Nintendo Stock Deep Dive w/ Clay Finck (TIP798)

Summary

Clay breaks down the fascinating history and business model of Nintendo, one of the most iconic entertainment companies in the …

Transcript

0:00While anyone can create playing cards, 0:022 secondsbuild a console, develop games,   or put together a movie, what cannot be  replicated is the emotional attachment  0:099 secondsthat people have with Nintendo  and the franchises they own. This makes   Nintendo fall into a similar category as Disney. 0:1818 secondsBut if we consider the intellectual   property through the lens of Hamilton  Helmer's Seven Powers, this primarily   falls under the category of branding. 0:2626 secondsEven though other types   of video games exist, many people choose   to purchase Nintendo's consoles and games. 0:3838 secondsBefore we dive into the video,   if you've been enjoying the show, be sure  to click the subscribe button below so you   never miss an episode. It's a free and easy 0:4545 secondsway to support us, and we'd   really appreciate it. Thank you so much. 0:5050 secondsHey everybody, welcome   back to the Investors Podcast. I'm your host, 0:5454 secondsClayfink, and on today's episode,   we'll be breaking down Nintendo. To kick  off today's episode, I wanted to start   by going back through the history of the 1:031 minute, 3 secondscompany. Because to   really understand where this company is today,  you have to appreciate the journey that brought   them here. Nintendo is one of the most 1:111 minute, 11 secondsinfluential and   successful gaming companies in the world.  They've been in the video game industry   since the industry's inception, and time and time 1:191 minute, 19 secondsagain, they've been at the   forefront of innovation. But what's interesting  is that Nintendo did not start in video  1:261 minute, 26 secondsgames at  all. Nintendo was founded all the   way back in 1889 by Fujiro Yumuchi. 1:321 minute, 32 secondsAt the time,   the company was in the business of selling  handmade playing cards, specifically a   traditional Japanese card game called Hanafuda. 1:401 minute, 40 secondsYamchi was a skilled   artisan and a lover of cards, and he had early  success in the cards business, partially due to  1:471 minute, 47 secondstheir use in the  underground gambling industry. Gamblers   would typically start a new game of Hanafuda  with a fresh deck, leading to strong demand for  1:561 minute, 56 secondsNintendo's cards.  After getting access to sell their cards in   shops all throughout Japan, Nintendo would become 2:032 minutes, 3 secondsone of, if not the largest   card manufacturer in Japan by the 1920s. 2:092 minutes, 9 secondsNintendo would   remain in the playing cards business in  the decades that followed. And in 1959,   Nintendo secured a licensing deal with another  globally iconic brand, Disney. Under the deal,  2:212 minutes, 21 secondstoys, board games,  and playing cards would be adorned with Disney   characters like Mickey Mouse and Popeye. In 1962, 2:292 minutes, 29 secondsthey decided that they   wanted to make a push to expand outside Japan.  So, the company went public and began to expand   into different markets. From there, 2:382 minutes, 38 secondsNintendo   attempted to enter several new business  segments, including, believe it or not,   rice cookers and a taxi service. 2:442 minutes, 44 secondsMost of these new   projects would fail miserably, and as a result,  by the late 1960s, Nintendo was on the brink of  2:522 minutes, 52 secondsbankruptcy. Nintendo  would then refocus on its bread and butter   segments, which really had worked for decades.  This was entertainment. Around this time,  3:013 minutes, 1 secondcomputers had  started to enter the scene. Nintendo was   on top of how they could use these new emerging 3:083 minutes, 8 secondstechnologies to create new   types of games that their customers could play, 3:143 minutes, 14 secondswhich led to the release   of the Beam Gun series in 1970, which was an  instant hit and sold more than 1 million units. In  3:213 minutes, 21 secondsthe years that  followed, home game consoles started to pick   up steam in the West. So, Nintendo partnered  with Mitsubishi to help them put together  3:293 minutes, 29 secondstheir first home  consoles. They go on to sell a few different types   of consoles throughout the 1970s, some of which 3:363 minutes, 36 secondsweren't much more than   just a game of Pong. In the 1980s, they launched  the Game and Watch, which was a handheld  3:433 minutes, 43 secondsgame that sold millions  of units over an 11-year time period. This success   gave them the cash necessary to continue 3:503 minutes, 50 secondsinvesting in new   games and continue on their growth trajectory.  In 1981, the original arcade game Donkey Kong was  3:593 minutes, 59 secondsdeveloped by Shagarro  Miiamoto and his team, and it was a culmination   of game design at the time. Miiamoto was just an 4:084 minutes, 8 secondsavid gamer himself,   and he understood that a game at its fundamental  level, it needed to be easy to learn, but  4:154 minutes, 15 secondsdifficult to master.  Donkey Kong was an immediate success as it was the   number one arcade game that year. This game was 4:234 minutes, 23 secondsalso the debut of the   iconic Nintendo character Mario. In the 1980s, 4:284 minutes, 28 secondsNintendo's gaming   segment included arcade games, handheld games,  and consoles. But Nintendo was starting to  4:354 minutes, 35 secondssee just  how difficult it was to be at the   center of the video game industry. 4:404 minutes, 40 secondsIt's an   industry characterized by booms and  busts and a flurry of competition.  4:454 minutes, 45 secondsOne of the most difficult  periods in the gaming industry's history was the   crash of 1983, which was created by a flurry 4:534 minutes, 53 secondsof third-party game   developers just flooding the market with  lowquality games. And the crash led to a   lack of demand for gaming consoles for around 2 5:025 minutes, 2 secondsyears. But Nintendo   was still intent on being the leader in the US  market. And after several years of success selling  5:095 minutes, 9 secondsthe Famicom home gaming  console, they rebranded the console to the   Nintendo Entertainment System, otherwise known as 5:165 minutes, 16 secondsthe NES. In the late   1980s, they would sell more than 13 million  units of the NES, and it would be in more   than onethird of all US households by 1990. 5:285 minutes, 28 secondsThere was one specific   addition to the NES that really set it apart from  other consoles, and this was the lockout chip.  5:365 minutes, 36 secondsWhile other video game  consoles had no protections for what games could   be inserted into the console, this led  to several game developers making, you  5:445 minutes, 44 secondsknow, just whatever games  they wanted that consumers would then purchase   and try out on the console. Nintendo wanted 5:515 minutes, 51 secondsfull control of that   user experience. So on the NES, users could  only play licensed games. Nintendo would also  6:006 minutesplace a gold Nintendo seal of  quality on gaming packaging and cartridges,  6:066 minutes, 6 secondsshowcasing to consumers  that their games were licensed and reviewed by   Nintendo for quality and family-friendly content. 6:146 minutes, 14 secondsAnd even   with this level of gatekeeping, 6:166 minutes, 16 secondsthe NES really had no   shortage of games in its library, which included  The Legend of Zelda, Duck Hunt, Wild Gunman,  6:236 minutes, 23 secondsand Nintendo's crown  jewel, Super Mario Bros. The NES was far ahead   of its time in terms of graphics and gameplay, and 6:306 minutes, 30 secondsit was also far cheaper   than other consoles that were available  at that time. Super Mario Bros. success   on the NES led Mario to become a cultural icon 6:406 minutes, 40 secondsin the United States. I   certainly have fond memories growing up playing  on the NES and the Nintendo 64, playing games  6:486 minutes, 48 secondslike Super Mario Bros.  and Super Smash Brothers. The NES would go on to   sell over 60 million units around the world. 6:566 minutes, 56 secondsSo, in the 1990s,   Nintendo would also go on to release one  of my other favorite games as a child,   Pokémon. Pokemon was 7:037 minutes, 3 secondsthe   brainchild of Satoshi Tajiri, and  it was a six-year project before   being released in February 1996. The success 7:137 minutes, 13 secondsof Pokemon led to a   natural expansion into playing cards and a huge  amount of merchandise. This actually reminds me  7:207 minutes, 20 secondsthat I was uh touring a  house for sale here in my city the other day and   in one of the children's bedrooms, there was a 7:287 minutes, 28 secondsNintendo themed room.   