The once great Japanese maker of gaming electronics, and arguably some of the best video games ever created, is well on its way toward its imminent death as a company. Nintendo (NTDOY.PK) recently announced that its sale goals and profit estimates would miss and reach a 26-year low. Additionally, the company president, Satoru Iwata, when asked about developing software for iOS, stated:
This is absolutely not under consideration. If we did this, Nintendo would cease to be Nintendo. Having a hardware development team in-house is a major strength. It’s the duty of management to make use of those strengths.
President Iwata is right, Nintendo’s in-house hardware team is a huge strength of the company. Coupled with its software team, being able to engineer both sides of the console made Nintendo the best in the world at what it did, but the company is far from what it was five, ten, or fifteen years ago. The inability to adapt has brought Nintendo from an industry leader to the brink of extinction.
Down 50.42% YTD and close to the same amount over the last 5 years, Nintendo has fallen far from its all time high of 70,000 JPY price in 2007, following the release of the Wii, to a closing price on September 30th of 11,220 JPY. How much further will Nintendo fall? And is there truly no chance for a reversal of this dismal course the stock price has taken?
For decades Nintendo was the gaming giant of the world. Exclusive titles and advanced forms of play made Nintendo, until 2007, a sturdy and growing company. Today, Nintendo lacks the franchises it once had, for example the Pokémon franchise introduced in 1996, and has failed to generate any new sort of multi-billion dollar franchises. Additionally, the exclusive game titles Nintendo was once known for, The Legend of Zelda, Mario Kart, Super Mario Bros. (arguably three of the best video games ever made), have been poorly reinvented to fit the Wii and Nintendo 3Ds. They also fail to compete with a new age of multi-player, high graphic quality, fast paced gaming that has become the norm on Xbox 360 and PlayStation3.
Though the Nintendo 3Ds and Wii are both competitively priced compared to their Sony (SNE) and Microsoft (MSFT) competitors, both systems lack the features and titles to justify their price. The Wii is no longer the only gaming system with motion detecting technology and the 3-D capabilities of the 3Ds are primitive and require the proper viewing angle to be fully appreciated. At $40 per game and $169.99 for the system, the 3DS is far less attractive than other mobile competitors. Especially as the mobile gaming market becomes more competitive, Nintendo lacks the weapons it once had, going all the way back to the Gameboy Color (which at the time had exclusive titles and advanced technology), to compete successfully.
Nintendo Wii and 3DS’ lack of a multiplayer network and any form of internet integration mean they simply cannot earn what other competitors can. Advertisement revenue within multiplayer games is growing and so is the market for gaming apps. Finally, the financials of Nintendo raise questions about whether the company can continue to grow.
Entering the final quarter of 2011, expect Nintendo to miss sales figures for individual product units as well as overall earnings estimates. Continued negative news has driven the stock price down to the point where this may be factored in, but the 3DS sales estimates recently were further forecasted down, and without any sort of major product launch expected in Q4, it might be tough for Nintendo to draw holiday consumers away from a slew of new mobile and mobile gaming electronics (Kindle Fire, Apple (AAPL) iPhone/ iPod Touch, iPad, etc.).
After decently strong fiscal years in 2008 and 2009, 2010 saw large drops in financial figures - expect no different in 2011. Just like the personal computer competition of 30 years ago, without any sort of killer app (or any apps at all for that matter), groundbreaking technology (3D is just not that cool), or new product releases, Nintendo seems doomed in the face of a fast growing mobile gaming market and highly competitive at-home gaming market.
Sure, there will always be a market for Nintendo - good games are like good books, worthy of an occasional re-visit, if only for old times sake. But nostalgia does not make a global market leader, or a nimble survivor with reduced market share. Nintendo needs to take a clue from its Pokémon days and morph itself to the new reality of scalable mobile titles.
As a final note, I realize that many investors may not be directly invested in Nintendo or its ADR, but multiple ETF portfolios are. Most ETFs that are regionally focused in Asia (except obviously Ex-Japan Funds) have positions in Nintendo. A list of ETFs with positions follows.
(IPK) - SPDR S&P International Technology Sector ETF
(AXIT) - iShares MSCI ACWI ex US Information Technology Sector Index Fund
(DXJ) - WisdomTree Japan Total Dividend
(ITF) - iShares S&P/TOPIX 150
(JPP) - SPDR Russell/Nomura PRIME Japan ETF
(DOO) - WisdomTree International Dividend ex-Financials Fund
(EWJ) - iShares MSCI-Japan
(IXN) - iShares S&P Global Information Technology Sector
(DGT) - SPDR Global Dow ETF
Disclosure: I am long AAPL.