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!

Monday, September 10, 2007

Nintendo’s Near Term Outlook Gets Clouded

Nintendo’s rumored problem ramping-up production of the Wii console and the company’s failure to comment casts a cloud over the near term outlook for its common stock. That outlook is further clouded by the weakness of the dollar.

In its last forecast dated July 25, 2007, Nintendo modified its projected fiscal 2008 earnings to reflect sales of 16.5 million Wii units, which was up from the 14 million units forecast in its April 26, 2007 release. At the same time, it revised its earnings to reflect an exchange rate of 118 yen per U.S. dollar versus its previous forecast of 115.

Since the last Nintendo investor release, the dollar has collapsed to 113 yen on September 10, 2007. If that exchange rate persists, it will cause a downward revision in earnings of approximately 30 billion yen ($266 million) in fiscal 2008.

Nintendo is not expected to release the results of its second quarter until the latter part of October, 2007. An upward revision in earnings in October similar to what it did last year seems unlikely.

Thursday, August 2, 2007

Who Is Buying Nintendo Stock?

Given the price rise of Nintendo stock, it seems appropriate to find out who owns its shares. It is especially important to discover whether the number of shareowners is expanding and if they are adding to or liquidating their holdings.
Treasury Stock
Nintendo has authorization to issue 400 million shares. Of those shares, 127,903,013 were outstanding on March 31, 2007.
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. By March 31, 2003 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. It purchased 1,002,389 more shares at a cost of 25.216 billion yen in 2006.
Nintendo bought an additional 1,171,987 shares during its fiscal 2007 year bringing its treasury stock holdings to 13,765,987 shares. During the five years ending March 31, 2007 Nintendo repurchased 9.7% of its outstanding shares. The amount spent to buy those shares was 155.396 billion yen ($1.26 billion). The average price Nintendo paid for its treasury stock was 11,288 yen ($917.7 million).
It is important to understand that the Nikkei stock average declined 28% in the 12 months ending March 31, 2003, which was during the time the board authorized Nintendo to buy back shares. The board’s action should provide a source of comfort to Nintendo shareholders. After all, Nintendo was willing and able to step-up to support its stock through share repurchases when those shares were under significant downward pressure. Nintendo’s president recently reaffirmed that the company remains willing to provide support for its shares in the event that is needed in the future. Furthermore, Nintendo is able to buy back shares because it had $8.15 billion in cash at the end of its 2007 fiscal year and that cash hoard grew by $1.27 billion in 2007 alone.
The Owners of Nintendo
There were 32,371 Nintendo shareholders as of March 31, 2007. By comparison, Sony has 630,554 shareholders and Microsoft has about 150,000.
The largest single Nintendo shareholder is Hiroshi Yamauchi who owns 141,650,000 or 11.07% of the company. His shares have a market value of about $6.4 billion, and he reportedly is now the third wealthiest man in Japan. He was Chairman, President and undisputed leader of Nintendo for 53 years from 1949 until he retired in 2002 at the age of 75.
Among other things, Yamauchi is credited with keeping the Seattle Mariners in Seattle. He achieved that distinction by buying the biggest piece of ownership in The Baseball Club of Seattle, which was organized to buy out the Mariners owner, who had run into financial problems in his other ventures. The group formed to rescue the Mariners originally approached Bill Gates of Microsoft, but he chose not to participate.
After being rebuffed by Gates, the group decided to approach Microsoft’s Redmond, Washington neighbor, Nintendo of America (NOA). Hiroshi Yamauchi’s son-in-law, Minoru Arakawa was President of NOA and had established himself as a leading member of the Seattle business community, so Yamauchi decided to fund a majority of the $125 million purchase price. In 1992 he paid $67 million for his 54% ownership stake in the Seattle Mariners. Interestingly, in the summer of 2004 he sold his entire stake in the Mariners to Nintendo of America for the same amount he paid even though Forbes estimated that the Seattle Mariners franchise was worth more than $400 million.
Yamauchi, apparently, had no interest in baseball and purchased his share as a goodwill gesture to help local leaders keep the team in Seattle. In 13 seasons as an owner, Yamauchi never visited Seattle or witnessed a game.
Banks and Trust Companies
The second through tenth largest shareowners are all banks or trust companies. The 2nd largest owner is the Bank of Kyoto, Ltd. with 6,387,300 shares and the 10th largest is Mellon Bank Treaty Clients Omnibus with 3,084,500. Most of these shares are probably held in custodial accounts for the benefit of their customers.
Directors
Unlike their counterparts in publicly-traded corporations in the United States, the officers and directors of Nintendo are not flush with stock. As a group, the 13 members of Nintendo’s board own only 14,315 shares. The value of those shares is about 701 million yen ($5.7) million. Satoru Iwata, Nintendo’s President, is the largest stockowner among directors with 4,300 shares. The second largest stock position is held by Takao Ota, General Manager of Manufacturing, who owns 2,079 shares.
Foreigners
As of March 31, 2006 foreigners owned 41% of the outstanding shares of Nintendo of Japan. This was a higher percentage than observed in 2005 (38%), 2004 (39%), 2003 (30%), and 2002 (37%). The noticeably lower percentage in 2003 is worth noting because that was when the stock market in Japan was in a sharp decline. During that stock market decline, Nintendo’s foreign owners showed a greater propensity to liquidate their holdings. This trait did not endear foreign shareowners to Nintendo officials.
Institutional Owners of Nintendo of Japan
Various investors, including mutual funds, are required to disclose their portfolio holdings quarterly to the U.S. Securities Exchange Commission (SEC). A comparison of those quarterly reports reveals if a fund is accumulating or liquidating a stock. Investors like to know if and when professional money managers are accumulating or liquidating a position, since it could influence a stock’s price.
Exhibit 1 shows a listing of 41 current shareowners of Nintendo of Japan. It also shows whether an owner increased or reduced their position since their last quarterly report. These owners hold 5,162,763 shares or 4.0% of all the shares outstanding. During their most recent quarter they were net buyers of 668,988 shares, a 14.9% increase in their holdings.

Exhibit 1Institutional/Mutual Fund Owners of Nintendo of Japan 2007
OwnerShares Change
Fidelity Diversified International Fund1,850,000150,000
William Blair & Company 865,700 865,700
Fidelity Overseas Fund602,500 -84,700
Fidelity International Discovery Fund340,10036,600
Vanguard Pacific Index Fund 316,915 10,140
Fidelity Advisor Diversified International Fund225,200 14,300
Fidelity Japan Fund222,000 -211,600
Fidelity Select Software and Computer Services 137,800 -9,300
The Japan Fund83,600 -74,600
Fidelity International Small Cap Opportunity 79,600 1,500
Fidelity Select Technology Portfolio76,900 -3,100
Fidelity Advisor Overseas Fund 53,400 -10,900
Fidelity Worldwide Fund41,400 -1,700
Fidelity Pacific Basin Fund 33,500 1,500
Matthews Asia Pacific Fund30,400 -5,800
Matthews Japan Fund 29,315 -17,900
Matthews Asian technology Fund16,585 1,000
iShares S&P/Topix 150 Index Fund 16,400 16,400
Excelsior Pacific/Asia Fund16,000 -24,000
Morgan Stanley Institutional Active International 10,900 NC
Templeton Transamerica Global10,700NC
SPDR Russell/Nomura Prime Japan ETF 9,248 9,248
MFS International Equity8,900 -1,200
Fidelity Advisor Japan Fund 8,500 600
iShares S&P Global Technology Sector Index Fund8,100 8,100
Fidelity Strategic Income and Dividend Fund 7,800 -1,100
Gartmore Worldwide Leaders Fund7,100 NC
ICON Asia-Pacific Region Fund 7,000 7,000
ICON International Equity Fund6,900 6,900
Gartmore International Growth Fund 6,700 900
Pacific Capital International Stock Fund6,700 -1,200
Fidelity Global Balanced Fund 6,000 3,600
IXIS Hansberger International Fund4,400 NC
Henderson Global Technology Fund 3,500 NC
Capital Guardian Global2,700 NC
Van Kampen Active International Allocation 2,600 NC
Fidelity Select Multimedia Portfolio2,200 -700
Morgan Stanley Institutional International Magnum 2,100 NC
Matthews Asia Pacific Equity Income2,000 NC
Commonwealth Japan Fund 1,000 NC
Gartmore International Index Fund400 -16,700
Total5,162,763 668,988