You know, you had Mario and Luigi posters on  the walls, a Mario themed bed, and all sorts   of merchandise in the room. So, Pokémon was 7:387 minutes, 38 secondsyet another success   for Nintendo as 80 million units were sold on the  Game Boy and Game Boy Color. When I was a child,  7:457 minutes, 45 secondsyou definitely could  have considered me a Pokémon addict. I just   loved the Pokemon games. Throughout the '90s, 7:517 minutes, 51 secondsNintendo's primary   competitor in the gaming console industry was  Sega, which really positioned itself as a cooler,  7:587 minutes, 58 secondsmore  mature console that targeted   older audiences. Sony was also on the rise, 8:048 minutes, 4 secondswhich had just released   the PlayStation as well. Nintendo launched the  Nintendo 64 in 1996. This featured their first 3D  8:138 minutes, 13 secondsvideo game console,  and it included the launch of Super Mario 64,   which beautifully showed off the N64's 8:218 minutes, 21 secondscapabilities. However,   the N64 had difficulties competing  with the PlayStation, as it was more   difficult for game developers to develop games, 8:308 minutes, 30 secondsand the games weren't   able to store near as much memory, which allowed  Sony to gain a lead in the gaming console market.   The intense competition between 8:408 minutes, 40 secondsNintendo and Sony,   it led to price cuts on the consoles to encourage  consumers to get that initial exposure to their  8:478 minutes, 47 secondsecosystem. Nintendo and  Sony, they just did their best to get the consoles   in the customer's hands with the hope that 8:548 minutes, 54 secondsthey would purchase   several games down the line to recoup their  losses on the sale of the console. The success   of the PlayStation showed Nintendo that they 9:039 minutes, 3 secondsreally needed to   continue to innovate and differentiate  themselves to stay on top of the   gaming industry. So, they had 9:109 minutes, 10 secondsthe   Nintendo Gamecube that sold around  21 million units, but the PlayStation   2 sold more than 7x that at 158 million 9:189 minutes, 18 secondsunits. However,   Nintendo got the upper hand on Sony through their  handheld device as the Nintendo DS sold over 150  9:279 minutes, 27 secondsmillion units, nearly  twice that of the PlayStation PSP. Next,   Nintendo set their sights on developing the Wii, 9:349 minutes, 34 secondswhich they described as   a console that mom would like. They sought  to have a console that was unobtrusive and   could slip into anyone's home regardless of 9:439 minutes, 43 secondswhether they were a   gamer or not. There were so many aspects to the  Wii that made it unique, and Nintendo was very  9:509 minutes, 50 secondsintentional in the  types of households they were targeting. It was   this thin and sleek design, making it easy to fit 9:589 minutes, 58 secondsinto anyone's household.   It had a much quieter fan than top competitors,  and the Wii remote was very similar and intuitive,   you know, to a remote. So 10:0710 minutes, 7 secondsolder   generations would intuitively know  how to work it and they would just   point it at the system similar to that remote. 10:1410 minutes, 14 secondsThe Wii was a huge   financial success for Nintendo as revenues more  than tripled from 2006 to 2010. A few years later  10:2410 minutes, 24 secondsthough, Nintendo had a  total flop with the launch of the Wii U. The Wii   U had several clear issues. But to summarize 10:3210 minutes, 32 secondshow big of a miss   this nextG console was, they were targeting to  sell 100 million Wii Us and they ended up only  10:4110 minutes, 41 secondsselling  13 million. So they were totally   dwarfed by other consoles in the Xbox 10:4810 minutes, 48 secondsand PS4.   And as a result, Nintendo turned  slightly unprofitable in 2012.  10:5410 minutes, 54 secondsThe one positive spin  from the Wii U was that it sort of forced Nintendo   to find that next big win. And this led them to 11:0211 minutes, 2 secondslaunch the Nintendo   Switch in 2017. And this allowed for gameplay both  at home on one's television and for gameplay on   the go, such as when you're traveling. 11:1211 minutes, 12 secondsAfter the   failure of the Wii U, the Nintendo Switch would  practically serve as the company's saving grace.  11:1811 minutes, 18 secondsRemarkably, the Switch  would break Nintendo's records for home console   sales and was able to attract interest  from thirdparty developers to help build   out their library of games. Since then, 11:2911 minutes, 29 secondsNintendo has   been riding the success of the Switch as it has  released updated versions to help keep the console   sales rolling in. So, currently they offer the 11:3811 minutes, 38 secondsregular Nintendo   Switch, the Nintendo Switch Light in the OLED  model, and then they also have the Switch 2, which   we'll be getting into here in a bit. In 2012, 11:4811 minutes, 48 secondswith everyone in the   world in a lockdown, Nintendo sold over  20 million Switches in that year alone.   The Switch is actually my most recent touch point 11:5711 minutes, 57 secondswith Nintendo. So,   when I was back home for Christmas, my younger  cousin uh she got us going on the Switch,   and it quickly brought me back to my childhood, 12:0612 minutes, 6 secondsplaying fun, intuitive,   and competitive games with friends and family.  None of us knew how to play this uh game that   she had set us up with. So, uh you know, 12:1612 minutes, 16 secondsgoing into that   evening, most of us just picked the game up rather  quickly, even those who didn't have previous   experience with the Switch. And you 12:2412 minutes, 24 secondsknow,   this really showcases all the  subtle nuances that go into   the design of Nintendo's games. So, like I 12:3212 minutes, 32 secondsmentioned earlier,   many of these games need to be easy to pick up  and get going, but difficult to master. In more   recent years, Nintendo has expanded into 12:4012 minutes, 40 secondsnew segments   to give the company a broader appeal and give  consumers different touch points. So, in 2016,  12:4712 minutes, 47 secondsNintendo  first entered the mobile market   by developing apps for mobile phones. 12:5112 minutes, 51 secondsAlthough mobile isn't   a significant revenue driver for the company, 12:5512 minutes, 55 secondscumulative   downloads for Nintendo's apps have  exceeded 900 million, indicating,  13:0013 minutesyou know, a pretty broad  reach. And although you have the classic   Mario games on mobile, the biggest mobile  hit was Pokémon Go's launch in 2016. This  13:1013 minutes, 10 secondsdrove huge  download numbers and player engagement.   Nintendo's stock price initially soared because  investors mistakenly believed that Nintendo would  13:1913 minutes, 19 secondsdirectly benefit from  that success, but Nintendo did not develop or   publish the game. It was uh published under the 13:2613 minutes, 26 secondsPokémon Company,   of which Nintendo only has a minority stake in,  so the financial impact to Nintendo was rather  13:3313 minutes, 33 secondslimited. They've also  followed Disney's lead by entering the amusement   park business. They've partnered with 13:4013 minutes, 40 secondsUniversal   Parks and Resorts to create Super  Nintendo World, an immersive theme   park based on its iconic games. They 13:4813 minutes, 48 secondsopened one   park in Japan in 2021, in subsequent  locations in Hollywood in 2023,   and Orlando in 2025. These parks 13:5613 minutes, 56 secondsbring   Nintendo characters and  environments to life in real spaces,  14:0014 minutesblending cuttingedge ride  technology with the gaming elements that   fans absolutely love. Amusement parks are yet 14:0814 minutes, 8 secondsanother example of   Nintendo being successful in introducing  its IP to a wider audience. And finally,   they've also been expanding into movies. 14:1714 minutes, 17 secondsNintendo's   major entry into big screen movies  came with the Super Mario Bros.  14:2214 minutes, 22 secondsmovie in April 2023.  The movie grossed $1.3 billion worldwide, becoming   the highest grossing film based on a video 14:3014 minutes, 30 secondsgame and one   of the top animated films ever.  Though Nintendo does not break   out film revenue in its own accounts, it 14:3814 minutes, 38 secondsacknowledged   that the Mario movie boosted overall awareness  of its IP and it helped increase sales of related   Mario games and merchandise after the 14:4614 minutes, 46 secondsrelease.   Given the success of the Super  Mario Bros. movie. Nintendo is   actively expanding its movie efforts with planned 14:5414 minutes, 54 secondsfilms, including the   Super Mario Galaxy movie in 2026 and a liveaction  Legend of Zelda film, which is expected in 2027,  15:0215 minutes, 2 secondsalongside other  projects drawing on its key franchises.   Nintendo's management has  emphasized that movies are a part of  15:0915 minutes, 9 secondsa long-term strategy  to extend and preserve its IP beyond games,   reaching new audiences and keeping its brands 15:1815 minutes, 18 secondsculturally relevant.   Zooming out, what's remarkable  about Nintendo is how they've  15:2515 minutes, 25 secondsneeded to produce hit  after hit with these new consoles, new games,   entering new markets, etc. And overall, they 15:3215 minutes, 32 secondsfound a way to both   survive and thrive over the last 137 years.  And it's no coincidence that Nintendo is this  15:4115 minutes, 41 secondslong-standing  Japanese company, as Japan is home to many   of the world's oldest companies that are still in  operation today. There are thousands of companies  15:5015 minutes, 50 secondsin Japan that are  well over a 100 years old. Japanese companies   are known for their focus on longevity rather than 15:5715 minutes, 57 secondsoptimizing short-term   earnings. They tend to avoid existential  risks by maintaining a strong balance sheet,   not getting overly leveraged, and moving 16:0616 minutes, 6 secondscautiously into new   categories. Since Nintendo was founded in 1889,  they just fit right into this Japanese model by  16:1416 minutes, 14 secondsensuring  survival and longevity over appeasing   short-term oriented shareholders. Nintendo's  balance sheet is rock solid as they have more   than enough cash to cover all their debts. 