Nintendo Bewilderment

Reflections on Investor Reaction

I am fascinated with the reactions I’ve received from talking, writing and tweeting about how bullish I have been on Nintendo (OTC: NTDOY, Japan: 7974). I could not believe I was buying a world class video game company at 10-12 times earnings while its Switch console was consistently sold out and it grew at triple digit rates.

My investment in Nintendo started about 18 months ago when I first realized the potential of its Switch console and could not understand the company’s low valuation. I posted my bull thesis on Nintendo on August 11th (Mama Mia Nintendo is 2013 Microsoft) of this year when the stock was $58 per ADR share.

I have been bewildered at the analyst and investor apathy for the stunning underlying performance of Nintendo’s business. I’ve been told that you should never invest in a Kyoto-based Japanese company. That I did not understand investing in Japan, or that it was just some giant value trap because I was some naïve western investor. Over and over, analysts told me that Nintendo didn’t care about profits, were perfectionists who moved too slow and sucked at investor relations.

Even more baffling was analysts and investors ignoring the overwhelming response from consumers who were sending every Nintendo game to the top of the bestseller list and buying every Switch console Nintendo produced despite the company boosting production twice and running their supplier factories at full tilt.

I wrote about my confusion at why I and other gamers were so excited by Nintendo’s games, but analysts weren’t here: Are analysts and investors even playing Nintendo's games?

By the way, are there any value investors besides me who are gamers? I’m surprised by how many of my super sharp contemporaries simply do not play games or have no interest in them. Here is my message to them: You better start paying attention to video games, because while software may be eating the world, gaming is eating entertainment. And that is a large part of future stock market returns you are ignoring because gaming is growing exponentially larger every day.

My only seeming compatriots were Ryan O’Connor at Crossroads Capital and Todd Wenning and the team at Ensemble Capital. Both have been vocal investors about Nintendo’s long-term potential and been very clear about how the market was not recognizing the change going on at the company.

All of this is in the past, but I wanted to revisit it now in light of the company’s recent stock run.

  1. Nintendo is still cheap! Remarkably, it only sells for 15 times this year’s earnings excluding cash. How is this still possible in this frothy market? Almost all of the stock’s performance in the last 18 months has come from earnings growing 100% more than analyst estimates and not from multiple expansion.

  2. The old narrative that if you invest in sleepy Japanese companies, your money will be trapped should be put to bed. Buffett is investing there; the Nikkei is hitting highs and there are incredible technology companies who are innovating just as fast and as impressively as anywhere in the world. I only wish I owned Sony (NYSE: SNE) right now as well.

  1. Another regret I have is that while Nintendo is a sizable position for me, I should have continued to buy on the way up and leaned into how power laws dominate investment returns. I wrote about this here: Power Law Dynamics. It’s my 2021 resolution to buy more and get more aggressive when my investments start executing at a much higher level than expected. The winners keep winning.

Another reflection from my experience in Nintendo is how little exposure most U.S. investors appear to have in international markets these days. Investors need to start checking out the opportunities outside the U.S. The valuations are simply much lower than the U.S., the quality of the enterprises excellent, and no one really seems to be paying attention. Don’t just listen to me, Fred Liu who I profiled in an interview is up probably 200% (Fred Liu Interview) this year and most of his portfolio is overseas.

Start brushing up on your foreign language skills, because Nintendo is showing me that the outsized returns of this new decade may belong to international markets, not the U.S.

Finally, while it is important to listen to critics of your investment ideas, pay attention to what they critique. If it has nothing to do with fundamentals, valuation or performance, the critique may not be relevant to the future returns of the stock. Nintendo is showing that when that happens, it may be game on!