larger than the yield on one-year Japanese government securities and three times the yield on 5-year Japanese government bonds. Individual Japanese investors would relish the opportunity to own such a secure high yielding investment.

Nintendo should begin to pay regular quarterly dividends like most other publicly-held corporations. This simple change would help financial reporting accuracy and be well received by shareholders who value Nintendo as a source of income.

Complete Existing Stock Buy Back Program and Institute A New One

The fourth important step that Nintendo needs to take is to complete its current stock buy back program and to announce a new one. At its annual meeting on June 27, 2002 the board of Nintendo authorized the company to buy back as many as 14 million shares at a maximum price of 250 billion yen.

During the first fiscal year of that program the company had bought back 7,334,448 shares at a cost of 81.521 billion yen. During the following 12 months, Nintendo acquired an additional 650,107 shares at a cost of 5.378 billion yen. In its 2005 fiscal year it acquired an additional 3,607,056 shares at a cost of 41.998 billion yen. In 2006 it purchased 1,002,389 more shares at a cost of 25.216 billion yen. Nintendo bought an additional 1,171,987 shares during its fiscal 2007 year. In fiscal 2008 it acquired an additional 13,366 shares.

During the six years ended March 31, 2008 Nintendo repurchased 13,779,353 shares of its own stock or 9.7% of its outstanding shares. The amount spent to buy those shares was 156.184 billion yen. The average price Nintendo paid for its treasury stock was 11,335 yen per share. During the first three months of its 2009 fiscal year it acquired an additional 1,530 shares. These share purchases since 2002 have left Nintendo with the ability to buy an additional 219,117 shares under the June 2002 authorization.

Given the facts that Nintendo stock is under downward price pressure and it has a war chest of more than $10.7 billion in cash and securities, it is time for Nintendo to complete its 2002 buyback authorization. Increasing the size of its treasury stock holdings to the 14 million share limit authorized in 2002 would only cost about $97 million at the current stock price. It is intuitively obvious that such share purchases would represent a far better use of Nintendo cash than investing it in Japanese securities at rates of less than 1% as is currently being done.

Nintendo needs to also announce that it is instituting a new stock buy back program to show the investing public that it believes its shares are undervalued. To be meaningful, the new buy back program should authorize the purchase of an additional 10 million shares. These shares would represent slightly less than 8% of the outstanding shares owned by shareholders after completition of the 2002 program.

At the current stock price, such a share buy back would cost about $4.4 billion. This amount is less than twice the positive cash flow resulting from Nintendo’s operating activities in Fiscal 2008 and less than 50% of its enormous cash position.

Create Nintendo Sponsored ADRs

The fifth step that Nintendo needs to take is to introduce Nintendo sponsored ADRs and have them listed on the NYSE. Presently, unsponsored Nintendo ADRs trade on the over-the-counter market (pink sheets) under the symbol NTDOY and do not get the respect or coverage they deserve from the financial community. In fact, numerous investors avoid investments in pink sheet listed stocks like a plague because of a lack of transparency. A listing of sponsored ADRs would give Nintendo management an opportunity to tell its story to the largest possible audience of potential investors.

Eight shares of NTDOY currently equate to one share of Nintendo of Japan and these ADRs would have to be incorporated into the newly sponsored shares to avoid confusion. The listing of Nintendo sponsored ADRs would simply recognize the fact that almost 50% of Nintendo’s stock is owned by stockholders outside of Japan, and it would significantly lower the transaction costs associated with purchasing shares of Nintendo.


The aforementioned recommended actions need to take center stage and be acted on swiftly. President Satoru Iwata left the door open to these changes in October 2007 when he was asked the following question: “Now that DS and Wii are in a constant sales stream, huge amounts of cash flow that you can not use for ordinary business is expected for several years to come. Are you going to pile up your cash reserves, or will you use them for some reasons, or will you make a return to shareholders?” Iwata responded, “If our cash deposits simply keep increasing at the current pace, it is possible that we may be required to take a new step that we have never done nor announced before.”

