Nintendo to Dominate Portable Gaming Market

| About: Nintendo Co., (NTDOY)

Nintendo's (OTCPK:NTDOY) Wii is the top-selling new console for the fourth month in a row. And for the first time in recent history, Nintendo has the top two positions on the game hardware list with its DS handheld continuing its number one run, and the Wii passing the Ps2 (on the decline obviously) for the first time since its release.

The Wii (360k units) sold 101,000 more units than in March, in a sign that Nintendo is finally managing to ramp up production enough to better keep pace with demand. The Wii's competitors, the Xbox 360 from Microsoft (NASDAQ:MSFT) and Sony's (NYSE:SNE) Playstation 3 delivered paltry results. XBox 360 sold less than half of Wii's numbers, while the PS3 sold less than a quarter of Wii's numbers at 82,000. Sony's numbers were down 37% over March numbers.

Nintendo also has the top 4 games on the April sales chart. Below are the games rankings along with units sold in the month of april. Figures courtesy of the NPD.

01. Pokemon Diamond [DS] - 1.045M
02. Pokemon Pearl [DS] - 712K
03. Super Paper Mario (Wii) - 352K
04. Wii Play (Wii) - 249K

Not only are these games made for Nintendo consoles, but they are all developed in house by Nintendo. What this means is that Nintendo keeps the lions share of the profits on these games as opposed to a game made by another publisher, which would just pay Nintendo a licensing
royalty for each game sold.


Lets take a look at the Xbox 360. The console had about a one year head start over the Wii and therefore has a larger installed customer base at this point. This is obvious as it was the only next gen console on the market for almost one year. Microsoft has 59%, while Nintendo has 27%. So Microsoft has twice as many consoles in homes, while Nintendo is currently outselling it 2 to 1. I'll take the growth every time. Lets take a look at an issue I have been hearing about
with the Xbox 360.

Here is a survey done by 360-Gamer Magazine regarding Xbox reliability:

Of the 3772 submissions:
1464 (38.81%) say they have NOT had a console fail
1506 (39.93%) say they've had one console fail
802 (21.26%) say they've had more than one console fail
Overall 2308 (61.19%) of submissions claim to have experienced Xbox 360 hardware failure. A total of 2347 users who responded to this survey left comments.

Speaking of comments, take a look at this charming story from the Bitter Old Punk blog.

Not only does this 50+ percent hardware failure generate bad press for Microsoft and its 360, one would have to be naive to think that the amount of units that have had to be replaced under warranty at Microsoft's expense have not eaten into Microsoft's gaming division earnings.
Sony, at this point is in third place in the console war. I would not count them out yet based on their past history (PS2 is the best selling console in history). In the short term, there is a lack of
games being published for the PS3, and the Wii is outselling it 3-1. Not to mention it retails for $600, more than double what the Wii goes for. Also of interest, the founder of the Playstation, Ken Kutaragi, will retire as chief executive of Sony's game division on June 19.

Competition Summary

What I would like to stress is not only that Nintendo is outselling the competition with its Wii and DS console sales. The point is that Nintendo actually makes a profit on each Wii that it sells, while Microsoft (even well over a year after its release) and Sony sell their consoles at a loss hoping to recover costs with accessory sales and of course software royalties. As the Guinness beer commercials would say: "sell consoles at profit? BRILLIANT!!"


Take a look at this chart of Nintendo's earnings. They are up 77% year over year.

Would you want anything different in a possible investment?

Even with the stock doubling in the last year, I still believe it has room to grow. I look at this more as a growth play than a value but the stock is far from expensive. It has a 30 p/e multiple which seems more than reasonable.

The company had record operating profit 226.02 billion yen ($1.91billion) in the year ended in March. This beat analyst expectations by more than 10%. This is more than double from last year. Net income meanwhile, is up 77%. I think this more than justifies their multiple
and makes Nintendo look very attractive even at current levels.

Nintendo is forecasting only a 0.4% increase in net income for next year (ending March 08). Look for them to beat this (although not by 77%) next year with a few guidance raises along the way. Their estimates are conservative as always. It is well know that the Japanese are conservative due to their culture, and in this case it makes for a very favorable investing environment.

Possible Negatives

• Dollar-Yen fluctuations may have impact on stock price. The situation is favorable at this point.
• Nintendo needs to develop new characters for game series. The next three big games coming out are sequels: Mario party 8, Metroid Prime 3, and Super Smash brothers 3. How many more Mario and Zelda games can Nintendo release?
• Not enough third parties are making use of the Wii's motion sensor with innovative new franchises. (EA does have big plans for new Wii games. Link here)


The Wii is the greatest innovation the video game industry has seen in a long time. It is still sold out in many places, 6 months after its launch. It is played by children, by partying college students (I have seen this with my own eyes), and even senior citizens. The Wii is still in its early stages. Look for Nintendo to catch up to the demand for the Wii (sorry resellers) and Metroid Prime 3 and Super Smash Bros. Brawl (Both games being produced by Nintendo) to drive Wii sales growth in 2007 while the company continues to dominate the portable gaming market.

JP Morgan's price target for Nintendo is $46.49

My 6 month price target (By 12/31/2007) is $51.00