Sixteen of the owners in Exhibit 1 are recent net buyers, 15 are net sellers, and 10 did not change (NC) their holdings. The largest net buyer is William Blair & Company, which acquired all of its 866,700 shares between December 31, 2006 and March 31, 2007. The second largest buyer is Fidelity Diversified International Fund, which acquired an additional 150,000 shares.

In addition to William Blair & Company, five others established new positions in Nintendo. Those five are Ishares S&P/Topix 130 Index Fund (16,400), SPDR Russell/Nomura Prime Japan ETF (9,248), iShares S&P Global Technology Sector Index Fund (8,100), ICON Asia-Pacific Region Fund (7,000), and ICON International Equity Fund (6,900).
Fidelity Mutual Funds
By far the largest owner of Nintendo is the Fidelity Diversified International Fund, which holds 1,850,000 shares. William Blair & Company is the second largest Nintendo of Japan shareowner with 865,700. Fidelity’s Overseas Fund is the third largest holder with 602,500 shares, but it reduced its holdings by 84,700 from the preceding quarter. The owner with the fourth largest Nintendo position is also a Fidelity fund; the Fidelity International Discovery Fund, which owns 340,100 shares adding 36,600 during its last quarter.
Of the 41 funds that owned Nintendo shares, 15 of them were Fidelity mutual funds. Those 15 held a combined 3,686,900 shares and accounted for 85.8% of all Nintendo of Japan shares owned. Fidelity, therefore, controlled 2.88% of all outstanding shares of Nintendo of Japan.
Nintendo Portion of Owner Portfolios
Among the owners with more than 100,000 share positions, Nintendo accounted for 3.94% of the net assets of the Fidelity Select Software and Computer Services portfolio and that was the largest percentage among those owners with more than 100,000 shares. The Fidelity Japan Fund is a close second with 3.87% of its assets in Nintendo shares followed by Fidelity Overseas Fund (2.22%), Fidelity Diversified International Fund (1.11%), and Fidelity International Discovery Fund (0.93%).
American Depositary Receipts (ADR)
American Depositary Receipts (ADRs) were created to aid US investors who wished to purchase shares of non-US corporations. An ADR is a negotiable certificate evidencing ownership of shares in a foreign corporation from a country outside the market in which the ADR is traded. Each ADR denotes depositary shares, which represent a specific number of the underlying shares on deposit in the issuer's home market.
ADRs are quoted in dollars and are governed by the trading and settlement procedures of the exchange on which they trade. Each ADR can represent one, more than one, or a fraction of underlying shares. The relationship between the ADR and the ordinary share is referred to as the ratio. While many ADR programs are established with a 1:1 ratio (one underlying share equals one depositary share), current ADR programs have ratios ranging from 100,000:1 to 1:100. The ease of trading and settling ADRs makes them an attractive investment option for investors wishing to purchase shares in foreign companies.
The Nintendo ADR ratio is 8:1; therefore, eight ADR shares equal one share of Nintendo of Japan. These ADRs trade on the over-the-counter (OTC) market under the symbol NTDOY. The average daily trading volume is about 150,000 shares.
Anyone can create Nintendo ADRs by pre-arrangement with one of the depositary banks. In order to create such ADRs, shares of Nintendo of Japan would be purchased on the Tokyo Stock Exchange and placed in a custodial account in Japan designated by the U.S. depositary. Once the New York depositary was notified by the custodian that they had possession of the purchased shares then the New York depositary would issue eight NTDOY shares for every one deposited in Japan. Japanese banks that serve as custodians for Nintendo of Japan shares include The Bank of Tokyo – Mitsubishi, Sumitomo Mitsui Banking Corporation,Sumitomo Trust and Banking Company, and Deutsche Bank - UK.
An owner of NTDOY shares could also turn their ADR shares into the depositary bank and have their shares turned back into Nintendo of Japan shares through a process called cancellation. The ability of holders to redeem shares in the U.S. for shares in Japan and vice versa insures that the shares will trade close to their intrinsic values. The conversion of shares also creates arbitrage opportunities during periods of stock market and foreign exchange instability.
Intrinsic Value of NTDOY
Buyers and sellers of NTDOY shares need to recognize that they are quoted and trade in U.S. dollars, while Nintendo of Japan shares are quoted and trade in Japanese yen. The intrinsic or underlying value of a NTDOY share is calculated by dividing the price of a share of Nintendo of Japan by the number of yen in a U.S dollar and then dividing that quotient by eight.
Because of time differences, the Japanese market is a day ahead of the U.S. stock market and the intrinsic value of NTDOY is known before the U.S. markets open. The correlation between the price of a share of NTDOY and the price of a share of Nintendo of Japan is not perfect. Fluctuations in the yen dollar exchange rate and market volatility influence the price of NTDOY, but it has always traded within a 95-105% band of its intrinsic value.
Nintendo knowingly passed up a rare opportunity to issue sponsored ADRs in 2007 when the Banks' Shareholdings Purchase Corp liquidated 1.987 million shares of Nintendo in a secondary offering in Japan. The company could have easily purchased all of those shares, filed a F-6 registration statement with the SEC, and then issued its own sponsored ADRs in a secondary offering to cover the purchase of the Banks’ shares. It seems reasonable to assume that they did not take that route, because they did not want to increase the foreign ownership of Nintendo.
At the time of the Banks’ secondary, Nintendo 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 surprising that Nintendo maintains its 100 share minimum purchase size on the Tokyo Stock Exchange (TSE) and/or fails to split its stock. On July 6, 2007 Nintendo closed at 48,950 yen on the TSE; therefore, an individual would have to pay 4.9 million yen ( $39,796) to purchase the minimum amount of Nintendo.
Nintendo ADRs became available in 1993 when the Bank of New York and then Citibank were established as depositaries. They were followed in 1994 by Deutsche Bank and by JP Morgan Chase in 2006. Registration statements filed with the SEC in 1993 authorized the issuance of 50 million Nintendo ADRs with BNY as depositary and 50 million with Citi as the depositary. A 1994 registration statement authorized the issuance of an additional 100 million Nintendo ADRs with Deutsche Bank as depositary. A 2006 registration statement was filed authorizing the issuance of an additional 50 million Nintendo ADRs with JP Morgan Chase serving as depositary. These four registration statements, therefore, permit the issuance of up to 250 million Nintendo ADRs, which would be the equivalent of 31.25 million shares of Nintendo of Japan or 24.4% of its outstanding shares.
Institutional Owners of NTDOY Shares
Exhibit 2 identifies 45 owners of NTDOY shares who are required to notify the SEC about their portfolio holdings via quarterly filings. It shows these owners hold 6,345,370 shares of NTDOY and their combined ownership increased by 2,792,765 shares or 76.7% versus their prior reporting quarter.

