Nintendo: the Next Disney?

Ok, I admit — the title is a little bit of hyperbole. But it’s not the most ridiculous exaggeration, either.

Let’s start with some news that might be surprising.

The Super Marios Bros. Movie—a Nintendo franchise—is the second highest grossing film of the year.

Meanwhile, over at Disney—more box office flops.

The Marvels had the worst opening weekend of any Marvel cinematic universe film ever.

Via Barron’s:

Disney’s latest film, The Marvels, brought in $47 million domestically in its opening weekend, below estimates of around $75 million to $80 million. That’s also sharply lower than the $153.4 million its predecessor Captain Marvel brought in domestically in its opening weekend in 2019.

Anybody paying attention knows the box office isn’t Disney’s only problem— problems are stacking like Lego’s in Burbank.

A brief summary:

• ESPN’s best days are behind it and they’re desperately searching for a “strategic partner.” (Translation: sale to private equity.)

• Pivoting to streaming is really f*&^’ing expensive.

• The Tik-Tok’ers are complaining about prices at the theme parks. (Related: Business advice they don’t teach in business school: never piss off the Tik-Tok’ers!)

• Not one—but two—activist investors sniffing around.

• The 2023 Bob Iger aura is not the same as the Bob Iger aura in 2019.

But other than that, how was the play Mrs. Lincoln?

Specific to the box office, Trung Phan recently covered the issue with his usual humor—stating the box office problems are two-fold:

1) Stretching Franchises Thin: Between Star Wars and Marvel superhero films, it seems like there’s a new one being released every month. The result? Audience exhaustion.

2) The Woke Element: Most of their films are going away from the original source material. Snow White is the obvious example. They removed dwarfs from the film because it was “offensive.” You know who revolted really hard after the decision? The actors and actresses who lost their jobs and potential income, because other folks at Disney found it offensive. Now the movie is “delayed” until 2025 and Disney is $300 million in the hole for it.

Disclaimer: “delayed” likely means they never release it and just write it off.

It was only a few years ago—though it feels like a lifetime—I was listening to a guest on Meb Faber’s podcast who said something to the effect, “owning Disney stock was like collecting a tax on birth rates.”

His point? Every new child born basically guaranteed Disney a new customer.

It was an interesting perspective, and likely true to some extent. I have a 3-month-old son and can’t wait to show him Lion King, Toy Story, etc.

But those movies feel like ancient history. That era has come and gone—or at the very least—is fading fast.

Does this mean Disney is dead? No, of course not. It’s an incredible franchise. And there is so much negativity—just look at the stock price—that these problems could form the foundation to dig themselves out (i.e., stock price rebound based on too much pessimism.)

For example, Disney stock had their best one day return since earnings after announcing giant cost cuts. So, I think it’s obvious there’s a lot of simple fixes they can make to eke out small wins.

Another anecdotal example: my brother runs a freight brokerage and has next to zero investing knowledge. Maybe even negative investing knowledge if that’s possible. He hit me up the other day with, “Disney has to be a buy here right?”

His thesis: an iconic brand with a stock down 50% = buy time!

Honestly, I can’t really argue with that thesis.

But my simple conclusion? Disney’s best days are very far behind them. It feels a little like IBM. They’ll still be relevant—of course!—but the luster the brand carries will continue to leak water.

Ultimately, the next generation is unlikely to have the same affinity for Disney franchises. Now, this opinion may come across strong—but I promise it’s loosely held!—and I’m totally open to the idea I’m way off the mark.

But I do think it’s possible Disney may cede that magic (pun intended) to another company. Which leads me to Nintendo.

I did a brief write up on Japan a few months ago.

The simple thesis: Japan has been an unloved equity market for decades, but there’s structural changes happening that could change their fortunes.

It just seemed like there were reasons to warm up to Japan. I could point to Buffett taking big stakes in Japanese companies to solidify my confirmation bias.

But a short time later, Microsoft closed their deal to buy Activision Blizzard. The funny thing about closing giant mergers? A lot of emails become public.

