Nintendo is an “inevitable” now – a high-return secular growth juggernaut that should just keep getting bigger and more profitable with time. Better yet, with Nintendo’s IP flywheel finally in full effect, the earnings snowball you were first told about many years ago is not only rolling and getting bigger, but it’s set to accelerate as higher-powered hardware drops in the near term and the software release slate normalizes thereafter.
Which brings us to another key reason to celebrate Nintendo’s fast-approaching “through the looking glass” moment: It's not just about its dedicated videogame platform business. Nintendo has been taking steps to diversify its income streams for years outside of its core business of videogames by slowly and successfully monetizing its IP via theme parks, movies, and other capital-efficient avenues that are just now beginning to reveal themselves. It’s still early innings, mind you, but we’re happy to report that years of constant assertions that Nintendo would shy away from properly monetizing its gold-plated portfolio of unrivaled IP look positively ridiculous in hindsight. With the blockbuster success of the Super Mario movie, as well as its theme park and other IP-related initiatives approaching critical mass, Nintendo today has multiple sources of high incremental margin revenue that will begin to snowball over the next several years.
To say the same thing a slightly different way, the quality and visibility of Nintendo’s business in early 2024 is radically superior and less risky relative to what it was at any point in its roughly 13-decade history, even if these structural improvements are not broadly appreciated as such. Furthermore, now that Nintendo is armed with the market-leading Switch platform and a self-sustaining IP flywheel on the far side of exit velocity, we remain more confident than ever about its efforts to properly leverage its Apple-like ecosystem of hardware, software, and services across its loyal, 122 million+ strong global customer base.
Let's recap why we think Nintendo is slowly but surely sending old bear arguments into permanent hibernation:
- Nintendo just printed its highest TTM revenue and operating profit figures in the Switch platform’s history, seven years into an aging console "cycle," despite having released only two top-tier first-party “system sellers” over the previous 18 months.
- Nintendo’s Apple-like ecosystem (reinforced by a very Disney-like IP content flywheel) has radically improved the economic resiliency and visibility of Nintendo’s revenue and cash flow, de-cyclifying its earnings power in lockstep.
- With the release of the Switch 2, Nintendo is primed for continued massive margin expansion by reaching a previously untapped market for the company’s consoles.
- With the release of the Switch 2, Nintendo is primed for continued massive margin expansion by reaching a previously untapped market for the company’s consoles.
Source: Crossroads Capital Annual Letter 2023
Disclaimer: I have a position in NTDOY
