Nintendo investment thesis before the launch of Switch

Nintendo (7974 JP / NTDOY)
before Switch launch
Yui Nausicaa
2017/2/21, Last update 2017/10/5
Reminder: this is an intellectual exercise
yuinausicaa@yahoo.com
Updates:
Feb.26; Mar.8,10,13,
14,15,16,18,23,24,25
29,30; Apr.6,9,29; May 7, 15;
Jun.30; Sep. 2, 4, 10,15, 24
Oct. 5

Thesis Nintendo Switch
Concerns/risks
• Less powerful and less
price competitive than
other home console
competitors
• Software lineup at launch
• Shrinking game console
market
• Production/supply issue
• Bet on Nintendo Switch
• The stage of first year
install base buildup is
very rewarding for
financial investors
• Improvements in smart
device business after the
release of FEH
Tracking
• 3 play modes with Joy-Con
-> new user experience
• The mobility and physical
interaction-> local network
effect
• Unit per household might
be higher than those of
other home consoles
• Software lineup expansion
since mid-January
• Better third party software
support
• Better pipeline mgmt
• TVCMs target demographic
groups suitable for initial
adopters
• Nintendo: 2M shipment in
1Q17
• Won’t sell at loss
• Users’ feedback
• Hardware and
software sell-
through
• Information about
supply/production
• Re-estimate TAM
once results come
in
Other
• Boom/bust?
Why Nintendo

Revenue/profit contribution
• Has experimented different gaming styles w/ different
monetization methods
• Mario Run: huge downloads but less favorable conversion
• FEH has decent downloads and grossing in JP and US -> show
capability to utilize its IP
• 2-3 games on smart devices per year
Console Type Life cycle Install base (M) Plan Concern
Switch Hybrid About to start ??? Difussion
3DS Handheld PostMain/Later 65.3 Extension
Wii U Home About to end 13.56 Phase out
FC/NES Home End NM Fullfil demand
Cannibalization
• Product still has room to diffuse
• Large install base to distribute software
Stable rev stream w/
growth potential
SmartdevicebizGameconsolebiz
1-3QFY16 1-3QFY17 YoY
20.5 6.5 -68.3%
amiibo Figure Sell-In (M units) • Need time to destock?
• Might be fueled by BotW

Nintendo Switch
Shrinking market sizeFeatures: Hybrid X Jon-Con Other players in the market
Software lineup has been expanding
3 play modes
Development
Dev kits: $450
Sharing/social/face-to-face
Potential demand side network effect
driven by “local network”
Switch: less powerful and probably less
price competitive than other home console
competitors

Platform, network and product diffusion
1st Party 3rd Party
Nintendo Switch
Player
Start-upor
Chicken-eggproblem
Software
NX
NXNX
NX NX Global & virtual
Local & physical
due to mobility
Connectivity
Custom acquisition and initial diffusion
Young adults
• Reasonable to choose this
demographic group as initial
adopter
• TVCMs are aligned with
diffusion plan
Age
Things to do
0. Start-up problem
1. Install base build-up
2. Software distribution
Characteristics unseen on other home consoles
1. Higher penetration per house hold . In other
words, the average number of NX might be higher
than those of other home consoles with statistical
significance
2. Higher contact rate in diffusion due to mobility
3. Additional demand side network effect due to
physical interaction in local network
Gaming console is a platform
1. Nintendo is a platform builder/governor
2. Control of hardware is key
What is the most lucrative
part in the market for
financial investors of a
gaming platform builder?

Fiscal year 7-Mar 8-Mar 9-Mar 10-Mar 11-Mar
eps 1.45 2.5 2.79 2.46 0.93
Fiscal year 12-Mar 13-Mar 14-Mar 15-Mar 16-Mar
eps -0.51 0.07 -0.22 0.37 0.15
Nintendo's eps w/o non-recurring items
Probably not for value investorThe build-up of install base in first year looks lucrative
Difficult to estimate
• Heavily depends on product cycle
• Requires assumptions such as TAM, adoption
pattern , tie ratio … for console business and MAU,
ARPPU, paying user… for mobile gaming
• Switch just about to launch and mobile gaming just
about to take off : might be too early
• DCF-based or earnings multiple-based valuation
method, timeframe will be relatively long
Installment Year1: lucrative and less risky to bet on the success of NX
Built up installed base
or platform => gaining
shares from other home
console s
Avg eps last 10 years 0.999
P/E 20.0x
=Earnings power value 19.98
+Net cash per shr 6.78
Equity value per shr 26.76
Obsession w/ valuation?
Some analysts maintain
detailed models.
Multiple expansion /
trading “at premium”