Exhibit 2Institutional/Mutual Fund Owners of NTDOY 2007
OwnerSharesChange
Thornburg Asset management 941,809941,809
William Blair & Company 738,135738,135
Alger MidCap Growth Institutional Fund 735,330-18,300
Fidelity Independence 590,000520,000
Firsthand Value Technology Fund 413,407413,407
Alger MidCap Growth Fund 321,640-13,400
Alger American Growth Portfolio 279,225-106,900
SunAmerica Series – Alliance Growth Portfolio278,60028,300
Parametric Portfolio Associates 224,169-38,401
Zeke, LP 200,000NC
Alger American MidCap Growth 177,950-8,900
Par Capital Management175,000NC
Alger Large Cap Growth Fund 174,700-33,400
Simms Capital Management152,370152,370
Fidelity VIP II Asset Manager Fund 126,200NC
JNL/Alger Growth Fund119,0006,000
Alger American Balanced Fund 84,000-26,400
Fidelity OTC Portfolio73,20073,200
Summit Investment Partners/Calvert Variable Series 68,600-9,800
National Bank Canadian Opportunities63,00063,000
RS Information Age Fund 59,600NC
Munder International Equity Fund57,000NC
Eagle Asset Management53,505 53,505
RS Internet Age Fund 53,230-1,770
BNY Hamilton International Equity40,800-8,000
Private Asset Management37,406 25706
Alger Balanced Fund 36,34536,345
Alger American Income and Growth Portfolio 31,600-14,450
Alger Large Cap Growth Institutional Fund 23,800-10,150
Navellier & Associates17,92517,925
Aperio Group 15,092NC
Globalbridge10,780NC
Windward Capital Management 9,3309,330
The Connable Office9,3109,310
JNL/FMR MidCap Equity Fund 9,000NC
JNL/Select Global Growth Fund8,000-5,000
Janney Montgomery and Scott 6,3906,390
JNL/Oppenheimer Global Growth Fund6,000-2,000
IXIS Moderate Diversified Portfolio 4,537-3,697
JNL/Mellon Capital Management International Index4,000NC
IXIS Equity Diversified Portfolio 2,096-2,952
JNL/FMR Balanced Fund2,000NC
SM&R Alger Growth Fund 1,775-55
Navellier International Growth984984
Gilder, Gagnon and Scott 624624
Total6,344,4592,713,554

Fourteen of the 45 owners shown in Exhibit 2 acquired all of their shares during the last quarter. Among those 13 are the top seven net buyers for the past quarter. These seven largest net buyers are Thornburg Asset Management (941,809), William Blair & Company (738,135), Firsthand Technology Value Fund (413,407), Simms Capital Management (152,370), Fidelity OTC Portfolio (73,200), NatCan Investment Management (63,000), and Eagle Asset Management (53,505).
Fred Alger Management is the largest owner of Nintendo ADRs with 2,529,622 shares in its mutual funds. In its prior reporting period it owned 2,946,094 shares; therefore, it was a net seller of 416,472 shares. Interestingly, on March 31, 2006 Fred Alger Management owned 4,447,380 NTDOY shares, a position it probably wishes it had kept given the uninterrupted rise in Nintendo’s stock price.
Nintendo ADRs account for 5.77% of assets managed by Zeke, LP and that was the highest percentage of assets observed. The RS Information Age Fund has the second highest percentage of assets, 3.41%, invested in NTDOY shares and is followed by the RS Internet Age Fund with 3.27%. Among other large fund holders, the JNL/Alger Growth Fund has 2.61% of its assets in Nintendo ADRs, Alger Mid Cap Growth Fund has 2.40%, and the Alger American Mid Cap growth Fund has 2.28%.
Thornburg Investment Management’s Nintendo ADRs accounts for only 0.14% of its assets under management. Similarly, William Blair and Company’s position only represents 0.08% of its managed assets. The market value of Fred Alger Management’s 2.5 million share position represents about 1% of the total assets it manages.
Nintendo and Shareowner Relations
Following 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 now would be too expensive, therefore, they had decided to do nothing until January 2009.
The explanation offered by company officials is absurd given that Nintendo has less than 33,000 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 over $8 billion in cash.
The number of owners of Nintendo of Japan and NTDOY shares is bound to increase regardless of what Nintendo does to encourage ownership. With expanded ownership will come increased coverage of Nintendo by the financial press, which has much to learn about the video game industry.
The inevitable increase in the number of Nintendo shareholders will coincide with growing revenue and income from its hugely popular DS and Wii hardware consoles and its proprietary and licensed video games. These forces will drive the stock to significantly higher prices.
If Nintendo decides to truly cultivate share ownership then it should take five actions. First, it should reduce the minimum number of its shares that can be purchased on the Tokyo Stock Exchange from 100 down to 1. Second, it should declare a stock split sufficient enough to reduce Nintendo’s share price to about 3,075 yen ($25); as of mid-2007 a stock split of about 20 to 1 would be required. Third, Nintendo should reduce its burgeoning cash position by buying back more of its stock. Fourth, it should work with current depositary and custodian banks to convert the existing unsponsored NTDOY ADRs into Nintendo sponsored shares to be traded on the New York Stock Exchange (NYSE). Fifth, it should be among the first Japanese companies to become cross-listed on the Tokyo and NYSE when that program is initiated.
The aforementioned actions by Nintendo would benefit existing shareowners of Nintendo of Japan and as well as owners of NTDOY shares. Furthermore, these actions would encourage people to become shareholders.

Tuesday, July 10, 2007

The Video Game Industry: Nintendo Returns To Dominance

The video game industry spans the globe and has emerged as a significant segment of the economic landscape. An analysis of its size and growth rate, along with an identification of the major companies in the industry, sheds important light on the existence of investment opportunities.

Size

The following list shows the most recent three years of video game revenue for 25 leading, publicly-traded companies in the video game industry. These better-known companies, whose common stocks are listed on various stock exchanges throughout the world, probably account for at least 90% of the worldwide sales in the video game in industry. With the exception of Sony, Microsoft, Disney, and Logitech, most of the other companies listed derive almost 100% of their income from the video game business.

Video Game Industry Sales: 2005-2007(in billions)
CompanyStockSymbol*200720062005Growth
SonySNE ADR$8.3$7.8$5.96.4
NintendoNTDOY8.1 4.3 4.288.4
MicrosoftMSFT5.04.33.116.3%
Sega SammySGAMY ADR4.54.74.44.3
ElectronicArtsERTS3.13.03.10.0
GamestopGME2.11.30.871.0
ActivisionATVI1.51.51.40.0%
KonamiKNMADR1.41.41.30.0%%
Square Enix3090 TSE1.41.00.640.0%
Namco Bandai1954 TSE1.11.11.00.0%
Take-Two InteractiveTTWO1.01.21.016.7%
THQTHQI1.00.80.825%%
VivendiVIVEF0.80.70.614.3
UbisoftUBIPSE0.70.50.540.0
Capcom9697TSE0.60.60.60.0
DisneyDIS0.50.40.325.0
NCSoft036570KRX0.40.30.333.3%
Game Group PLC GGOPF0.40.30.333.3
SCI EntertainmentSEG LSE0.30.20.150.0%
MidwayGamesMWY0.20.20.20.0
AtariATAR0.10.20.450.0%
GameloftGFT LSE0.10.10.10.0
LogitechLOGI0.10.10.10.0%
Mad Catz InteractiveMcz0.10.10.10.0%
MajescoCOOL0.10.10.10.0%
Total42.936.231.418.5%
*Note: ADR=American Depositary Receipt, TSE=Tokyo Stock Exchange, PSE=Paris Stock Exchange, KRX=Korean Stock Exchange, and LSE=London Stock Exchange.