16:2516 minutes, 25 secondsAnd this has given   them the optionality to continue to experiment  and find new ways to monetize their incredibly  16:3216 minutes, 32 secondsvaluable IP. To  further illustrate how long-term Nintendo behaves,   consider that Mario debuted in 1981 and more than 16:4116 minutes, 41 secondsfour decades later,   Mario remains a cornerstone of Nintendo's  monetization strategy. That does not happen by  16:4916 minutes, 49 secondsaccident. That's the  result of deliberate stewardship of intellectual   property across generations. Now, this 16:5616 minutes, 56 secondslong-term strategy   isn't necessarily viewed as a good thing to some  investors because if a company is too cautious in  17:0417 minutes, 4 secondsthe way they operate,  then they might be leaving quite a bit of money   on the table or they may be even doing their  customers a disservice by not offering products   that there is clear demand for. 17:1517 minutes, 15 secondsSo,   that's the big question with Nintendo  from an investor's perspective.  17:2017 minutes, 20 secondsIs this a company that  is shareholder friendly and looks to maximize   long-term value for its shareholders? So, around 17:2717 minutes, 27 seconds2018, Nintendo made   a strategic shift in their  business model by focusing   more on generating recurring revenue through a 17:3517 minutes, 35 secondssubscription model   rather than continuing to start from scratch  and need to have yet another hit console and   new set of games in order to survive. I 17:4417 minutes, 44 secondsthink back to   my childhood. One of my all-time  favorite games was Super Smash   Brothers on the Nintendo 64. It's a game 17:5117 minutes, 51 secondsthat I could   pick up years later and feel like I enjoyed it  just as much as when I played it when I was a kid   with my brothers or my friends. But Nintendo 18:0018 minuteswas only able to monetize the   sale of the console and then the one-time  sale of the games. I was getting tremendous  18:0918 minutes, 9 secondsvalue from those  games for years, but Nintendo only captured   those one-time sales, which brings us to this 18:1618 minutes, 16 secondsfundamental shift   that they've made over the past few years. So,  to frame it another way, Nintendo is delivering  18:2418 minutes, 24 secondsextraordinary amounts  of value to many of their customers, but they're   only capturing a small portion of that value. 18:3118 minutes, 31 secondsSo, by implementing   more of a recurring revenue model, they can  position themselves to increase each customer's   lifetime value to the company. Over the 18:4018 minutes, 40 secondsyears, I'm   sure Nintendo has looked at how Apple's business  operates and in what ways they could replicate   Apple's success. Apple implemented a business 18:4918 minutes, 49 secondsmodel that's known   as the iterative hardware model. This business  model is built around releasing consistent   incremental upgrades on a predictable 18:5818 minutes, 58 secondsannual   cycle rather than reinventing its  products all at once. Each new device   typically keeps the same core design but 19:0719 minutes, 7 secondsimproves key   components like processing power, battery life,  cameras, and displays. Over time, these steady  19:1319 minutes, 13 secondsenhancements, they  compound into major performance gains while   reducing manufacturing risk and smoothing revenue 19:2119 minutes, 21 secondscycles. The approach   also strengthens ecosystem  lockin as hardware, software,  19:2619 minutes, 26 secondsand services  evolve together in a controlled coordinated   way. Investors also tend to favor this model  because it creates more predictable demand,  19:3619 minutes, 36 secondssteadier cash flows,  and lowers the risk of major product missteps.   Now, how is Nintendo implementing this playbook? 19:4419 minutes, 44 secondsPrior   to the release of the Switch, 19:4619 minutes, 46 secondsNintendo's earnings   essentially always relied on the success of their  gaming consoles and handheld devices. So the  19:5319 minutes, 53 secondscore of the idea of  this transformation was creating customer lockin   once a customer entered Nintendo's ecosystem. 20:0120 minutes, 1 secondSo in the past once a   customer purchased let's say the Wii, they might  have had that customer for 5 years and then they   would just hope that that customer would 20:0920 minutes, 9 secondsthen purchase   the next generation console. But now with the  creation of the Switch, the hope is that once   a customer purchases the Switch One or the 20:1720 minutes, 17 secondsSwitch 2, they're   now in Nintendo's ecosystem for a much longer  period of time. Nintendo has been able to add more  20:2420 minutes, 24 secondsvalue to its customers  by developing a softwarebased ecosystem that   features a library of games. users would not only 20:3220 minutes, 32 secondsbe able to access the   current generation of games, but it would also  be backwards compatible, meaning that you'd   be able to play many of the games that were 20:4020 minutes, 40 secondsavailable on past   consoles, offering more selection. Furthermore,  if a customer buys the Nintendo Switch in,  20:4620 minutes, 46 secondslet's say, 2018, they  still may be able to play some of the new games   that are being released today. The simple way to 20:5320 minutes, 53 secondsthink about this   is that smartphone apps that are  developed today might work best   on the newest iPhone, say the iPhone 17, 21:0221 minutes, 2 secondsbut those apps   also work on previous generations of the iPhone.  So, the release of the Switch represented that   shift in their business model where each 21:1021 minutes, 10 secondsnew console had   a much longer shelf life and it created this  strong customer lockin. Sony's PlayStation and  21:1721 minutes, 17 secondsMicrosoft's Xbox, they  followed the subscription model years ago. The   Xbox 360 was the first console to put online 21:2421 minutes, 24 secondsplay behind a payw   wall through a service called Xbox Live Gold  back in 2005. In PlayStation, they followed   suit with the PS+ in 2013 with the launch of 21:3421 minutes, 34 secondsthe PS4. Nintendo   launched the Switch in March of 2017  and then the Switch 2 in June of   2025. The Switch was just a big 21:4221 minutes, 42 secondshit.   It sold 155 million units worldwide,  making it their bestselling console   ever. As of year in 2025, Switch 21:5221 minutes, 52 seconds2 sales have   come in at 17 million units, which is selling  at an even faster pace than the Switch One. In   the first 4 days of the Switch 2's launch, 22:0122 minutes, 1 secondsales exceeded 3.5   million units, making it the bestselling release  for any video game platform in history. The UK   sold out their stores in less than 2 minutes. 22:1122 minutes, 11 secondsFrance sold out in   less than an hour and the website in  Japan was repeatedly breaking due to   so much traffic. Are you looking to connect with  highquality people in the value investing world?  22:2222 minutes, 22 secondsBeyond hosting this  podcast, I also help run our tip mastermind   community, a private group designed for serious 22:2922 minutes, 29 secondsinvestors. Inside,   you'll meet vetted members who are entrepreneurs,  private investors, and asset managers. People   who understand your journey and can help 22:3722 minutes, 37 secondsyou grow. Each week   we host live calls where members share insights, 22:4122 minutes, 41 secondsstrategies, and   experiences. Our members are often surprised to  learn that our community is not just about finding   the next stockp, but also sharing lessons on 22:5122 minutes, 51 secondshow to live a   good life. We certainly do not have all the  answers, but many members have likely face   similar challenges to yours. And our community 23:0023 minutesdoes not just live online.   Each year we gather in Omaha and New York  City, giving you the chance to build deeper,  23:0723 minutes, 7 secondsmore  meaningful relationships in person.  23:1023 minutes, 10 secondsOne member told me  that being a part of this group has helped him   not just as an investor, but as a person looking  for a thoughtful approach to balancing wealth  23:1823 minutes, 18 secondsand happiness. We're  capping the group at 150 members, and we're   looking to fill just five spots this month. So, if 23:2623 minutes, 26 secondsthis sounds interesting   to you, you can learn more and sign up for the  weight list at thevestorpodcast.com/mastermind.  