Diffusion and total addressable marketAconceptualcausalloopdiagram
Total Addressable Market : Methods to Estimate a Company’s Potential Sales by Mauboussin and Callahan
Asimpleway:Bassmodel

0
20
40
60
80
100
120
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14
4Q14
2Q15
4Q15
Millioninstalledbase
Wii Model Training
Wii installed base Estimate Wii installed base
0
2
4
6
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10
12
14
16
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
Wii U Model Training
Wii U installed base Estimate Wii U installed base
0
50
100
150
200
4Q04
3Q05
2Q06
1Q07
4Q07
3Q08
2Q09
1Q10
4Q10
3Q11
2Q12
1Q13
4Q13
3Q14
DS Model Training
DS installed base Estimate DS installed base
0
10
20
30
40
50
60
70
3DS Model Training
3DS installed base Estimate 3DS installed base
Home console Handheld console
Internal reference model to estimate p & q

Model Type p* q* Lifecycle Note
Wii Home 0.027 0.186 End
Wii U Home 0.000 0.236 End Weak p
DS Handheld 0.009 0.207 End
3DS Handheld 0.042 0.048 PostMain/Later TAM 80m assumed
Switch Hybrid 0.03 0.20 Initial stage Arbitrary p q
Seed 1Q17 2m Forecast by Nintendo
p 0.03
q 0.20
Assumptions in the model
* Assume no supply issue
Benchmark TAM 1st year 2nd year Growth
Wii U 13 4.2 3.4 -19.5%
20 5 5.1 2.2%
40 7.2 9.6 33.8%
60 9.3 14.0 50.5%
80 11.5 18.3 59.3%
Wii 100 13.6 22.6 66.3%
125 16.2 28.0 72.7%
PS2 155 19.4 34.4 77.4%
200 24.1 44.0 82.7%
Current street
estimates implied
TAM range
Implied TAM
1st year 8-10m 45-65m
By end of 2020 40m 47.5m
Analyst forecasts
Some results
Insights from this exercise Post-investment management: tracking
• If traction of NX to be : 2m/3m/3m/5m in
1Q/2Q/3Q/4Q17 -> very promising
• Local network effect might be detected by
exponential growth and weak seasonality
• One year might be enough to determine TAM
• Key risk: supply/production issue
• Get actual result to check p, q and TAM
• Get user experience feedback and check social part
of news about NX after launch
• Focus on information about supply/production if any
• If it delivers better than expect, be prepared for a
boom-bust cycle

Stuffs not discussed in detail
Yui Nausicaa
Update 2017/2/26

Home-based Mobile-based
Game
console
Spec
Tech
Teardown
Game
Even look into NVDA
Software lineup BOTW, GOTY???
AAA…
Positioning/Customer acquisition & reactivation
Non-
console
Supply-chain
Budget
Number of developer
Product
performance
Time
High-end
Low-end
Performance demand/supply & constrain on software development
AdvertisingPricing
Competitors
Most popular: tech/game/pricing

Valuation in concept
Yui Nausicaa
Update 2017/3/10

“Peripherals”
“Console” gaming
Online service
Nindies
Subscription
Console Software
1st Party
3rd Party
Mobile gaming
IP portfolio
NWC
Intangible
“Idle” “cash”
NPPE
LT-Investment
Talent
Brand & history
Fan base
AccountingvalueEconomicvalue
“Normalized”valueofoperatingasset
Other opportunities (just for example)
Growth opportunity from underlying biz
Valuefrom“future”(strategic)
Valuepalyw/call
So… What’s the value of Nintendo???
• Valuation for this company is difficult if
possible
• Target price is possible, just check with
your favorite analyst
• No TP for this thesis but a target horizon
• Some might try to estimate private market
value, liquidation value or rebuild value.
Nice exercise if you think those events will
happen in the foreseeable future or you
have a way to unlock the value …
• Value estimated above (liquidation value…)
should only be used as upside potential
rather than downside protection ( might
become a value trap)
Mkt price close to or
below NAV: value
investment for patient
capital provider

Mobility & sharing:
real life example
Yui Nausicaa
Update 2017/3/8

Mobility & sharing: higher contact rate with user experience
Next step: local network effect…

Tracking
Yui Nausicaa
Last update 2017/10/5

Weekly traction: Sell-through Japan only, as of Sep 2, 2017
Find anything interesting?
Source: ?
300000
1300000
2300000
3300000
4300000
5300000
6300000
JP Cumulative sell-through
Switch PS4 WiiU 3DS VITA Wii NS Ln Pred
NS Week 26
If forecasted as linear