The largest of the pure video game companies is Nintendo, which accounted for 18.9% of the most recent combined sales presented. Sony, however, edged Nintendo as the company with the largest sales revenue in the video game industry. Its sales of $8.3 billion represented 19.4% of the sales of all 25 companies.

The 25 listed companies had total video game hardware and software sales of $42.9 billion for the year ending March 31, 2007. Comparable sales in 2006 were $36.2 billion and in 2005 they were $31.4 billion.

Growth

The combined video game sales at these companies, therefore, grew at a rate of 18.5% during the year ending March 2007 after growing at a rate of 15.3% rate during the prior year. These growth rates are well above comparable growth rates in most other industries and suggest that investors have the opportunity to earn above average returns by purchasing stock of companies operating in the video game industry.

An examination of the most recent sales data for each company shows that Nintendo experienced the greatest growth rate. Its sales grew at a rate of 88.4% for the year ending March 31, 2007. The second and third largest growth rates in sales were produced by Gamestop (61.5%) and SCI Entertainment (50%).

Gamestop is a retailer of new and used video game hardware and software, while SCI Entertainment is a game developer based in London. The sales figures shown for Gamestop were adjusted to avoid double counting. In particular, only the gross profit (sales minus cost of goods sold) on sales of new video game hardware, software and other products was included along with the gross sales of used video game products. Similarly, only the gross profit was included for Game Group PLC, the largest retailer in Europe.

Major Hardware Manufacturers

Video game revenue at Microsoft and Sony represents only about 10% of their total revenue. Most of that revenue came from sale of their new video game hardware systems at prices below their production costs. Reportedly, Sony is selling the PS3 at a loss of $250 per console.

The expertise of these two industrial giants obviously did not extend to their video game business. Microsoft had an operating loss of $1.3 billion in 2006, which followed losses in each of the preceding four years. Microsoft’s combined losses in video games for its five fiscal years ending 2006 were $4.9 billion on sales of $15.3 billion.

Similarly, Sony reported an operating loss on its video game business of $1.97 billion for its 2007 fiscal year. Sony’s combined profit since it entered the video game industry is $3.3 billion on combined sales of about $72 billion.

Sony’s most profitable video game years were 1998 and 1999 when it reported profits of $950 million and $1.1 billion, respectively. On a relative basis, the video game segment of Sony’s business reached its zenith in 1999 when it accounted for 40.3% of Sony’s profit.

For the past last eight fiscal years ending in March 2007, however, the income earned by Sony on its video game business has been less than stellar. In fact, from 2000 through 2007 Sony’s video game business combined profit was only $920 million on combined sales of $57.3 billion, a gross margin of only 1.6%.

Shareholders of Sony and Microsoft might have been better served if they had stayed out of the video game business. At best, their video game segments have been a needless distraction and represent failed attempts by these companies to jump-start slowing growth in their main line of business.

Sony

Sony officially entered the video game industry in November 1994 when it introduced its PlayStation (PS) home console in Japan. In September of the following year it began selling the PS in the U.S. and the rest of the world.

The PS was quickly adopted as the platform of choice by video game developers who were particularly attracted by the fact that the PS used CD Roms, which cost pennies. By contrast, Nintendo required third-party video game developers to purchase proprietary cartridges from them in bulk at price of $20-$30 per cartridge. Because of the differences in cost between cartridges and CDs, PS games sold for $45-$50, while Nintendo 64 games sold for $60-$70.

The arrival of Sony, with its much cheaper CD game delivery system, marked the end of Nintendo’s dominance of the video game industry. In an effort to recapture its former glory it introduced the CD based GameCube home console system in 2001. That system, however, failed to gain traction because developers chose to focus their attention on games for the PS, PS2 and Microsoft’s Xbox.

Sony went on to sell more than 100 million PS systems. An up-dated version of the PS, which was aptly named the PS2, was launched in March 2000 and it enjoyed even more success. Through May 2007 Sony had sold 118 million PS2 home consoles.

Sony effectively dominated the hardware end of the video game home console market for a decade beginning in 1995. Sales of its industry leading PS2 finally began to run out of steam in late 2005. For its fiscal year ending March 2006 Sony reported PS2 sales of 16.22 million, which was slightly above its prior year total of 16.17. In its 2007 fiscal year sales of the PS2 system fell to 14.2 million units.

The decline in PS2 sales reflected the tendency of console sales to reach market saturation at a level slightly above the 100 million mark. The decline also coincided with the introduction of Sony’s next generation home console the PS3 in November 2006. The PS3 sold 5.5 million units during its first five months.

Sony entered the hand-held video game market with the launch of its PlayStation Portable (PSP) in December 2004 in Japan and in March 2005 in the U.S. Unit sales were 2.84 million through March 31, 2005, 14.06 million for the 12 months ending March 2006. Sales of PSPs then declined sharply and fell to 8.36 million in fiscal 2007. While the PSP drew rave reviews regarding its technological advances, it lacked a supply of compelling games.

Sales data show that while the introduction of the PS3 and PSP were initially greeted warmly, potential buyers quickly lost interest because of a lack of games. The fact is that games drive sales of video game hardware. Sales of the PS3 have also been hampered by its price tag of $800, which is significantly above prices for the Xbox 360 ($400-$600) and the Wii ($250).

The apparent failures of the PS3 and PSP certainly contributed to the departure of Ken Kutaragi, 56, an icon among gamers, who stepped down as Sony Computer Entertainment Inc.'s chairman and group chief executive in June 2007. In late 2006 Kutaragi had been relieved of day-to-day responsibilities as president but stayed on as chief executive and chairman. The departure of Kutaragi, marked the end of an era at Sony that saw the company long dominate the video game industry with its flagship PlayStation consoles. It also highlights troubles at Sony amid a series of blunders over the rollout of its PlayStation 3 and intense competition from Nintendo's popular Wii console and Microsoft's Xbox 360. Sony is not expecting to post a profit in its game business until the fiscal year ending March 2009.

Microsoft

Microsoft has been actively trying to establish itself within the video game industry since November 2001 when it launched its Xbox console. From then through December 2005, Microsoft sold 24 million Xbox consoles of which 16 million were sold in the U.S., 6 million in Europe, and 2 million in Japan.

On November 22, 2005, Microsoft launched the Xbox 360 as a successor console. From that launch date until June 2007 Microsoft sold 12 million Xbox 360 units. Accordingly, Microsoft has sold 36 million consoles since it entered the video game industry and, as previously mentioned, has managed to lose money every year. Microsoft’s supporters view these losses as a small price to pay to establish a beachhead in living rooms with the Xbox 360, which is designed to serve as the gateway for the convergence of the internet, television, and games.