23:3423 minutes, 34 secondsThat's  thespodcast.com/mastermind or feel free to   email me directly at clay@theinvestorpodcast.com. 23:4523 minutes, 45 secondsIf you enjoy excellent   breakdowns on individual stocks, then  you need to check out the intrinsic value   podcast hosted by Shaun Ali and Daniel Mona. 23:5523 minutes, 55 secondsEach week, Shan   and Daniel do in-depth analysis on a company's  business model and competitive advantages. And   in real time, they build out the intrinsic value 24:0424 minutes, 4 secondsportfolio for you to   follow along as they search for value in the  market. So far, they've done analysis on great   businesses like John Deere, Ulta Beauty, 24:1324 minutes, 13 secondsAutozone,   and Airbnb. And I recommend starting  with the episode on Nintendo,  24:1824 minutes, 18 secondsthe global powerhouse  in gaming. It's rare to find a show that   consistently publishes high quality, comprehensive 24:2524 minutes, 25 secondsdeep dives that cover   all of the aspects of a business from  an investment perspective. Go follow the   Intrinsic Value Podcast on your favorite 24:3324 minutes, 33 secondspodcasting app   and discover the next stock to add  to your portfolio or watch list.  24:4024 minutes, 40 secondsWall Street's  initial consensus on the success of the   Switch 2 was that they'd sell around 18 million  units in the first year, and it's looking like  24:4824 minutes, 48 secondsthey're going to  far surpass that. This also illustrates the   pricing power that Nintendo has, considering  that the Switch 2 launched at a meaningfully  24:5624 minutes, 56 secondshigher price  point than the original Switch One. So,   initial sales for the Switch 2 have been strong,  which I don't think should be a surprise since   it's been 8 years since the original Switch. 25:0725 minutes, 7 secondsThe Switch   2 includes several upgrades, 25:1025 minutes, 10 secondsincluding   a significantly more powerful  processor and GPU, up to 4K   resolution when docked, a larger screen, and a 25:1825 minutes, 18 secondsmajor increase in   storage capacity. It also has built-in  game chat, and an integrated microphone   with noise cancellation. Overall, there's this 25:2625 minutes, 26 secondsstrong incentive for   customers to upgrade from the Switch One to the 2, 25:3025 minutes, 30 secondsassuming that they're   just big fans of Nintendo. Turning back  to the Apple analogy, part of what would   make the Switch a long-term success is 25:3825 minutes, 38 secondsencouraging   third-party developers to develop games that  could then be sold within Switch's ecosystem.   Nintendo has taken several steps to encourage 25:4725 minutes, 47 secondsdevelopers to do   just that. They've created a developer  platform which provides support for   developers throughout the process of creating 25:5425 minutes, 54 secondsSwitch games.   They've lowered the technical barriers by  supporting popular engines that are used   by most developers. and they've improved 26:0226 minutes, 2 secondsrelationships   with thirdparty publishers  and collaborated more directly   with companies like Microsoft, EA, Capcom, 26:0826 minutes, 8 secondsand Sega. Overall,   they've made it much more attractive for  developers to develop games for the Switch,   and it seems to have worked out beautifully. 26:1826 minutes, 18 secondsThe Nintendo   Switch now has a library of over  13,000 games in their ecosystem,  26:2326 minutes, 23 secondsand the vast majority  of these games are coming from thirdparty   developers. To help put this into perspective,  the Wii U offered just 600 third party titles.  26:3326 minutes, 33 secondsIt's also important  to mention that since Nintendo has such a vast   base of users, this gives developers even more 26:4026 minutes, 40 secondsof an incentive to   develop for their ecosystem rather than one of  their competitors. The more users they have,  26:4726 minutes, 47 secondsthe greater the  profit potential for developers, which leads   to a wider moat for Nintendo. But I think that  Nintendo still wants to keep their firstparty  26:5526 minutes, 55 secondsgames at the  center of the user experience and, you know,   staying true to their mission of creating  these unique, intuitive, and family-friendly  27:0427 minutes, 4 secondsentertainment  that just put smiles on the faces   of everyone they touch. So, 27:0927 minutes, 9 secondswhat do   the economics look like for the Switch? Starting  from the beginning, the Switch 2 console, which   includes two controllers, it sells for $450 in 27:1827 minutes, 18 secondsstores. In the   Switch one, it sells for $340. 27:2227 minutes, 22 secondsOther   consoles sold by Sony and Microsoft are sold  at a loss with the hopes of recouping their   money through the high margin video games. But 27:3027 minutes, 30 secondsNintendo is unique in   that they actually sell their hardware at a profit  with something like a 10 to 20% gross margin.  27:3727 minutes, 37 secondsAfter buying the  console, games will need to then be purchased   as well. There are three tiers of games that  you can purchase within the Switch's ecosystem.  27:4627 minutes, 46 secondsYou have indie,  which is short for independent, double A,   which you can think of as a mid-tier level, and  then AAA. Indie games are around $10 to $30,  27:5527 minutes, 55 secondsand they can be  produced by a single developer or a small team.   It's more of your basic games. DA games are $30 to 28:0228 minutes, 2 seconds$50, and they tend to   be put together by midsize studios. These  can be solid games, but they're not quite   uh blockbuster level. And then you have the 28:1128 minutes, 11 secondsAAA games. These   tend to run around $60 to $70. Teams that have  huge budgets are putting these AAA games together.   Some examples include The Legend of Zelda, 28:2128 minutes, 21 secondsDiablo III, and   Skyrim. Third-party developers collect revenue on  games sold within Nintendo's ecosystem and end up  28:2828 minutes, 28 secondspaying Nintendo a  30% fee in return. In case that sounds familiar,   that is exactly the fee that Apple  charges its third party developers   for iOS purchases. Now, you might be wondering, 28:4028 minutes, 40 seconds"But what if users only   buy a couple of games and they don't need anymore? 28:4428 minutes, 44 secondsDoesn't that mean that   you just have the same problem as before where  users would buy the consoles, buy the games,   but then no further value would be captured? 28:5228 minutes, 52 secondsWell, this is where   Nintendo Switch Online comes into play. Nintendo  Switch Online or NSO is their paid subscription  28:5928 minutes, 59 secondsservice for the Switch  and Switch 2. NSO includes online multiplayer   for supported games, clouds save backups, 29:0629 minutes, 6 secondsaccess to a library   of classic games from previous hardware  consoles, and online features like voice   chat integration. Individuals can pay $20 for 29:1529 minutes, 15 secondsa year and families   can pay $35 for a year. For Nintendo  super fans, they also have a higher tier   which includes additional features such as retro 29:2429 minutes, 24 secondslibraries. This runs at   $50 per year for individuals and $80 per year  for families. And I think it's increasingly  29:3029 minutes, 30 secondsimportant that  Nintendo has invested significantly in their   online infrastructure to allow for users  to play online with their friends or other  29:3929 minutes, 39 secondsusers. It's also  pretty attractively priced as PlayStation charges   $80 a year for PlayStation Plus for the Essentials 29:4629 minutes, 46 secondsplan and then $160 per   year for the premium plan. And then Xbox's Game  Pass Ultimate, it runs at $360 per year. So,  29:5529 minutes, 55 secondsit may be that  Nintendo is just beginning to tap into, you know,   further monetizing their user base through the 30:0330 minutes, 3 secondsgrowth of Nintendo   Switch Online. To paint some more numbers  around Nintendo's size and their scale,   they've been successful in growing their number 30:1130 minutes, 11 secondsof annual playing users   within the Switch ecosystem. This metric grew from   16 million all the way back in 2018 to 30:1930 minutes, 19 seconds129 million   today. The surprising finding, at least  what I thought, on this metric is that it's   basically been flat in recent quarters despite the 30:2730 minutes, 27 secondslaunch of the Switch 2.   This suggests to me that a lot of consumers who  bought the Switch 2 were simply upgrading from  30:3530 minutes, 35 secondsthe Switch One. And it  also showcases that Nintendo is going to need to   come up with more creative ways to attract 30:4230 minutes, 42 secondsnew users into   their ecosystem. Of the 129 million active users,  around 34 million were NSO users. That was as of  30:5130 minutes, 51 secondsSeptember  24. And it looks like Nintendo quit   reporting this figure altogether. 30:5630 minutes, 56 secondsIf   that is representative of where the  number of subscribers are at today,   then I think there's still room for this 31:0331 minutes, 3 secondssegment to continue   to grow. Nintendo has seen this transformation to  a more capital light recurring revenue business  31:1231 minutes, 12 secondsand it is making  an impact on the financials. So, prior to   the launch of the Switch, operating margins  were around 6% and then prior to the launch  31:2031 minutes, 20 secondsof the Switch 2, you  saw margins rise all the way to 30%. So this is   a result of a higher mix of their business  coming from software sales which of course   have lower input costs and higher margins. 