Why does 3DS’ pattern look different from those of others?
300000
1300000
2300000
3300000
4300000
5300000
6300000
Switch 3DS NS Ln Pred
3DS launched on 2011/2/26
Holiday season: Nov. 2011- Mid Jan. 2012

Incorporate potential production boost for holiday season
3,481,632
4,156,316
300000
1300000
2300000
3300000
4300000
5300000
Switch 3DS NS Ln Pred NS Ln Pred w/ Holiday Adj
3DS launched on 2011/2/26
NS launched on 2017/3/3
If NS follows 3DS’ pattern &
supply constraints mitigated
Holiday season
It seems 18mm is not
just a bs number…
As of September 4, 2017
Timing
NS Cum. Unit
Sold (MM)
JP units (MM) JP Share(%)
Jun 2017 4.7 1.12 24%
Dec 2017 14.6 3.48 24%
Week 52 17.4 4.16 24%

Est. JP share 24% Global Cumulative Noticeable SW Event
Week Ending Week # Forecast Actual A-F Forecast Actual A-F Forecast
2017/8/27 Week 26 69,654
2017/9/3 Week 27 47,854 50,074 2,220 1,573,354 1,575,574 2,220 6,602,467 Mario + Rabbids Kingdom Battle
2017/9/10 Week 28 47,854 45,439 (2,415) 1,621,208 1,621,013 (195) 6,803,283 Dragon Ball Xenoverse 2
2017/9/17 Week 29 47,854 44,052 (3,802) 1,669,062 1,665,065 (3,997) 7,004,098
2017/9/24 Week 30 47,854 43,426 (4,428) 1,716,916 1,708,491 (8,425) 7,204,914 NBA 2K18 / Pokken Tournament DX
2017/10/1 Week 31 47,854 73,231 25,377 1,764,770 1,781,722 16,952 7,405,730 FIFA 18 / Golf Story
2017/10/8 Week 32 47,854 1,812,624 7,606,545 Stardew Valley
2017/10/15 Week 33 47,854 1,860,477 7,807,361
2017/10/22 Week 34 47,854 1,908,331 8,008,176 Fire Emblem Warriors
2017/10/29 Week 35 47,854 1,956,185 8,208,992 Super Mario Odyssey
2017/11/5 Week 36 47,854 2,004,039 8,409,807 Earnings Release
2017/11/12 Week 37 99,272 2,103,311 8,826,393 Sonic Forces / Warriors x3
2017/11/19 Week 38 69,596 2,172,907 9,118,449 Skyrim
2017/11/26 Week 39 68,271 2,241,178 9,404,942
2017/12/3 Week 40 85,189 2,326,366 9,762,430 XC2
2017/12/10 Week 41 167,417 2,493,783 10,464,983
2017/12/17 Week 42 292,594 2,786,377 11,692,831
2017/12/24 Week 43 300,118 3,086,495 12,952,256
2017/12/31 Week 44 395,137 3,481,632 14,610,420
2018/1/7 Week 45 157,554 3,639,187 15,271,586
2018/1/14 Week 46 199,164 3,838,351 16,107,366
2018/1/21 Week 47 78,696 3,917,047 16,437,606
2018/1/28 Week 48 47,854 3,964,901 16,638,422
2018/2/4 Week 49 47,854 4,012,754 16,839,237
2018/2/11 Week 50 47,854 4,060,608 17,040,053
2018/2/18 Week 51 47,854 4,108,462 17,240,869
2018/2/25 Week 52 47,854 4,156,316 17,441,684
2018/3/4 Week 53 47,854 4,204,170 17,642,500
Actual: Media Create
JP Weekly Sell-through JP Cumulative
For those who love numbers (as of 2017/10/1)
Revision of ?