Microsoft does have a valuable, proprietary video game franchise in its Halo series. Halo was developed by Bungie Studios, which was a long-time Macintosh game developer that was acquired by Microsoft in 2000. Halo:Combat Evolved (Halo 1), a multiplayer game for the Xbox, was introduced on November 15, 2001 and received the "Game of the Year" and "Console Game of the Year" awards for 2002 from the Academy of Interactive Arts & Sciences. On Nobember 9, 2004 Halo 2 was introduced and sales on the release date exceeded $125 million. On May 9, 2006 Microsoft announced that it would introduce Halo 3 for the Xbox 360 in August 2007. It has been reported that pre-orders for Halo 3 exceed 4 million units. Through the first half of 2007 Halo 1 and Halo 2 had combined sales of more than 14 million units.

Nintendo

The nascent video game industry collapsed in 1983-1984 taking with it Atari, which was the leading hardware and software company. That collapse provided Nintendo an opportunity to become the industry leader, because it coincided with the introduction of its Family Computer System home console in Japan in 1983 and immediately preceded the introduction of the Nintendo Entertainment System (NES) in the U.S. in 1985.

Nintendo’s rise to the pre-eminent position in the industry was sealed when its proprietary Mario Brothers video game became a smash hit worldwide in 1985. Nintendo further solidified its dominating presence in home consoles with the introduction of Legend of Zelda in 1987 and the launch of its up-dated Super NES system along with Super Mario World in 1991.

In 1989 Nintendo decided to extend its reach to the hand-held video game market. In that year it launched GameBoy, which was the first successful hand-held video game system with interchangeable game paks. By 1992 Nintendo had established itself as a fully integrated video game company. Furthermore, it had a stranglehold on the video game industry with the leading home console system, the leading hand-held system, and the leading video games.

By the end of 1992 Nintendo’s estimated market share was 90-95% of the video game market in Japan and 70% of the U.S. market. Its market dominance was reported in depth in a 1993 book, Game Over: How Nintendo Zapped an American Industry, Captured Your Dollars, and Enslaved Your Children by David Sheff.

Despite its market dominance Nintendo continued to introduce new versions of its hand-held and home console systems. In the hand-held arena it launched Super GameBoy in 1994 followed by GameBoy Advance in 2001. In its home console systems it introduced Nintendo 64 in 1996 followed by GameCube in 2001.
The combined sales of Nintendo 64, Super NES, and NES hardware through March 2007 exceeded 140 million units, while related software sales exceeded 770 million units. GameBoy and GameBoy Advance hardware sales exceeded 198 million units and accompanying software sales 867 million units. These systems, along with Sony’s PS and PS2 series, are the biggest selling video game systems of all time. Their sales totals serve as a barometer to gauge the size of the market for a video game platform. Sales of these systems suggest that a successful new video game system should be expected to sell about 120 million hardware units and 600 million software units within five years of such introduction.

Nintendo’s dominance began to fade with the entry of Sony into the video game business in 1995. Until the introduction of the PlayStation, video game developers were forced to deal with Nintendo. In general, developers believed that Nintendo was difficult to deal with, arrogant, and cheap.

Game developers moved swiftly to the PS. In that process, Sony was able to provide a wealth of new and exciting games that could be played only on its PS.

Nintendo’s decline accelerated with the entry of Microsoft and its Xbox in 2001. Sony and Microsoft recognized that games drove their sales, therefore, they either acquired game developers or they entered into exclusive contracts such that certain games would run only on their console. Game developers were able to command millions in up-front payments in return for granting Sony or Microsoft exclusive rights. Nintendo did not enter into a such deals with game developers; therefore, their games became stale.

During its fall from the mountain top, Nintendo also suffered because its new systems did not replicate the success of the previous generation. The Nintendo 64 and, especially the GameCube, failed to generate the desired sales. Nintendo sold only 21.59 million GameCube systems from 2001 to 2007 and 206 million units of GameCube software. It sold 33 million Nintendo 64 systems and 225 million units of software. It seems more than fair to say that these two systems were failures and contributed to Nintendo’s loss of dominance.

Nintendo originally listed its common stock on the Osaka and Kyoto Stock Exchanges in 1962. In 1983 it listed its shares on the Tokyo Stock Exchange. The performance of its shares closely paralleled its rise and fall within the video game industry. From 1983 to August 1990 the price of its shares rose 800%. They then fell 65% to January 1995, and then the share price rose 345% into March 2000. Following that rise, Nintendo’s share price fell 76% into March 2004, at which time it retested the low price it reached a decade earlier in 1995. As of July 5, 2007, Nintendo’s share price was 631% above its March 2004 level, but only 72% above the previous peak established in March 2000.

DS

The retirement of Nintendo’s legendary chairman and president Hiroshi Yamauchi in 2002 at age 75 after a distinguished 53 year career coincided with an internal review of the video game industry. The result was that Nintendo decided to focus its attention on expanding the video game user population by designing delivery platforms and games that were fun. This approach was in marked contrast to the direction of the video game industry, which was toward developing more complex, highly sophisticated hardware and games.

The DS hand-held was the first product introduced that reflected the new direction taken by Nintendo. The DS has been an unrivaled success. From its introduction in 2004 through March 2007, Nintendo sold 40.3 million DS hand-held units and 184 million units of DS software. Notably, sales of the DS rose from 5.3 million in 2005 to 11.5 million in 2006 and to 23.6 million in 2007. Sales of the DS are, therefore, running 2.8 times the sales of Sony’s PSP.

The sales of DS software are equally impressive. More than 183 million units of DS software have been sold though March 2007 and that amounts to about 4.5 software units per hardware unit sold.

Wii

In November 2006 Nintendo continued its bold move to expand the gaming population by launching the Wii. This new home console was enthusiastically greeted with long lines of anxious customers. Nintendo’s Wii production has remained far below demand. Nine months after the Wii was introduced people were still paying a premium via eBay to get their hands on this revolutionary home console or standing in long lines at retailers.

Through March 2007 Nintendo sold 5.84 million Wii consoles and 28.84 million units of related software. At its current sales pace, Wii sales will exceed the records established by Nintendo’s NES family of home game consoles and Sony’s PS and PS2.

Historically, two home console manufacturers have always dominated the video game industry. One company invariably captures the lion’s share, about 70% of the market, while the other dominant manufacturer captures about 20%. Remaining hardware manufacturers are left to fight for the remaining 10% as they struggle for survival before exiting that segment of the business. Atari and Sega are prime examples of companies that dropped out of the video console business after being #1.

Early reports strongly suggest that Nintendo’s Wii will be the dominant home video game console followed by the PS3 and the Xbox 360. In June 2007, the Wii was outselling the PS3 at a rate of six-to-one in Japan following having outsold it by 4:1 in April and 5:1 in May. At the same time, the Wii was outselling the Xbox 360 in Japan 15:1. Nintendo is dominating the home console war even though it has been unable to satisfy all its orders because of insufficient production.
Available data also suggest that the Nintendo DS will be the dominant hand-held video game platform. In June it outsold the PSP 5:1 in Japan.

Nintendo is in the early stages of recapturing the dominant position it held in 1992 in home consoles, hand-helds, and video games. The likelihood of it reaching it former 70-90% market share, however, seems remote.

Forecast Sales for DS and Wii

At its current pace, Nintendo will sell 100 million DS hand-helds by June 30, 2009 along with 500 million units of DS software units. The 100 million unit sales mark for the Wii should be reached by mid-2011 at which time Wii software sales should reach 500 million. Such sales will drive a growing stream of revenue as production ramps up to meet the burgeoning demand. While Nintendo management has stated that its profit margin on the Wii console is not as great as on the DS hand-held, the profit margin on its proprietary software is enormous and can be expected to provide dramatic growth in revenue and net income.

