Knowledge Leader Spotlight: Nintendo Co.
As Pokemon GO has taken over the US in less than week and has led to a gamer finding a dead body, lured victims to robbers and is generally causing players to run into things, we thought it was an opportune time to illuminate the intangible investments that led to such a craze.
Nintendo is up a staggering 53% in USD MTD as an estimated 7.5 million people have downloaded it from the US Google Play and iOS App stores since its release. This is good news for Nintendo investor’s obviously but especially considering that prior to this rally Nintendo’s stock was actually down over 25% over the past 5-years. Amazingly, YTD Nintendo still isn’t even the best performing stock in its sub-industry.
Nintendo invests about 14% of its sales into R&D and another 7% of its sales into firm specific resources. Overall, it invests over 23.5x more in intangible investments as it does in tangible investments. This is a very large intangible to tangible investment ratio but its actually not even the largest ratio in its sub-industry. International Game Systems invests over 70x as much in intangible assets as it invests in tangible assets.
Nintendo has a great looking balance sheet. About 16% Nintendo’s assets fall into the intellectual property category, which is actually below the average (20.2%) for the sub-industry. Nintendo has the a ton of a cash on its balance sheet as 63.7% of its capital is in cash. Combine that with the fact that Nintendo has zero debt and Nintendo ends up having the second lowest net debt as a % of capital in the sub-industry.
Nintendo has some of the lower gross margins in the Home Entertainment Software sub-industry. Nintendo’s gross margins are 42.6% which is fairly high in general but below the 60% average gross margin in the sub-industry. Its net profit margin is the the third lowest in the group at 9.5% thanks to an onerous 40.4% tax rate.
The major rally in its stock price has pushed Nintendo’s valuation levels up to the fifth highest level in the group at 11x intangible-adjusted cash flow. However, from a historical perspective, this is still a 30% discount to the 10-year average price to cash flow ratio.
From a technical point of view, the recent rally could extend further. Nintendo has certainly put in a long-term base and has pushed out to new highs relative to the MSCI ACWI. The question facing investors is whether this rally continues to run further and makes a definitive breakout or if it reverses and pushes Nintendo back into a trading range.