Exhibit A: Xbox boss Phil Spencer had an email leaked making it clear Nintendo was a “prime asset” that Microsoft would be interested in buying.

The headline:

The email is in full below. He expanded mentioning, “getting Nintendo would be a career moment.”

My instincts seeing that? I know about Nintendo, but I know nothing about Nintendo.

Nintendo is a company I’ve interacted with all my life, but never spent more than 30 seconds thinking about the business.

Nintendo 64 is the best gaming console ever created. This is not my opinion, rather a fact of life—I won’t hear any arguments to the contrary.

GoldenEye, Super Smash Bros., Zelda, Mario Kart: the 1927 Yankees can’t compete with that lineup.

(Related: I’ve been out of college for a decade, and I still miss playing Drunk-Kart. Real ones know.)

Now, Nintendo the business is one most people can easily understand. They make gaming consoles, sell them to consumers, and do it all over again a couple years later.

It’s hardware. And hardware is a very difficult (read: cyclical!) business. Hardware cycles tend to follow a series of “ups and downs,” and a simple fact about markets: they tend to like numbers that move in smooth lines, not zig-zags.

A brief 20-year history of Nintendo’s console cycles would be described something like this:

N64 — winner.
GameCube — dud.
Wii — another winner.
A second version of the Wii — flop.
The Switch — big success.

It’s a very inconsistent pattern. And inconsistent business results don’t lead to huge valuations. But there’s reason to believe we’re reaching an inflection point.

What could proverbially smooth out the lines?

Leveraging intellectual property!

Enter The Super Smash Bros. movie, which has been a raging success. Its premiere in April was the biggest opening weekend for an animated film ever—beating out Disney’s Frozen 2, the previous recordholder.

Do I dare say this could start a flywheel effect?

Movies driving interest to product sales, which drive interest to physical experiences (read: theme parks), which help drive merchandise sales, which all drives interest back to movies. 

(I just went full venture capitalist for a moment.)

But Nintendo’s President did mention on a recent earnings call how the movie is benefiting the entire Nintendo ecosystem. Switch sales are rising in areas of the world they did not expect:

Looking at the response by region, Mexico was a little surprising. The install base of our dedicated video game platforms is not as large in Mexico as in other major sales regions, but the box office revenues were high there. We learned that there are many Mario and Nintendo fans in Mexico, and sales of Nintendo Switch there have increased.

It feels like Super Smash Bros. may just be the beginning of something much larger.

They announced a Zelda move was in production on that same call—partnering with Sony for distribution. The release date is unknown, but the direction of the business is clear: they will be leveraging more IP.

Then there’s the move into theme parks. Super Nintendo World was opened at Universal Studios Hollywood earlier this year, with two more theme parks already planned for Orlando and Singapore.

And Nintendo is giving all the indications they will be patient and deliberate with their content. They don’t want to oversaturate the market like others have.

Nintendo’s president on the matter:

Regarding the balance between maximizing IP value and the risk of causing devaluation, it is important to continue developing projects one by one, being careful to prevent excessive exposure of the IP and to not let down our game fans, given their expectations and emotional attachment.

The conservative nature extends into other areas of the business as well. They have a balance sheet that would make Jamie Dimon blush—$14 billion in net cash.

Pair that with a market cap of roughly $50 billion—compared to the price Microsoft paid for Activision ($69 billion)—and it does feel like Nintendo could be a long-term bargain.

To be clear, buying companies based on a comparable purchase price may be an interesting factoid, but it shouldn’t serve as the foundation of due diligence.

There’s also obvious problems investors have had investing in Japanese companies in the past: namely unfriendly management teams that don’t prioritize shareholders.

There’s always positives and negatives.

But the simple conclusion? Nintendo might be worth watching. 

(Fair disclosure: the author of this article recently purchased 150 shares of Nintendo stock for a whopping total of $1,500ish and subsequently purchased another 10 shares of Nintendo stock in his sons custodial account for $100ish.)