Nintendo’s stable of proprietary games gives it a franchise of incredible value. It should be expected that Nintendo will capture a growing percentage of the video game industry’s total revenue as its growth rate continues to exceed the industry average.

Nintendo has firmly established itself as a renowned manufacturer of video game hardware and software. Since 1983, Nintendo has sold nearly 2.4 billion video games and more than 409 million hardware units globally, and has created industry icons like Mario, Donkey Kong, Metroid, Zelda and Pok√©mon. Recently, it made a conscious decision to distance itself from the eternal quest of avid gamers for more realistic and complex game graphics. Nintendo’s strategic decision to expand the population of video gamers by introducing lower cost hardware along with software that appeals to the masses instead of only hardcore gamers is proving to be farsighted.

In an unusual move for Nintendo, perhaps in recognition of past problems it and Sony has had with game developers, it has reached out to encourage smaller independent developers to create video games for the Wii. In June 2007 it announced that, beginning in 2008, it will allow individuals and outside game studios to create and sell downloadable Wii games with a tool called WiiWare. Gamers will then be able to purchase the created games through the console's Wii Shop channel once Nintendo has quality-checked it.

Buy Nintendo Stock

Investors looking to participate the growth of the video game industry need to focus their attention on the clear market leader, Nintendo. It offers the purest play in that industry and its stock offers the greatest value with a PEG ratio (price earnings ratio divided by the growth rate in earnings per share) of 36%.

An examination of its share price trend shows that shareholders reaped dramatic rewards the last time Nintendo gobbled up market share in the video game industry. Returns similar to those earned during the 1983-1990 period are not totally outside the realm of possibility.

Amazingly, some security analysts insist on comparing the stock prices of Nintendo and Sony as if they are in the same industry. At best, such comparisons are specious, since about 100% of Nintendo’s revenue comes from the video game sector, while only about 12% of Sony’s total revenue comes from its video game segment. Similarly, comparisons between Nintendo and Microsoft would be equally absurd, since only about 10% of the latter’s total revenue comes from its video game segment.

Saturday, June 30, 2007

The Horse Race Between Sony and Nintendo for #10 in Japan

Members of the financial press have been tripping over themselves to see who would be the first to chronicle that Nintendo has surpassed Sony in market capitalization to become the 10th largest company in Japan. This imaginary horse race has captured the attention of numerous observers and been blown out of proportion.

Well, On Friday, June 29, 2007 The Asahi Shimbun announced that “Nintendo Co. on Thursday (June 28) exceeded Sony Corp. in terms of market capitalization, ranking it among the nation's 10 largest companies in aggregate market value. Nintendo finished the day at 45,050 yen per share, which valued the company at 6.38 trillion yen, above archrival Sony's 6.24 trillion yen. Sony closed at 6,220 yen per share on Thursday.”

Unfortunately, this declaration was wrong for two reasons. First, Nintendo’s stock price at the close of trading on the Tokyo Stock Exchange (TSE) was 44,950 not 45,050. Second, and more importantly, Asahi Shimbun in its rush to declare Nintendo the winner failed to use the proper number of shares of stock.

The market capitalization (MarketCap) of a stock is defined as the share price times the number of shares outstanding. It is not the share price times the number of shares issued nor is it the share price times the number of shares authorized. Nintendo has reported that on March 31, 2007 it had 127,903,013 shares of common stock outstanding, while Sony has reported that it had 1,002,062,405 shares outstanding on that same date.

A correct calculation of market capitalizations using the June 29, 2007 Tokyo Stock Exchange closing prices of 44,900 yen for Nintendo and 6,330 yen for Sony shows that the MarketCap of Sony is 6,232,828,159,000 yen or $50.603 billion U.S. (123.17 yen=$1), while the MarketCap of Nintendo is 5,749,240,434,000 yen or $46.677 billion. For comparative purposes, Disney has a market cap of $69 billion, Apple $110 billion, IBM $159 billion, and Microsoft $288 billion.

While the MarketCaps of Sony and Nintendo are close, the companies are vastly different. Nintendo is highly acclaimed worldwide as a video game company that has a proven track record of producing breakthrough hardware systems and immensely popular, propriety games. It current focus is on growing the gaming market so it can sell more game products, since almost 100% of its revenue comes from the video game industry. Its sales increased 89% in fiscal 2007 and its net income rose 77%.

By contrast, the video game segment of Sony’s business accounted for only 12.3% of its total revenue in 2007. Its video game sales increased 6.1% and the game segment of Sony’s business produced an operating loss of $1.97 billion.

Thursday, April 26, 2007

Nintendo Upward Guidance A Certainty

Nintendo management has a penchant for significantly understating future sales, income and dividends. This characteristic is admirable and indicative of its innately conservative corporate culture that has thus far benefited Nintendo stockholders. The pattern of Nintendo lowballing its likely financial results is clear and strongly suggests that the fiscal 2008 forecasted sales and net income per share included in its April 26, 2007 press release are artificially low.

The fact is that the 2007 fiscal year financial results released on April 26, 2007 dwarfed the guidance given by Nintendo on May 25, 2006, July 24, 2006, October 3, 2006, and January 10, 2007. Its May 25th forecast stated it expected 2007 net sales of 600 billion yen, net income of 65 billion yen, and earnings per share of 508.15 yen. Nintendo actually reported 966.5 billion yen in net sales, 174.29 billion yen in net income, and earnings per share of 1,363 yen. The actual results for fiscal 2007, which ended March 31, 2007, therefore, far exceeded the forecast made 10 months earlier. In fact, net sales were 61.1% above guidance, while earnings per share and net income were 168% above Nintendo management’s forecast.

Similarly, actual 2007 net sales exceeded the July 24th upward revised forecast by 55.7, while earnings per share were 110% above forecast. Nintendo revised its guidance upward once again on October 3rd but those revised net sales and earnings were exceeded by 30.6% and 74.5%, respectively. On January 10, 2007 Nintendo again revised its guidance upward but it still exceeded its upward revisions in net sales by 7.4% and earnings per share by 45.3%.

It is readily apparent that Nintendo management’s forecasts are consistently too low. Accordingly, investors can expect that Nintendo’s actual financial results for its fiscal year ending March 31, 2008 will far exceed its guidance of 1.14 trillion yen in net sales and earnings per share of 1,368 yen. Furthermore, investors can expect to see at least three significant upward revisions in net sales and earnings per share by Nintendo management during the next eight months. Those revisions will likely be announced in July, October, and January.

