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Investor in Nintendo? Five good reasons why you should sell your Nintendo stock now
Nintendo’s stock has fallen 69% from its peak in mid-2008. How much further does it have to fall?
Is Nintendo’s growth behind it? The Wii is under increasing pressure from lower price points for the Xbox 360 and PlayStation 3, while the chart below shows how far the company’s share price has fallen since its peak.
Analyst Jason Mauricio of Arete research has just made Nintendo an Arete Best Idea Short. And he has five very strong reasons.
(A quick aside on Arete Research. They’re an independent research firm that earns its money from investors for providing high quality investment advice to investors. This is an unusual model: most research analysts earn more money from the companies they cover than from the investors, leading to a challenging conflict interest – and I should know since I used to be one. Conflicted analysts rarely have any Sell recommendations, since it hurts their business; Jason is the happy position of being able, even encouraged, to say what he really thinks.)
Reason 1: The Wii is terrible for third-party publishers
Look at the table below. It shows how much money EA (ERTS), Activision (ATVI) and Ubisoft are making from titles published on the Wii (installed base: 52 million units) versus the PS3/Xbox 360 (combined installed base: 57 million units)
Third party software sales by platform, last 12 months
|Source: Arete research estimates *Non GAAP sales **Non GAAP last six months|
So publishers are getting more bang for their development buck by publishing for the HD consoles (perhaps not surprisingly, given that this is the hardcore gaming market). Not only that, but Sony and Microsoft will give publishers marketing and other support, particularly for exclusive titles, which increases the attraction of a PS3 or Xbox 360 strategy.
Reason 2: The Wii doesn’t breed sequels
Publishers have a model for making money from games: innovate with new titles and if they work, sequel the hell out of them. (I’m not sure that sequel is a verb, but never mind.)
Ubisoft’s experience in casual games suggests that new games takes time to ramp, then sell consistent volumes on a weekly basis. But sequels tend to do poorly on the Wii, often selling fewer units than the original, which is in complete contrast to the hardcrore market, where sequels almost always sell better.
If publisher’s can’t be confident of building profitable franchises on the Wii, they will less inclined to support it with innovative new titles in the first place.
Reason 3: The Wii price is no longer so competitive
When the Xbox 360 and PS3 were $150-$200 more expensive than the Wii, they were in a different league, and it was hard for consumers to justify the higher expense unless they were committed gamers. Now that the price difference is close to $50-$100, it becomes progressively easier. And new initiatives such as Project Natal and Sony’s Motion Controller make the HD consoles feel more “future-proof” than Nintendo’s “old-tech” Wii.
Reason 4: Piracy on the DS.
You know you have a problem when 10 year old kids are asking their parents to replace their aging DS Lites with the equivalent model rather than the DSi because they know their RF cards won’t work with the newer handheld. One industry exec I know recently had their 6-year old daughter explaining why she wanted an R4.
The solution may be to go digital only, discontinuing the DS and only supporting the DSi, although that risks alienating the retail channel that is so important to selling the units to a younger demographic.
Reason 5: The iPhone
More accurately, the iPod Touch. The low-end iPod Touch is now only $199, compared with a DSi at $170. There are 22,000 games available for it, and most of those games cost 1/10 of the price of a DS game. There are now 50m iPhones and iPod Touches in the market, which is big enough to start attracting development talent. The risk to Nintendo is that the cheap content and impressive functionality of Apple’s products starts slicing away large chunks of its market share.
Valuation and conclusion
Jason argues that while Nintendo’s valuation is a reasonable 10x future earnings (“On consensus estimates, Nintendo is trading at 10x FY09 and FY10 EPS estimates, or 7x ex cash”, We do not see room for further multiple de-rating”.)
But, and this is a huge but, he thinks that the consensus estimates of how much profit Nintendo will make are far too high, for all of the reasons above. He thinks that Nintendo will miss its numbers by as much as 30%, which means the share price has a further 30% to fall.
Nintendo shocked the market by launching the Wii on old technology and with a new way of playing games. It makes a profit on each unit and is the dominant publisher on its own platform. But its competitors have not stood still and new ones have emerged (particularly Apple). Nintendo’s share price has fallen a long way from its peak. Now investors are being warned that has further still to fall.