31:3131 minutes, 31 secondsSoftware overall   is just a much much better model for Nintendo as  consumers become accustomed to purchasing most of  31:3931 minutes, 39 secondstheir  games online. That has profound   implications on Nintendo's business. 31:4331 minutes, 43 secondsThey don't   need to ship a physical product to retailers like  Best Buy and Walmart. They don't need to give   those retailers a cut. Consumers don't need to 31:5131 minutes, 51 secondsdrive to the store to   get a game. And for thirdparty developers, they  also get a better end of the deal as there's   less friction involved in making the purchase 31:5931 minutes, 59 secondsand they're also   cutting the retailer out of the equation as  well. I was reading a Morning Star report   this morning on Nintendo's business. And 32:0732 minutes, 7 secondsMorning Star   estimates that 80% of Nintendo's gross margins   come from software sales and around 75 to 80% of 32:1532 minutes, 15 secondstheir software sales   come from selling their own firstparty games.  So the rest of their software sales come from   those third-party titles. So Nintendo's growth 32:2432 minutes, 24 secondsis somewhat contingent   on them being successful with the release of  new firstparty games going forward. So you  32:3232 minutes, 32 secondsknow  they have a very good track   record of doing that time and time again. 32:3632 minutes, 36 secondsWhat's also important   is that more than half of Nintendo's firstp  party titles come from their longestablished   and classic franchises. Think Mario, Zelda. 32:4632 minutes, 46 secondsAnd this helps the   company continue to generate  this strong and consistent   earnings and returns over time. I'd like 32:5432 minutes, 54 secondsto talk a little   bit more about the Switch 2 here as well. While  the Switch 2 may look similar to the previous   generation, Nintendo re-engineered the 33:0333 minutes, 3 secondshardware and   its accessories from the ground up. The  Switch 2 features a larger display screen,   upgraded controllers, and it includes 33:1133 minutes, 11 secondssignificantly more   powerful processing and graphics capabilities.  Nintendo wants to encourage the existing Switch  33:1833 minutes, 18 secondsusers to upgrade.  So, they need to provide enough additional   benefits to try and incentivize them to do so. And 33:2633 minutes, 26 secondsthis would prove to be   a challenge given that the Switch 2 is priced a  decent amount higher than the original Switch.  33:3233 minutes, 32 secondsThey  also did a few more things to   help encourage users to upgrade. So, first, 33:3633 minutes, 36 secondsthey strategically   bundled the system with the highly anticipated  Mario Kart World. So, if you go to their website,  33:4333 minutes, 43 secondsyou'll see the option  to purchase the Switch 2 for $450 or purchase   the bundle, which includes Mario Kart World 33:5033 minutes, 50 secondsas well for $500.   Nintendo is also, as I outlined earlier, they've  taken these major steps to secure a suite of  33:5833 minutes, 58 secondsextensive third party  games. So, the Switch 2 includes a custommade   Nvidia chip that showcases graphical 34:0534 minutes, 5 secondsimprovements   and increased memory and bandwidth. This new chip  also allows more third-party AAA games, which puts  34:1234 minutes, 12 secondsthe systems  capabilities more in line with the PlayStation and   Xbox. Most third-party AAA games weren't really 34:2034 minutes, 20 secondsavailable on   the original Switch due to its  limited hardware capabilities,   but now that's no longer an issue. They 34:2734 minutes, 27 secondsadded game chat,   which is a built-in voice and  video communication feature,  34:3134 minutes, 31 secondsand the first  console that has allowed players to talk,   share screens, and even video chat while gaming.  This is important because gaming for a lot of  34:3934 minutes, 39 secondspeople is a social  activity. They might hop online just to spend   time with their friends in the comfort of  their own homes. This helps make many of their  34:4834 minutes, 48 secondsgames more engaging,  leads to longer play sessions, and it pairs well   with the more complex multiplayer games so  players can better communicate with each  34:5634 minutes, 56 secondsother. It also  opens up a whole new segment of the types   of games that developers may want to create which 35:0335 minutes, 3 secondspreviously, you know,   just weren't interesting due to the lack  of the voice chat feature. What's also   interesting about game chat is that players can be 35:1135 minutes, 11 secondsplaying different games   and still be in communication with each  other. So perhaps you're playing on the   Switch with three of your friends. You and one 35:1935 minutes, 19 secondsfriend might decide   to go and play a round of Mario Kart World.  And perhaps your other two friends would rather   play The Legend of Zelda. So, in the midst of 35:2735 minutes, 27 secondsall that, all four   of you can remain in constant communication with  each other if you'd like. They also introduced   mouse functionality, allowing Joy-Cons 35:3635 minutes, 36 secondsto function like   a mouse and even supporting standard USB mouse  inputs. That may sound like a small addition,  35:4335 minutes, 43 secondsbut it significantly  expands the types of games that work well on the   platform, particularly firsterson shooters, 35:5135 minutes, 51 secondsstrategy games,   and simulation titles that benefit from  precise cursor control. By removing that   control limitation, Nintendo makes the Switch 2 36:0036 minuteseven more attractive to thirdparty   developers and more competitive with  PC and other console ecosystems,   which really increases the Switch 2's total 36:0936 minutes, 9 secondsaddressable market.   With all of this put together, there's been  a fairly significant increase in the value   proposition now that users get with, you 36:1836 minutes, 18 secondsknow, they get   the best of the best Nintendo games, backward  compatibility for games from previous generations,   and many of the best third-party games, 36:2736 minutes, 27 secondsincluding   those of which that are AAA. 36:2936 minutes, 29 secondsAdding   the AAA gaming capabilities, I think,  was huge for Nintendo. For years,  36:3436 minutes, 34 secondsthey opted out of  this AAA arms race and they left it to Sony and   Microsoft to invest just crazy amounts of money in 36:4236 minutes, 42 secondsdeveloping games like   Call of Duty and Grand Theft Auto. The most  popular AAA games, they can cost hundreds   of millions of dollars per year to develop 36:5136 minutes, 51 secondsand have carried   significant financial risk because the developers  don't know exactly how successful the games   will be. The cost of developing these games 37:0037 minuteshas also risen just a lot that   both Sony and Microsoft have opted to go this 37:0737 minutes, 7 secondsmulti-platform route   to help recoup that upfront investment. Meaning   that they're allowing users on other consoles to 37:1537 minutes, 15 secondsstart playing their   first party games because the users on their  consoles aren't enough to have them recoup that   investment. Thanks to Nvidia's custom 37:2337 minutes, 23 secondschip,   the Switch 2 now has the capability to run  these modern AAA games, which opens them up   to a whole new segment of gamers. Historically, 37:3337 minutes, 33 secondsNintendo has catered to   families, casual gamers, and younger demographics.  And now they're able to also capture some of  37:4137 minutes, 41 secondsthose older  demographics and hardcore gamers. And this   is also a win for Sony and Microsoft as well  because it opens up their games to the largest   gaming ecosystem that exists with the Switch. 37:5337 minutes, 53 secondsNintendo still won't   have the most powerful hardware in the market.  It's not the game they're trying to play.  37:5937 minutes, 59 secondsInstead,  they're expanding their capabilities   just enough to participate in the  broader AAA ecosystem while still  38:0638 minutes, 6 secondsleaning into what makes  Nintendo Nintendo. That's the iconic first-party   IP, innovative gameplay, portability, 38:1438 minutes, 14 secondsand a focus   on providing games that are fun instead of having,  you know, this incredible raw horsepower. Another   added bonus is that not only does Nintendo 38:2338 minutes, 23 secondstake a cut on the   sale of each Nintendo game, they also get the 30%  cut on any upsells. So, these upselles are pretty  38:3238 minutes, 32 secondsprevalent in  AAA games through downloadable content and   in-game purchases. And similar to Apple's model, 38:3938 minutes, 39 secondsNintendo takes a cut   of these transactions without incurring  any costs. So, as I highlighted earlier,  38:4538 minutes, 45 secondsNintendo's expansion  into movies has given them a great opportunity   to both further monetize their IP and use movies 38:5338 minutes, 53 secondsas a tool for marketing   to selling their gaming consoles and games.  