Thursday, April 5, 2007

Nintendo’s Share Price Expected To Skyrocket

A few hours after this blog forecast that Nintendo would release an upward revision of its fiscal 2007 results it did exactly that. Nintendo’s April 5, 2007 announcement that it exceeded its own January 10, 2007 upward revisions was well received by shareholders.
The price of its shares rose 900 yen on the Tokyo Stock Exchange immediately following the Thursday mid-day press release and closed the day up 550 or 1.62%. The next day, Friday, April 6th, Nintendo rose an additional 800 yen or 2.33% to close at 35,100 yen, which put the intrinsic value of the NTDOY shares at $36.95.
The official April 5th release stated that the company intends to accelerate its financial closing process so that it will release its March 31, 2007 fiscal year results on April 26, 2007. That is a full month earlier than comparable releases in 2005 and 2006 and indicative of a company management that is anxious to report its good news
Nintendo whetted the appetite of shareholders when it stated that it exceeded its forecasts of sales, consolidated operating income, consolidated income before income taxes and extraordinary items, and consolidated net income. In particular it noted that sales were 66 billion yen greater and that foreign exchange would yield about a 30 billion yen boost. Nintendo also stated that it would likely pay its year-end dividend based on its 50% of net income.
These statements strongly suggest that Nintendo will report fiscal 2007 net income of about 159 billion yen or 1,240 yen per share up 62.6% from 2006. Furthermore, it will likely pay a year-end dividend of 550 yen, which is in addition to its regular 70 yen, interim dividend. Its expected total fiscal 2007 dividends of 620 yen would represent a 59% increase above its fiscal 2006 dividends of 390 yen.
An examination of quarterly results shows that Nintendo’s sales are in a dramatic uptrend. Its sales for the quarters ended June, September, and December were up 85%, 59%, and 75%, respectively over prior year comparable quarterly sales. Even more remarkable is the fact that its sales for the quarter ended March 2007 at 253 billion yen are expected to be about 160% above the comparable March 2006 quarter.
On April 5, 2007 Nintendo was selling at a price earnings (PE) ratio of 27.7 based on estimated fiscal 2007 earnings and it provided a healthy 1.8% dividend yield. Nintendo’s PE multiple is much too low considering its sales and income growth rates, its abundant cash position ($6.7 billion), its debt-free balance sheet, and comparable PE multiples of other publicly held gaming companies. For example, the PE multiple of Gamestop is 33, THQ is 45, Activision is 72, and Electronic Arts is 190. By the way, none of these companies pay a dividend.
Nintendo shareholders should expect generous total returns going forward from a combination of dramatic growth in earnings per share, further dividend increases , and a higher PE multiple. Furthermore, favorable financial coverage of Nintendo will surely call it to the attention of the investing public who remain largely unaware of how to buy stock in Nintendo.

Wednesday, April 4, 2007

Nintendo Expected to Announce Upward Revision of Fiscal 2007 Net Income

During the past two years Nintendo has established a pattern of announcing upward revisions of its forecasted fiscal year-end income and dividends during the first week in April. On April 6, 2005 it announced that it had exceeded its forecasted net income by 17.1% for its March 31, 2005 fiscal year. A year later on April 4, 2006 it announced that it had exceeded its forecasted net income for its March 31, 2006 fiscal year by 26.7%.

Within the next few days, shareholders should expect Nintendo to once again announce that it exceeded its forecasted net income for its latest fiscal year ended March 31, 2007. The forthcoming upward revision will be partially due to the fact that Nintendo’s earlier 2007 forecast assumed a weaker dollar and Euro versus the yen.

As of March 31, 2007 the U.S. dollar was trading at 118.05 yen and Euro was trading at 157.33 yen. Nintendo’s financial forecast modifications of January 10, 2007 assumed exchange rates of 115 yen to the U.S. dollar and 143 yen to the Euro. These differing exchange rates benefit Nintendo’s net income because it has deposits and receivables denominated in dollars as well as Euros. For example, as of December 31, 2006 Nintendo had about $3.9 billion in cash, deposits, and receivables denominated in U.S. dollars and $1.5 billion denominated in Euros.

A comparison of amounts denominated in other currencies along with the forecast versus actual exchange rates prevailing on March 31, 2007, Nintendo’s fiscal year-end, suggests that it will announce an increase in net income of about 5% above its January 10, 2007 forecast.

Saturday, March 10, 2007

Stockholder Suggests Nintendo Make Shareownership Affordable for Individuals in Japan

The Tokyo Stock Exchange (TSE) classifies listed stocks into TOPIX categories that rank TSE first section stocks according to market capitalization and liquidity. The TOPIX Core 30 includes the 30 most liquid and highly capitalized shares. The TOPIX Large 70 includes the next 70 most liquid and highly capitalized shares. The TOPIX 100 includes all stocks in the Core 30 and Large 70 categories.

On February 28, 2007 Nintendo was ranked #16 on the TOPIX 30. With 127.9 million shares outstanding and a market price on that date of 31,400 yen, the total market value (market capitalization) of Nintendo was 4 trillion yen or $33.5 billion.

The minimum number of shares of Nintendo that can be purchased on the TSE is 100. Accordingly, at the end of February 2007 a purchaser would have had to pay 3.14 million yen or $26,167 to become a Nintendo shareholder. Only 4 other companies in the TOPIX 100 have a higher entry price to become a shareholder. How many individuals in Japan can afford to place such a stock order?

The entry price to become a shareholder in Nintendo is clearly too high in Japan. It simply does not sync with Nintendo’s recent public statement that it wants to widen its shareholder base and encourage shareholding by individual investors. Nintendo has stated that it has experienced a growing interest by individuals in owning Nintendo stock, which it attributes to the growing popularity of its DS handheld player and Wii console. Given these expressions of individual interest in owning Nintendo stock, it is time for Nintendo management to take positive action to promote such ownership.

The simplest and most meaningful way for Nintendo to achieve its stated objective of encouraging individual ownership is to lower the minimum number of shares of Nintendo that can be purchased on the Tokyo Stock Exchange to one (1) from the current 100 share minimum. There are currently 8 companies in the TOPIX 30 and 14 companies in the TOPIX 100 who already allow the purchase of a single share of their stock. Interestingly, this action would allow individuals to purchase a share of Nintendo stock at essentially the same price as a Wii console.

Going forward, the share price of Nintendo should rise dramatically during the next few years as production and sales of Wii consoles, DS handhelds, and related games expand. It will, therefore, become necessary for Nintendo to keep the entry price of ownership within the reach of the average individual by declaring either stock splits or stock dividends.

It would be a good idea for Nintendo to always keep the minimum price of stockownership close to the selling price of its Wii console. Millions of Nintendo fans could then enjoy their games, while participating in the profits they generate for the company. Such profits could then allow them to buy more games, thereby, further adding to Nintendo’s financial success.

Tuesday, March 6, 2007

Nintendo Secondary Offering Price of 30,478 Yen Should Provide Support

The secondary offering of the 1.987 million shares of Nintendo stock owned by the Banks' Shareholdings Purchase Corp was priced at 30,478 yen on Tuesday, March 6th after the Tokyo Stock Exchange closed. The offering price represented a 2.47% discount from the Tuesday's closing price of Nintendo which was 31,250 yen. Brokerage firms in the syndicate selling these shares include Nomura Securities, Nikko Citigroup, Shinko Securities, Mitsubishi UFJ Securities and Daiwa Securities SMBC.

Given the large number of non-Nintendo shares that must be liquidated going forward by the Banks Shareholdings Purchase Corp, there is considerable pressure on member firms in the selling group to make this offering a success. A successful offering will go a long way toward insuring that these brokerage firms will be included in future sales.
It would be embarrassing to the Japanese government if the price of Nintendo dropped below the offering price. In that event, a wave of public criticism would surely be leveled at government officials for allowing the Banks entity to dump shares on unwitting purchasers.

Accordingly, the pressure on brokerage firms and the Banks Shareholdings entity for a successful sale strongly suggests that the Nintendo secondary will be over-subscribed, the price will rise above the offering price, and 30,478 will become a floor under which Nintendo will not trade in the immediate future.

Intrinsic Value of NTDOY

On Wednesday, May 2nd Nintendo closed at 38,650 yen on the Tokyo Stock Exchange. That was down 150 yen or 0.38% from the previous close. As of 8 AM New York time, the U.S. dollar was trading at 120.185 yen. Accordingly, the intrinsic value of NTDOY at the start of Wednesday's trading in New York is $40.20. The Tokyo Stock Exchange will be closed on May 3 and May 4.

