Is It Safe to Declare the Winner of the Latest Game Console Battle?

Nintendo has been the wild card in the latest round of video game console launches. Until the Wii's debut Nintendo stayed mostly under the radar, generating buzz over its wand-like controller, while its stock climbed the whole time. Today in an interesting note, Merrill Lynch Japan is embracing the Wii in a big way.

The theme or what I believe is the key message in ML's report, translated in English is the statement: "Let's share in the dream of the Wii." Japan's Kabushiki Shimbun, a real-time news service specialized in covering equities, published an article summarizing the report entitled by the same quote.

Shareholders will be pleased with the ¥40,000 ($41.32 ADR equiv. at ¥121/$1) target share price hike from ¥33,000 ($34.09) previously. ML upward revised its financial forecast of Nintendo after it reported solid Q3 results yesterday. In particular, it raised its expectations for Nintendo's interim earnings (half-year period ending Sept). ML mentions the following positives for Nintendo:

• Monthly Wii production will increase to 1 million units a month from Feb.
• Global shortage of the Wii persists against strong demand
• Perceives greater latent potential for the Wii now, compared to before
• Strong momentum for the Wii and DS
• Expects the Wii to sell 69.3m units by Mar. 2011, upgraded from its prior est. of 46.1m

The sky is the limit for Nintendo's stock price, as ML says, at this time when a top can't be called for its shares it sees a big possibility its stock will lead the way in pricing in the future success of the Wii. Therefore, ML says, "Let's share in the dream of the Wii."

Nintendo's ordinary shares (JP: 7974) gained 1.6% to close at another high ¥34,050 ($35.18), coming within ¥150 of hitting its all-time high set in August 1990. The possible upside based on ML's target is about 17.5%. From the target prices I've seen this is the most ambitious.

Nintendo did not upward revise its full fiscal year forecast as some had expected. In fact, Nintendo's 9-month earnings already exceed its full year forecast, ¥1,031.32/share, compared to its ¥938/share estimate.

Before it released earnings I gathered some historical stock and earnings data (and revisions) to track how Nintendo trades in order to see if its forward P/E multiple might be getting too far ahead of itself. The findings were rather surprising. First, fiscal year to-date, Nintendo has upped its guidance by approximately 20% or more on three occasions for a grand total 84.6%. Thus, even though its shares have continued upward, it is actually trading at a lower multiple than it has all year.

I now calculate a forward P/E of 33 for its fiscal year ending this March, compared to 35 on Thursday and a high of 39 at the end of December.

While reviewing Nintendo's earnings, I learned the Wii is outselling the Sony (SNE) PS3 about 2:1 both in the U.S. and Japan. Also, it has already sold 3.19m units, meaning it is on pace to meet its 6m target by the end of March. In addition, it is believed Nintendo is already breakeven and could be profitable on its Wii sales.

Let's not forget the importance of its DS handheld, which it says is off to the best start of any console ever in Japan. Similar to the Wii, Nintendo cannot keep up with demand.

Even with the ML report and its new target share price and sales estimates, the big question continues to be how much higher Nintendo's stock will go. It will be interesting to see other analyst reactions as Nintendo has met or exceeded some of their targets. It's almost like we're talking about Apple (AAPL) or Google (GOOG) but with much less daily publicity.

Nintendo (NTDOY.PK) 2-year chart:

Nintendo (NTDOY.PK), Microsoft (MSFT) and Sony (SNE) 2-year chart:

Disclosure: The author does not own shares of any companies mentioned in this article.

Comments

[Ron Coleman]

Steven,

Great article. I just came across it on FeedTheBull and read the full article here. Thanks for sharing all of the data you have collected. It is suprising how well the Wii is doing, as like you mentioned, it was far under the radar. You mentioned that it is outselling the PS3 2:1, how is it doing against the Xbox 360? Keep up the great work.

2007 Jan 26 01:36 PM