Attach Rate Breakdown as of 2Q17
FY End Mar 31, 2017
Calendar Year 1Q17 2Q17 3Q17 4Q17 1Q18
Cum. SW Sales (M) Nintendo Guidance
Zelda 2.76 3.92
1-2 Switch N/A (to Others) 1.22
MK8 Deluxe 3.54
ARMS 1.18
Splatoon 2
Mario + Rabbids
Others 2.7 3.74
Cum. SW Sales (M) 5.46 13.6 40.46
Cum. HW Sales (M) 2.74 4.71 12.74
Cum. Attach Rate 1.99x 2.89x 3.18x
Zelda 1.01x 0.83x
1-2 Switch N/A (to Others) 0.26x
MK8 Deluxe 0.75x
ARMS 0.25x
Splatoon 2
Mario + Rabbids
Others 0.99x 0.79x
Fiscal Year Ending March 31, 2018

Global traction: different sources
NX shipment Software Note
Nintendo_target 2m by end of Mar17
Rumor_target 2.5m+ by end of Mar17
IHS Markit 2.4-2.6m by end of Mar17
Nintendo_actual 2.74m 5.46m by end of Mar17
Nintendo_target 10m 35m during Apr17-Mar18
NX sell-through Zelda Date in press Source
SuperData_1 1.5m 1.34m 2017/3/14 gamesindustry.biz
SuperData_2 2.4m 2017/4/14 venturebeat.com
Ace Research Institue 2.3m 2017/4/14 WSJ
IHS Markit 2.3m 2017/4/26 IHS
Nintendo_actual 1.2m 2.86m by end of Mar17
NX sell-through Zelda Date in press Sourse
NPD 906K 925K 2017/4/13 businesswire.com
Nintendo_actual 600K 890K by end of Mar17
NX sell-through Note Sourse
Famitus 555.6K Cum. Week 5 Famitsu
US traction
Japan traction
Global traction

Google trend comparison as of 2017/4/9
E3
Holiday
season

Chart
Yui Nausicaa
Last update 2017/3/29

For those who love charts
• If Nintendo does nothing and stays at
25000 Yen, MA25 will reach MA75 on
3/29
• Information and events during this
period that might make price depart
from 25000 Yen:
• Sell-through
• Management interview
• Splatoon 2 Global TestFire 3/24-26
• Restock at My Nintendo Store 3/27
Revisit after 3/29

Fund flow from specific firm
Yui Nausicaa
Update 2017/3/23

LT confidence enhancement from established investor
Next day: mkt participants taking profit?
ADR was relatively strong
Comment
• Large long position from active management firm (are they?) is generally positive
• As they need more time to accumulate and then to distribute, they are more likely to focus on longer term
• The stock should be well researched (hopefully) before building meaningful position so it might be an
opportunity to free ride their work
• However, large position might be viewed as stock price driver before disclosing so stock price might be volatile once
specific manager’s position is reported. This might attract more buyers or signals short term profit taking
opportunity to sellers

Beginning of TAM consensus revision
Yui Nausicaa
2017/3/18, Last update 4/6

WSJ as the first one to report the “production expansion”
• Apr17-Mar18
 Production plan: 8m->16m at least
 Suggesting Nintendo believes to sell significantly
more than 10m in this period
 First year 10m is regarded a threshold
 Production plan beats most analysts’
expectation
• Mar17 shipment might be 2.5m or more
Takeaway
Comment
• “First year”(depending on definition) estimation
ranges from 5m-10m clustering around 8m-10m
• First year sales consensus gets moved by this
news. After incorporating positive sell-through
and business briefing in April, consensus will
quickly gravitate to a new one. Might be described
as following the Wii path and eventually leading to
TAM consensus revision
• Information sources -> first year consensus -> TAM
consensus. Upward revision is more likely but
should focus on actual execution and adoption

DIGITIMES gets information from TW supply chain makers
Potential supplier and assembler
• Hon Hai Precision Industry
• Misumi Electronics
• Hosiden
• Advanced Semiconductor Engineering
• Jentech
• Delta Electronics
• Nanya PCB
• Foxlink
• Realtek
• Alps Electronic
• Richwave
• STMicroelectronics
• Cypress Semiconductor
• Macronix
• Nvidia
• JDI
• Toshiba
• Samsung
• Maxim
• Broadcom
• MegaChips Corporation
• Pericom Semiconductor (Diodes)
• Texas Instruments

Fomalhaut estimates Nintendo Switch to sell 30M by 2018

Color from retailer
Yui Nausicaa
2017/3/24, Last Update 2017/3/30

GameStop's (GME) Q4 2016 Results - Earnings Call Transcript

GameStop's (GME) Q4 2016 Results - Earnings Call Transcript
Note: Vu should be Wii U

Game Digital’s (GMD) Interim Results – Presentation

Before earnings release
Yui Nausicaa
2017/4/15

Tools used
Yui Nausicaa
Update 2017/3/10

For those who are interested in business theory
Note: Nintendo is NOT a value investing target for me

Performance 2/21-6/30
Yui Nausicaa
Update 2017/6/30

Nintendo investment thesis before the launch of Switch

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