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.

2 comments:

ch1c0 s4b10 said...

I think the Wii is going to sell 100,000,000 units by 2012, what would incentivate developers to create games, making it a virtuous circle...

The Good Doctor said...

I think Nintendo will sell more than 100 million DS hand-helds by the end of 2009 and believe that by the end of 2012 Wii sales will be about 120 million. Developers will naturally want to develop games for the Nintendo DS and Wii because of the huge potential sales. They should not be expected to do it for peanuts.

The real cash machine for Nintendo is the library of proprietary games that it is up-dating for the DS and Wii to much fanfare from long-time Nintendoites. The profit margin on Nintendo's proprietary games is astronomical.

Mario is going to be extremely busy cleaning out all the cash that is going to get stuck in Nintendo's pipes!