Two years ago, Nintendo was seen as no more than a has-been that could only serve the children’s video gaming market. However, with a renewed vision Nintendo has successfully entrenched itself into a billion dollar mass appeal market that has very little competition.
While Sony (SNE) has yet two realize it, the PS3 is only appealing to “hardcore” gamers with bulging wallets. Microsoft (MSFT) has been more successful targeting a broader range of consumer through use of multiple price points. However, Microsoft has yet to make a footprint in the Japanese market, which is a crucial market for the success of a console. The Nintendo Wii, on the other hand, has been able to target almost every consumer segment through development of mass appeal games and has made a footprint in every major gaming market. As a result, the Wii has outsold the PS3 fivefold and Microsoft's Xbox 360 at a 2-1 pace.
Even though Nintendo’s stock has doubled over the past year, we believe it is still undervalued because a lack of third party gaming development has hampered Nintendo’s already stellar console sales. However, as of June, all major video game developers have publicly announced they have underestimated the Nintendo Wii’s popularity and will be developing high quality game for the Wii. Ubisoft (UBI) has announced that they “made mistakes” by rushing out products and sacrificed quality as a result, but are now vowing to significantly increase the quality of upcoming Wii projects. Activision (ATVI) has stated that they are “reinvesting against the Nintendo platform in a way that in the last cycle [they] really did not.”
We believe the launch of high quality third party games, combined with blockbuster first party games, will allow the Nintendo Wii to command 50% of the console market.
We believe a 50% market share of the console market combined with the best selling handheld to date will allow Nintendo to generate fiscal 2008 revenue of $10 billion. Therefore, we are initiating an outperform rating and a per share price of the ADR shares of $50.
NTDOY.PK 1-yr chart