Nintendo's first successful film was the   Super Mario Bros. movie which was released in 39:0239 minutes, 2 seconds2023 and that was   in partnership with Illumination  and Universal Pictures. The film   was a hit because it combined this 39:1039 minutes, 10 secondsnostalgic   appeal for the longtime fans  with familyfriendly humor,   strong animation, and global distribution 39:1839 minutes, 18 secondsthrough their   partnerships. And this allowed  the movie to resonate across   generations and just be a a blockbuster 39:2639 minutes, 26 secondshit. So, this   past weekend, I actually went back and watched  the movie and thought it was just wonderful.   You have Mario and Luigi. They're going about 39:3339 minutes, 33 secondstheir normal lives   before they get sucked into this magical warp  pipe and uh separated from each other. Mario  39:4039 minutes, 40 secondslanded in the Mushroom  Kingdom ruled by Princess Peach. And then Luigi,   he ended up in the dark lands controlled by 39:4639 minutes, 46 secondsBowser. It was just   so nostalgic to say the least, considering my  childhood memories playing Mario games. And it  39:5339 minutes, 53 secondsproved to me that  Nintendo could in fact successfully take these   iconic characters to the big screen without 40:0140 minutes, 1 secondnecessarily losing their   appeal. So the success of the film helped give  Nintendo that confidence to continue to release   more movies going forward. In April 40:1040 minutes, 10 seconds2026,   they'll be releasing a sequel to the  Super Mario Bros. movie. And in 2027,   we'll see the Legend of Zelda. 40:1840 minutes, 18 secondsMovies   help introduce Nintendo's franchises to a global  mainstream audience. many of whom may not own   Nintendo consoles. And this expands the 40:2740 minutes, 27 secondsbrand beyond,   you know, its traditional demographics. Down the  line, Nintendo is targeting to release around one   movie per year, and it helps just accelerate 40:3540 minutes, 35 secondstheir flywheel. The   more people who see their movies, the more  consoles they should expect to sell over   time. To wrap up the discussion on the business 40:4340 minutes, 43 secondsitself, I'd like to   highlight some of the sources of Nintendo's  moat and competitive advantage. The most   obvious source of their moat is the intellectual 40:5240 minutes, 52 secondsproperty. Nintendo owns   some of the most valuable entertainment franchises  in history, including but not limited to  40:5940 minutes, 59 secondsMario, Pokémon, and  Zelda. These franchises transcend generations   and are essentially embedded into cultures 41:0641 minutes, 6 secondsglobally. While   anyone can create playing cards, build a console,  develop games, or put together a movie, what  41:1341 minutes, 13 secondscannot be replicated  is the emotional attachment that people have with   Nintendo and the franchises they own. 41:2241 minutes, 22 secondsThis makes   Nintendo fall into a similar category  as Disney. But judging Disney's stock   performance over recent years, 41:2841 minutes, 28 secondsthat   might not make too many of our listeners that  excited to compare the two. If we consider the   intellectual property through the lens of Hamilton 41:3641 minutes, 36 secondsHelmer's Seven Powers,   this primarily falls under  the category of branding.  41:4141 minutes, 41 secondsEven though other  types of video games exist, many people choose   to purchase Nintendo's consoles and games.  The brand they've built allows them to charge  41:5041 minutes, 50 secondsthese premium prices  for their consoles and games, and this leads to   high returns on invested capital over time. 41:5641 minutes, 56 secondsThe second source   of their mo is counterpositioning. Nintendo  benefits from counterpositioning by deliberately   avoiding the graphics and performance 42:0442 minutes, 4 secondsarms race   that Sony and Microsoft compete in. Instead, it  focuses on differentiated hardware and unique  42:1142 minutes, 11 secondsgameplay experiences.  Their competitors are structurally locked into   serving these hardcore gamers and relying on 42:1942 minutes, 19 secondshigh-powered consoles.   So, if they tried to copy Nintendo's strategy,  they would risk alienating their core audience   and undermining their existing strategy. 42:3042 minutes, 30 secondsWith Sony, Microsoft,   and Nintendo owning a lion share of the US video  game market, Nintendo has uniquely positioned  42:3742 minutes, 37 secondsitself to continue to  thrive in an everchanging environment. Another   aspect of their remote to consider is switching 42:4342 minutes, 43 secondscosts. As users   purchase games and play games  with their friends within the   Nintendo ecosystem, leaving the platform 42:5142 minutes, 51 secondsbecomes less   and less attractive, and parents who purchase  multiple firstparty titles and accessories for   their households are also more likely to stay 43:0043 minuteswithin that ecosystem for the   next console cycle. While switching costs  aren't as high as some software platform,   for example, they still create 43:0943 minutes, 9 secondsmeaningful   stickiness that supports recurring engagement and  sales. I don't know how things were for you as a  43:1643 minutes, 16 secondslistener growing up,  but I would tend to get one console per generation   of releases. So, if I ended up getting a 43:2343 minutes, 23 secondsWii, I didn't also   get an Xbox or a PlayStation. I would typically  have to wait a few years until Christmas time to  43:3143 minutes, 31 secondsask to  play another console after I had   already made use of the previous console  that I received as a gift. Nintendo also  43:3843 minutes, 38 secondsbenefits from network  effects and scale advantages. A large installed   base of Switch users attracts thirdparty 43:4643 minutes, 46 secondsdevelopers, which   in turn brings more content to the platform and  reinforces its appeal. And as hardware sales grow,  43:5443 minutes, 54 secondsNintendo can  spread development and distribution costs   across a wider audience, improving margins  on firstparty titles. While these forces  44:0344 minutes, 3 secondsare not as dominant as  its IP and brand power, they still strengthen the   overall durability of the ecosystem. And since 44:1144 minutes, 11 secondsAI is just all the   rage today and it's just top of mind for so many  investors who are thinking more and more about the   potential for disruption coming from AI, 44:2144 minutes, 21 secondsI thought it   would be interesting to touch on how  AI might impact Nintendo's business   going forward. It seems like AI 44:2844 minutes, 28 secondswill   improve the development efficiency and  thus expand their margins over time.  44:3344 minutes, 33 secondsAI tools can  help with things like game development,   game testing, leading to shortened development  leading to shortened development cycles, allowing  44:4244 minutes, 42 secondsNintendo's  team to focus more on the user experience,   which is where the company tends to really  differentiate itself. AI could also strengthen  44:5044 minutes, 50 secondsNintendo's ecosystem  by improving online safety and personalization. As   Nintendo expands, social features like game chat 44:5844 minutes, 58 secondsand online multiplayer,   AI powered moderation, anti-cheat systems,  and smarter content recommendations could   make the platform safer and more 45:0645 minutes, 6 secondsengaging.   Lastly, AI at the hardware level could enhance  performance and further broaden their addressable  45:1345 minutes, 13 secondsmarket. ondevice AI  upscaling, smarter battery optimization, and   improved graphics processing can allow Nintendo 45:2145 minutes, 21 secondsto deliver stronger   performance without investing these absorbent  amounts like Sony and Microsoft. So AI empowers  45:2945 minutes, 29 secondsNintendo to  continue to innovate without necessarily   sacrificing its profitability levels. One  risk to monitor, however, is industrywide  45:3845 minutes, 38 secondscontent over supply.  So, as AI lowers the barriers to game development   and floods digital storefronts with more 45:4445 minutes, 44 secondstitles, you know, this   would increase competition for player attention  and and make the discovery of games even more  45:5145 minutes, 51 secondscritical. Over time,  AI likely won't change Nintendo's core advantage,   which is the IP, but it can make the business 46:0046 minutesmore efficient, more scalable,   and more defensible in an increasingly  competitive gaming landscape.   Speaking of overupplying competition, one 46:0946 minutes, 9 secondsinteresting   tidbit I came across was from  one of the co-founders of Xbox,  46:1446 minutes, 14 secondsSheamus  Blackley. Blackley shared that   Microsoft is very focused on the future  of AI and they're just not interested in  46:2246 minutes, 22 secondsmany of these business  segments that aren't in AI. He stated, "Exbox,   like a lot of businesses that aren't the core 46:2946 minutes, 29 secondsAI business,   is being sunseted. They don't say that, but  that's what's happening." End quote. So, Xbox,   they currently have 40 million plus active 46:3746 minutes, 37 secondsusers, which might   be a huge plus for Nintendo if they discontinue  uh the release of new Xboxes. So, we'll see how  46:4546 minutes, 45 secondsthis plays out. I think  PlayStation would likely benefit from this more   than Nintendo, but undoubtedly it would help 46:5246 minutes, 52 secondsNintendo as well.   Turning to the valuation, Nintendo's  stock price got a big boost after the   early success of the Switch 2.  