Valuation
Based on a relative valuation method using fwd P/E ratios, my 3-year target price is JPY 7123 (-3% upside) based on an exit multiple of 25x (7-year average, slightly above industry median), and 5-year target price is JPY 9898 (+35% upside) based on an exit multiple of 25x. The 5-year target prices in the successful venture into a new video game console (Nintendo usually creates a new one every ~7-10 years) with the integration of the Dynamo Picture venture.
In my opinion, Nintendo could also afford a higher P/E ratio as the company is a rare player in the industry that owns a multitude of successful IPs for its video game production.
Risk
High exposure to fluctuations in foreign exchange rates. Overseas sales accounts for >70% of its total sales, with majority of transactions made in local currencies. Hence, fluctuations in forex rates have strong influence on assets when they are converted to yen-dominated assets.
To mitigate the risk, Nintendo purchases in foreign currencies on an ongoing basis
Inherent cyclicality of video game industry. Customer taste and preferences may change quickly, and games tend to go out of trend within 1-2 years (eg. It Takes Two). The emergence of new forms of entertainment such as on-demand streaming and podcasts takes time away from the video game market as well. Furthermore, profitability in the video game market faces high hurdles due to large investments required in R&D and marketing. There are also multiple media giants expanding their strengths in the field (eg. Netflix integration of games into their platform, Microsoft’s Xbox and newly formed Microsoft Gaming division).
Track record of successfully creating sequel for flagship games such as Mario and Legend of Zelda which have shown decades of success, a rarity in the video game industry
Nintendo is increasing its presence in the multimedia empire, purchasing its own CG production studio, Dynamo Pictures, which will enable it to create more innovative products based on its IP
ESG Assessment
Environment (E): Manufacturing GHG production / Waste Management
Uses renewable energy and energy conservation activities to reduce environmental footprint spanning the design stage to post-sales repair and support through recycling. Nintendo also actively manages their inventory forecasts to avoid excessive production waste from obsolete products.
Nintendo also has an established environmental policy by implementing a plan-do-check-act (PDCA) cycle to keep the company accountable.
Nintendo’s subsidiaries outside of Japan also promote environmental initiatives. For example, since January 2020, Nintendo of Europe has been using recyclable plastic which contains 50% sugarcane-based biomass plastic for the shrink foil of packaging materials for certain software packaged with exclusive items.
Social (S): Inclusive workplace
Inclusive workplace environment cultivates collaborative and innovative culture as Nintendo can understand the needs of diverse customer profiles.
Nintendo has set goals to maintain 100% use of childcare leave by women and increase the percentage of men utilizing childcare leave to 50% or more in terms of cumulative totals over a five-year period beginning in the fiscal year ended March 31, 2022, and has succeeded in achieving them in FY23.
References
https://fortune.com/2022/05/11/ea-electronic-arts-loses-20-billion-fifa-video-game-franchise-licensing-spat/
https://www.vintageisthenewold.com/game-pedia/how-did-the-video-game-industry-recover
https://www.nintendo.co.jp/csr/en/report/environment/topics/index.html?active-topics=topics01
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.
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