Turmoil in the world markets caused by toxic financial instuments has caused a number financial institutions to fail and more are expected. The ricochetting bullets from these failures are hitting corporate balance sheets, since surplus corporate funds are invested in these exploding financial instruments and held by these failing institutions. At times like this, Nintendo’s cash hoard of more than $10 billion becomes a significant liability and a cause for shareholder concern. It is simply impossible for Nintendo to invest those funds risk-free while earning a favorable return. Numerous other corporations have already had to take charge-offs due to bad investment of their surplus funds and Nintendo cannot escape that fate.

Nintendo’s problem is exacerbated by the fact that its earnings have become increasingly impacted by volatile exchange rates. For example, its report for the quarter ended June 30, 2008 showed it enjoyed a foreign exchange gain of 29 billion yen and that represented 22.1% of its before tax income.

Without question, Nintendo’s earnings have become heavily dependent on exchange rates. Any attempt to hedge would worsen its predicament and most likely put them in the hands of investmant banking wizards who have proven they are adept at destroying things they touch

Market conditions require Nintendo to take the actions presented in this article. It would be foolish to ignore the timely importance of these recommendations.

Tuesday, December 25, 2007

Nintendo Stockowners Anxiously Await Announcement

In October of 2005, 2006, and 2007 Nintendo announced upward revisions of their forecasted respective fiscal year ending March 2006, 2007, and 2008 earnings and dividends. Its October 2006 modification was followed by further upward revisions issued on January 10, 2007. No such upward modification announcement was made in January of 2006.

Investors looking for a revised forecast of earnings and dividends by Nintendo need to focus their attention on a possible announcement by the company around January 10, 2008. A failure to announce upward modifications would likely cause a cool response and disappointment from Nintendo stockowners who have grown accustomed to seeing long lines of Wii buyers being unable to buy the console.

For the past month, as Christmas shopping accelerated, the Wii console has generally garnered eBay bids of $100 and more above the retail price. At such prices, eBay resellers are surely making more than either Nintendo or its licensed retailers.

Nintendo’s stock price action indicates that stockowners remain relatively confident that the public’s appetite for the Wii will not wane. Knowledgeable observers believe that sales of the Wii in 2008 and future years will now be driven by an abundance of video games likely to be introduced by Nintendo itself and other game developers.

Thursday, October 25, 2007

Nintendo’s Income Growth Limited by Wii Production

Nintendo’s failure to anticipate the demand for the Wii and its inability to ramp-up production are seriously restraining its growth. Furthermore, Wii console shortages have encouraged Microsoft and Sony to slash Xbox and PS3 prices and capture many would be Wii buyers.

Unit sales for the Wii revealed in the October 25, 2007, Nintendo earnings release show Wii sales of 1.143 million per month for the quarter ended April 30th, 1.3 million per month for the quarter ended September 30th, and expected sales of 1.695 million per month for the six months ending March 31, 2008. While these numbers show increased production, they fall far short of meeting actual demand.

Nintendo itself has acknowledged that there will be a significant shortfall of Wii consoles for the second consecutive Holiday season. Company officials, however, have continually refused to provide future Wii production numbers creating the impression they do not have a good handle on the situation.

In fiscal 2007 Nintendo’s net income increased by 77.2%. Its net income growth rate is now forecast to decline to 57.8% in fiscal 2008. While such income growth is admirable, the actual rate would be much greater if Wii supply was more closely aligned with demand. It remains to be seen how shareholders will react to a declining growth rate in net income.

The Wii shortage is best evidenced by the continuous sales of vast numbers of Wii consoles on eBay at substantial premiums above MSRP. Meg Whitman, the CEO of eBay, needs to send a special Christmas present to Satoru Iwata, Nintendo’s CEO, thanking him for all the business the Wii shortage has brought to eBay. She might even suggest that Iwata invest some of Nintendo’s abundant cash, which totals about $8 billion, in eBay stock while the Wii console shortage persists.

It is understandable when a manufacturer misses one Holiday selling season because of insufficient product. It is unacceptable to miss two in a row!