And as of the time of recording,   the stock is down over 35% 47:0347 minutes, 3 secondsfrom   the highs it set in August 2025. 47:0647 minutes, 6 secondsInvestors   have the option of buying the  shares on the Tokyo Stock Exchange,  47:1047 minutes, 10 secondsticker  7974. And there's also an ADR   that trades under the ticker NTD. 47:1747 minutes, 17 secondsThe market cap of   the business is around 10.1 trillion Japanese yen,  which seems like a ridiculously high number. It's  47:2447 minutes, 24 secondsreally equivalent to  65 billion US or so. In the trailing 12 months,   the company had record revenue coming in 47:3247 minutes, 32 seconds13.5 billion.   Net income over that period was 2.5 billion. This  gives the stock a PE ratio of around 26. Nintendo  47:4147 minutes, 41 secondsis not a company whose  valuation should be judged on current revenue,   current profits, because there's just so  much more to be seen as it relates to the   launch and the success of the Switch 2. 47:5247 minutes, 52 secondsSo, despite   the stock selling off, the company seems to just  continue to be firing on all cylinders. The Switch   2 has been outpacing sales of the prior 48:0148 minutes, 1 secondrelease of the   Switch One despite, you know, them hiking  prices. There were concerns in 2025 related   to tariffs impacting Nintendo's business, but 48:0948 minutes, 9 secondsrevenue and earnings   post tariffs continue to surpass expectations,   and investors anticipated a uh weak holiday 48:1748 minutes, 17 secondsdemand for the   Switch 2, which it looks like really did not  end up materializing. But in early February,  48:2448 minutes, 24 secondsNintendo announced  its Q3 results that ended December 31st, 2025.   Revenue over the 9-month period was up nearly 100% 48:3348 minutes, 33 secondsyear-over-year and net   profit was up 51%. So, it's pretty remarkable  that the stock has sold off as much as it   has despite the Switch to being, you know, 48:4248 minutes, 42 secondsstill managing to   be so far make it the bestselling console ever,  at least is on track to be. And the market does   also seem a bit concerned about the rising 48:5148 minutes, 51 secondscosts of memory   chips used for the Switch hardware. Memory  prices have been rising globally due to   supply constraints and increased demand from 48:5948 minutes, 59 secondsdata centers and AI   infrastructure. And this puts pressure on the  cost structure of Nintendo. If those component   costs remain elevated, Nintendo either has to 49:0849 minutes, 8 secondsabsorb, you know,   that or consider raising prices and investors  are trying to gauge how that might impact  49:1549 minutes, 15 secondsprofitability going  forward. Investors are also uncertain about the   pipeline that Nintendo has for firstparty games. 49:2249 minutes, 22 secondsbeyond that initial   launch window. So Nintendo's fairly secretive  about its release schedule and this creates  49:3049 minutes, 30 secondslimited visibility  into what major titles might drive engagement   and software sales over the next 12  to 24 months. And in a hardware driven  49:3949 minutes, 39 secondsbusiness, that lack  of clarity can make the market nervous even   when the long-term fundamentals remain intact. 49:4549 minutes, 45 secondsFurthermore, I think   there is some element of the market assuming  that Nintendo will continue to be a boom bust  49:5249 minutes, 52 secondsstory that has  historically characterized much of the   video game industry. Video game engagement  has traditionally been cyclical with player  50:0150 minutes, 1 secondactivity and software  sales surging around you know when the consoles   are launched and uh then tapering off in the 50:0850 minutes, 8 secondsyears that follow.   Investors have seen that pattern you know play  out repeatedly across the industry. So even   with the strong early success of the 50:1550 minutes, 15 secondsSwitch 2,   there's still a lingering concern that growth  could normalize once the initial upgrade cycle   fades. So when we look at the valuation, the first 50:2450 minutes, 24 secondsthing that comes to my   mind is how does Nintendo's financials develop  over the next 5 years now that we are roughly 1  50:3150 minutes, 31 secondsyear into the launch  of the Switch 2. If we look back at how things   played out for the Switch 1, the launch of  the Switch One was a clear step change for  50:4050 minutes, 40 secondsNintendo's  business. So from fiscal year 2017   to 2018, revenues increased by 115% 50:4850 minutes, 48 secondsand they continue   to increase through fiscal year 2021 before  declining in 2022 and 23. Additionally, Nintendo  50:5650 minutes, 56 secondsexperienced significant  margin expansion after the launch of the Switch   1 as operating margins went from around 6% to 51:0351 minutes, 3 secondsmore than 35% in 2021.   But with that said, it shouldn't be a  surprise that the stock price performance   from the launch of the Switch One to the Switch 51:1251 minutes, 12 seconds2's launch was just   phenomenal. It increased by more than 4x in  around 8 years. The launch of the Switch 2 has  51:2051 minutes, 20 secondsput downward pressure  on margins since the sale of hardware just isn't   as profitable for them, which is what  happens with the launch of each new  51:2751 minutes, 27 secondsconsole. So, I  would expect Nintendo to experience expanding   margins over the next few years as more of their  revenues come from these digital games and their  51:3651 minutes, 36 secondssubscriptions. And  to put some numbers around this digital shift,   Nintendo's digital sales have grown from just 32.5 51:4551 minutes, 45 secondsbillion yen in fiscal   year 2017 to 443 billion yen  in fiscal year 2024. That's  51:5251 minutes, 52 secondsmore than a 13-fold  increase in just 7 years. These digital sales   carry significantly higher margins than 51:5951 minutes, 59 secondsphysical copies   since there is no manufacturing, packaging or  retailer costs involved. And that mixed shift   towards digital should act as a good 52:0752 minutes, 7 secondstailwind for   profitability. Given the stock's decline of  around 35% in recent months, if any time was   a good opportunity to buy shares in Nintendo, I 52:1652 minutes, 16 secondssure think now could   potentially be that time. The market's concerned  about margin pressures, increased hardware costs,   and the Nintendo's pipeline of 52:2552 minutes, 25 secondsfirstparty   games. But I see reasons to  be optimistic about Nintendo's   future over the next, say, 3 to 5 years. So 52:3252 minutes, 32 secondsNintendo is gearing   up for the release of the Super Mario Galaxy movie  on April 1st, 2026, in part to celebrate Mario's  52:4152 minutes, 41 seconds40th anniversary. The  first Mario movie was seen by over 170 million   people across theaters worldwide. So, this 52:4952 minutes, 49 secondsshould not only be   a profit generator on its own, but it should  also help accelerate demand for Switch 2. In   the gaming side of things, Ryan O' Conor 52:5852 minutes, 58 secondsfrom Crossroads   Capital, he wrote about Nintendo in a  recent letter to shareholders. He writes,   "Keep in mind, these films aren't a cost center, 53:0653 minutes, 6 secondsthey're a profit center.   The first Mario movie generated roughly $559  million in net profit on a hund00 million  53:1353 minutes, 13 secondsproduction  budget, which means the 250 million plus   consumer impressions it generated  to the core gaming franchise  53:2153 minutes, 21 secondscame at a negative  cost of customer acquisition. In effect,   Nintendo has built an infinitely scalable  self-funding marketing machine, one that  53:2953 minutes, 29 secondspays Nintendo to  advertise its own games, and it's about to   start compounding annually with every new MCU 53:3653 minutes, 36 secondsrelease." End   quote. And more importantly, Nintendo  is riding the success of the Switch 2   and solid software sales with a strong pipeline 53:4453 minutes, 44 secondsgoing forward as well.   They're sitting on the richest firstparty  software pipeline in its history over   the next 2 to four years of the Switch 2 life 53:5253 minutes, 52 secondscycle, which includes   titles like 3D Mario, The Legend of Zelda, Super  Smash Bros., Animal Crossing, and the next gen  54:0054 minutesPokémon. Nintendo wants to  ensure that the Switch 2 has that sustained   momentum across the 5 to 7year life cycle by 54:0754 minutes, 7 secondsbackloading its   biggest franchises rather than front-loading  them and seeing a drag on the financials   towards the end of the cycle. And as I've 54:1554 minutes, 15 secondsmentioned,   Nintendo has positioned the Switch 2 to be one  of, if not the most successful console they've   ever released. With the PlayStation 6 54:2254 minutes, 22 secondsreportedly   expected to launch in late 2027  or early 2028, Nintendo likely   has a clear runway to continue building 54:3154 minutes, 31 secondsmomentum and   expanding its installed base before the next major  competitive hardware cycle begins. As a result,  54:3754 minutes, 37 secondsmargins are likely to  increase on a growing revenue base. Because of the   inherent nature of this business and it 54:4554 minutes, 45 secondsjust being   fundamentally different than  your typical quality company   that tends to just grow earnings year after year. 54:5154 minutes, 51 secondsIn my view, Nintendo is   just a more difficult company to accurately value. 