Friday, March 2, 2007

Shareholder Criticizes Nintendo Management for Encouraging Government Entity to Sell its Stock

On February 23, 2007 after the close of trading in Tokyo the Nintendo Company announced that 1.987 million shares of its common stock held by Banks Shareholdings Purchase Corporation through Japan Trustee Services Bank were going to be sold in a secondary offering.
These shares represented the entire stake in Nintendo owned by this government-controlled body, which was established in 2002 to buy stocks from banks. Such stock purchases were designed to prevent the wholesale liquidation of stocks as banks were required to cut cross-shareholding arrangements with customers. The shares being sold equal about 1.4% of all the outstanding shares of common stock in Nintendo.
This government entity started selling shares in various companies in January 2007. It has until 2017 to unload all its holdings. Data on the size of its holdings in each company is not available.
Bloomberg reported that Ken Toyoda, a Nintendo Company spokesman, said by telephone that Nintendo initiated the sales by approaching the government-body. Reportedly, Nintendo is looking to widen its shareholder base and encourage shareholding by individual investors and it saw this as a way to achieve those objectives. The company noted that the popularity of its DS handheld player and Wii console have caused a growing interest in owning Nintendo stock.
What was Nintendo management drinking when they came up with this idea? Encouraging a large shareholder to liquidate their entire position is stupid and a disservice to all Nintendo shareholders. It artificially increases the supply of stock or float and acts as a significant depressant on the price of the stock.
Management’s portrayal of this as a way to expand the shareholder base is absurd and evidences a total lack of investment knowledge. It strongly suggests that Nintendo management needs to learn the basics about the care and feeding of shareholders.
If they want to increase the number of shareholders there are at least two actions they need to immediately take. First, they need to institute a stock-split to reduce the current stock price to a lower level. How many gamers and other individuals can afford to pay more than 30,000 yen ($250) for an ownership position? Second, they need to officially sponsor the issuance of Nintendo shares in the United States where Nintendo has a large and growing fan base. Those shares could then be traded on the New York Stock Exchange (NYSE) or the NASDQ and the company would enjoy much higher visibility. Currently unsponsored Nintendo ADR's (symbol NTDOY) trade in the pink sheets and there are only 50 million such shares registered with the SEC and their underlying 6.25 million shares represent only about 5% of the total outstanding shares of Nintendo
At the end of 2006 Nintendo had 866.6 billion yen ($7.2 billion) in cash and deposits and that was up 71.4 billion yen ($595 million) from December 31, 2005. The company clearly has more than enough cash and cash equivalents to simply buy the entire block of stock from the government entity and reduce the number of shares outstanding or use those shares to support the issuance of American Depositary Receipts (ADR’s) in the U.S. The cost of such a purchase would be about 67.3 billion yen ($557 million) as of the day of the secondary was announced and absorb less than 10% of Nintendo’s cash.
Nintendo management can still rectify their grave mistake by instituting a major stock buyback before, during, and after the secondary offering, which is scheduled for early March 2007. It is the only way they can easily make amends for the needless pain they have inflicted on their loyal shareholders by violating the fundamental tenets of maximizing shareholder value.

Thursday, February 22, 2007

Nintendo Shares Ready To Soar

As a regular viewer of Jim Cramer's Mad Money show, I was surprised when he stated on his Friday, November 17, 2006 show: "You can't play the Wii by buying Nintendo because it doesn't even trade here." That statement is not correct.

Since February 2006 people have been able to buy Nintendo American Depositary Receipts (ADRs) (symbol NTDOY) on the over-the-counter market. A total of 50 million NTDOY shares were registered with the SEC in February 2006. JP Morgan Chase is the depositary and eight (8) NTDOY shares equal one (1) Nintendo Japan share. The intrinsic value of a share of NTDOY can be calculated by converting the yen price of a share of Nintendo stock as quoted on the Tokyo Stock Exchange into dollars and then dividing by eight (8). It should be noted that Japan is 14 hours ahead of the United States; therefore, Tokyo trading generally dictates the price of NTDOY.

As an avid gamer and investor, I am a big fan of Nintendo. I own NTDOY shares and believe that everone who buys a Nintendo Wii or DS Lite needs to also buy NTDOY shares. I am convinced that the profit they will earn as shareholders will dwarf the cost of their consoles and games.

On February 21, 2007 NTDOY closed at $33.80, whereas Nintendo Japan closed on the Toyko Stock Exchange at 31,400 Yen. At those prices, Nintendo has a reported PE of 29.8 and a dividend yield of 1.25%.

Nintendo's fiscal year ends March 31. In a recent (January 25, 2007) news release Nintendo management announced impressive nine-month results for the period ended December 31, 2006. It stated that both "Nintendo DS" hardware and software recorded very strong sales for the nine month period ended December 31, 2006. "Nintendo DS" hardware has been the fastest rising game platform ever in the Japan market, and, in addition, has sold well in overseas markets. As a result, sales in the first three quarters have reached 18.88 million units on a worldwide basis. As for ” Nintendo DS” software, net sales have also accelerated, supported by a number of millon-seller titles. Sales have been led by "New Super Mario Bros.", with 8.64 million units sold on a worldwide basis and continuing strong sales of "Touch! Generations" titles such as "Brain Age: Train Your Brain in Minutes a Day!" and "Nintendogs". In the console business, "Wii" hardware (launched at the end of last year) got off to a favorable start and “Wii” software
titles such as "The Legend of Zelda : Twilight Princess" enjoyed brisk sales as well.

As a result, net sales rose to 712.5 billion yen (72.8% up y/y), causing operating income to reach 167.6 billion yen (102.5% up y/y) despite a rise in selling, general, and administrative expenses, which was primarily driven by higher marketing expenses. Income before income taxes and extraordinary items was 220.7 billion yen (50.5% up y/y) primarily due to 26.0 billion yen (45.2 billion yen last nine-month period) of foreign exchange gains. Net income reached 131.9 billion yen exceeding last year by 43.1%.

Importantly, Nintendo has a stated dividend policy of distributing the higher of the amount calculated by dividing 33% of consolidated operating income by the total number of outstanding shares, excluding treasury stock, as of March 31, 2007 rounded up to the 10 yen digit, or the amount calculated based on the 50% consolidated net income standard rounded up to the 10 yen digit. Based on this policy, the year-end dividend per share and the annual dividend per share are expected to be 410 yen and 480 yen, respectively. The ex-dividend date for the year-end dividend will be in March.

Unlike Sony with its PS3 and Microsoft with its XBox, Nintendo offers a pure play on a widely heralded new game product and has said it will make a profit on its Wii console sales. Nintendo says it will ship 4 million Wii units before the end of 2006. Importantly, most of Nintendo's biggest selling titles like "Legend of Zelda" and "Super Mario Brothers" are proprietary.

The trading volume in NTDOY has been rising as more people discover they can buy shares in Nintendo and for the past 10 trading days the average daily volume according to eTrade has been 356,824 shares.
A report in the The Financial Times on Wednesday, February 21, 2007 quotes one of Tokyo's more prominent game analysts, Merrill Lynch's Yoshiyuki Kinoshita, as being beyond bullish on the Wii. He told the UK-based business daily that he expects the console, which has appealed to nongamers via its motion-sensing capabilities, to be in 30 percent of US homes by 2011. In Japan, Kinoshita expects a full third of households to have the machine in four years. He believes the future of the Wii console will be brighter than anyone previously thought.