David Rosenthal: belief

Transcript context

…But thank God that someone is a Nintendo in the world and gets to innovate and drive things forward because everybody else is just copying each other and figuring out, is there a cash grab to be had, or are we going to miss out on some big thing, we need to hurry up and go chase it? Nintendo is really not doing that. I think that is what is clearly different about Nintendo now than the past 20 years, which is they're no longer stupid. They may not be as commercial as shareholders would like them to be, but they're no longer stupid. I think you probably got to have some faith that they're going to figure it out. On the other hand, relative to a Sony or Microsoft where you can be pretty sure that they're not going to screw up the next generation, there is still that wildcard risk with Nintendo. Totally, which is the bear case is. Games are hit-driven, consoles are even more hit-driven, and they take six to eight years to recover from a mistake. Now they have all their eggs in one basket. To close out the bear case, even with the Switch's success, revenue still hasn't matched the 2008 peak. Sure they're doing more with this licensing, movie, theme parks, other mobile apps, but it's not clear how they will make a material amount of revenue from all of that relative to their core business. We've talked a lot about the bear case. The bull case, if they actually transition to this durable platform business, they have a billion-plus dollar subscription business on their hands. They have a $3 billion digital high margin direct-to-consumer business on their hands. They also on top of all of this—to your video games are the best business model of all time—have durable IP, perhaps the most valuable IP in all of video games on top of the subscription business, creating the additional stickiness. As we get into their Crossroads Capital viewpoint here, there's a valuation bull case, because you have this company that if they're actually set up in this way and they do actually execute the platform playbook, their price to sales is at a measly three and a half X, where they're trading right now. You compare that to Apple, that's half of Apple. If they're actually going to go execute Apple strategy, and they actually have the ability to have the margin structure, the growth rate, and the durability that Apple has with the iPhone business with the App Store on top of it, you can make a case that you should value those companies the same based on their multiple of revenue, but then let's get to profits. Their price to earning is only 13X. For comparison, freaking Sony is at 16X. Apple is at 28X. Disney's at 54X earnings. Nintendo's got a $3 billion digital business. If you value that comparable to other SaaS businesses, that's a $21 billion business. You add in their cash. That gets you to 34 billion. If you look at Nintendo's actual market cap where they're trading today, it's $47 billion. That means the difference between those two is $13 billion. Would you value their entire hardware business, hardware Switches, hardware cartridges (games for the Switch), and all the future licensing revenue at just $13 billion? That's a freaking steal. That's the whole AWS narrative around, you buy AWS and you get the retail business for free. If everything goes right, and if you believe the whole platform thesis, that's the valuation bull case that Crossroads has astutely pointed out.…

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