54:5654 minutes, 56 secondsBut as Buffett says,   it's better to be roughly right instead of  precisely wrong. So if Nintendo bulls are correct  55:0355 minutes, 3 secondsabout the thesis and  how it could play out over the next few years,   then shares may be attractively priced today. So, 55:0955 minutes, 9 secondsdoing some quick   math here on the numbers, at roughly a 16%  revenue growth rate through fiscal year 2029,   that's over the next 3 years, we get 22.8 55:1855 minutes, 18 secondsbillion in   revenue. This business is certainly difficult  to forecast, but I wouldn't be surprised if the   actual numbers do come in higher. Margin 55:2755 minutes, 27 secondsexpansion,   that's what I expect in the  near future. I penciled in   operating margins to increase from roughly 15% 55:3455 minutes, 34 secondstoday to 30% in 2029.   At this margin level, this would give Nintendo  roughly $6.8 billion in operating income. If I  55:4255 minutes, 42 secondsapply  an earnings multiple of 16 and   discount that back to today at a 10% 55:4755 minutes, 47 secondsdiscount rate,   that gives me an estimated intrinsic value  of $82 billion. Today, Nintendo trades at   around $65 billion in market cap, which 55:5655 minutes, 56 secondswould imply a   20% discount to this estimated intrinsic value  and an expected return of around 19% over that  56:0356 minutes, 3 seconds3year time frame.  Now, again, this is just back of the napkin   type math, and there's a lot of nuance to  Nintendo's business. It sort of feels like a  56:1156 minutes, 11 secondsbusiness that just has  this wide range of different outcomes that could   play out in such a short period of time. So, 56:1856 minutes, 18 secondsto invest in a   business like this, I would need to get more  comfortable with understanding the full picture   from the perspective of both the Bulls and the 56:2556 minutes, 25 secondsBears. It's also worth   noting that Nintendo maintains a substantial  net cash position on its balance sheet. They  56:3256 minutes, 32 secondshave over $14 billion  in cash and short-term investments with zero   long-term debt. That's around 22% of the 56:4056 minutes, 40 secondsmarket cap. So,   this is a substantial cash position. This level  of cash adds long-term durability and strategic  56:4756 minutes, 47 secondsoptionality to the  business, allowing management to invest through   console cycles, fund new IP and experiences, and 56:5556 minutes, 55 secondscontinue thinking in   decades rather than quarters. However, this  cash pile can also be seen as a liability to   some investors. There's only so much value to 57:0457 minutes, 4 secondscash sitting on the   balance sheet because cash that is sitting  idle is cash that could otherwise be used   to reinvest into the business or distribute 57:1157 minutes, 11 secondsback to shareholders.   The company currently pays around a 2%  dividend and at the moment they are not   buying back any shares, but they do do a bit of 57:2157 minutes, 21 secondsshare repurchases.   You know, you look back to 2022, 2023, and I  would expect as cash continues to pour in and   it becomes clear that they have far more 57:2957 minutes, 29 secondscash than they   would ever need, they would then decide to  likely pull the share buyback lever again and   likely increase the dividend as well. So, it 57:3857 minutes, 38 secondsseems clear to me   that management is shareholder friendly and  focused on delivering returns, but like many   Japanese companies, they are also pretty 57:4757 minutes, 47 secondsfocused on the   long-term durability and ensuring  that they're going to be able to   monetize that IP for decades to come. 57:5557 minutes, 55 secondsThis can also   be seen in the way they approached their movie  segment. All the way back in 1993, Nintendo   debuted the Super Mario Bros. movie, which for all 58:0458 minutes, 4 secondsintents and purposes   was a total flop and disappointment. The  experience reinforced how easily beloved   characters could be diluted when creative control 58:1358 minutes, 13 secondsis loosened. As a   result, Nintendo became highly reluctant to  license its core IP for movies for decades   afterward. It wasn't until the company 58:2158 minutes, 21 secondscould maintain   meaningful creative oversight and partner  with the right studios that it felt confident   bringing Mario back to the big screen. And I 58:2958 minutes, 29 secondsthink it's very   reassuring for shareholders to see how big of a   success the Mario movie was back in 2023. When 58:3758 minutes, 37 secondsstudying Nintendo and   considering where the business will go from  here, I do think the most important takeaway   is that historically Nintendo was much more 58:4458 minutes, 44 secondsprone to these big   swings in its core business. Because each  console cycle could dramatically reset the   company's trajectory depending on whether the next 58:5258 minutes, 52 secondsplatform was a hit or   a flop. That made the business inherently  higher risk as they relied on continuing to  58:5958 minutes, 59 secondssuccessfully launch  the next piece of hardware. But today, the picture   looks much different. Nintendo has created a 59:0659 minutes, 6 secondsmuch stronger customer   lockin with the Switch ecosystem. They have  a rapidly growing base of digital game sales   that expand margins and a recurring revenue 59:1559 minutes, 15 secondssubscription model   through NSO that monetizes engagement  beyond one-time purchases. In addition   to the massive installed user base that attracts 59:2359 minutes, 23 secondsthirdparty developers   and strengthens the overall ecosystem.  Putting it all together, Nintendo is far   less dependent on the binary success of each  new console cycle than it was in the past.  59:3459 minutes, 34 secondsHowever, cyclicality  I think will always remain an inherent part of   Nintendo's model, at least for the time being. As 59:4159 minutes, 41 secondseach new console   launch brings higher upfront hardware costs and  marketing spend that can temporarily pressure   margins before the installed base scales 59:4959 minutes, 49 secondsand higher margin   software and digital revenues once again  take the lead. To wrap it up, Nintendo is   just an iconic company that is sitting on some  of the most valuable IP in the world. And yet,  1:00:001 hourafter backing out their  huge cash position, this IP today is   valued at around $50 billion. If they're able to 1:00:081 hour, 8 secondsnavigate this transition   to a recurring revenue model effectively,  then I could see shares compounding at a   high rate from today's prices. That wraps up 1:00:171 hour, 17 secondstoday's episode.   Thanks a lot for tuning in and I  hope to see you again next time.  1:00:221 hour, 22 secondsThanks for listening  to TIP. Visit the investorspodcast.com for   show notes and educational resources. This  podcast is forformational and entertainment  1:00:311 hour, 31 secondspurposes only and  does not provide financial, investment, tax,   or legal advice. The content is impersonal  and does not consider your objectives,  1:00:381 hour, 38 secondsfinancial situation  or needs. Investing involves risk, including   possible loss of principle and past performance  is not a guarantee of future results. Listeners  1:00:451 hour, 45 secondsshould do their own  research and consult a qualified professional   before making any financial decisions.  Nothing on this show is a recommendation or   solicitation to buy or sell any security or other 1:00:541 hour, 54 secondsfinancial product. Hosts,   guests, and the investors podcast network  may hold positions in securities discussed   and may change those positions at any time 1:01:011 hour, 1 minute, 1 secondwithout notice.   References to any third party products, services,  or advertisers do not constitute endorsements,   and the investors podcast network is not  responsible for any claims made by them.  1:01:101 hour, 1 minute,  10 secondsCopyright by the   Investors Podcast Network. All rights reserved. 1:01:171 hour, 1 minute, 17 secondsTry and think   about what you would have to offer someone to  use Branch Out instead of LinkedIn. Once LinkedIn   has already been the established user base, 1:01:251 hour, 1 minute, 25 secondsthere's   very little incentive for people to switch. The  amount of capital it would take to convert a   significant portion of LinkedIn's user base is an 1:01:331 hour, 1 minute, 33 secondsunthinkable   amount. So, it just wouldn't be worth a new  player trying to enter the market. And if they do,   they would essentially just be throwing money down 1:01:401 hour, 1 minute, 40 secondsthe drain. As   a result, network economies tend to be a  winner take all industry once the leader   has crossed some sort of tipping point. Once the 1:01:491 hour, 1 minute, 49 secondsleader achieves   a certain scale, then the other firms are  just forced to throw in the towel. In my view,   network economies have brought us some of the 1:01:571 hour, 1 minute, 57 secondsbest   businesses in the world because  their modes are just so difficult   to disrupt and they're extraordinarily profitable.