0:00While anyone can create playing cards, 0:022 secondsbuild a console, develop games, or put together a movie, what cannot be replicated is the emotional attachment 0:099 secondsthat people have with Nintendo and the franchises they own. This makes Nintendo fall into a similar category as Disney. 0:1818 secondsBut if we consider the intellectual property through the lens of Hamilton Helmer's Seven Powers, this primarily falls under the category of branding. 0:2626 secondsEven though other types of video games exist, many people choose to purchase Nintendo's consoles and games. 0:3838 secondsBefore we dive into the video, if you've been enjoying the show, be sure to click the subscribe button below so you never miss an episode. It's a free and easy 0:4545 secondsway to support us, and we'd really appreciate it. Thank you so much. 0:5050 secondsHey everybody, welcome back to the Investors Podcast. I'm your host, 0:5454 secondsClayfink, and on today's episode, we'll be breaking down Nintendo. To kick off today's episode, I wanted to start by going back through the history of the 1:031 minute, 3 secondscompany. Because to really understand where this company is today, you have to appreciate the journey that brought them here. Nintendo is one of the most 1:111 minute, 11 secondsinfluential and successful gaming companies in the world. They've been in the video game industry since the industry's inception, and time and time 1:191 minute, 19 secondsagain, they've been at the forefront of innovation. But what's interesting is that Nintendo did not start in video 1:261 minute, 26 secondsgames at all. Nintendo was founded all the way back in 1889 by Fujiro Yumuchi. 1:321 minute, 32 secondsAt the time, the company was in the business of selling handmade playing cards, specifically a traditional Japanese card game called Hanafuda. 1:401 minute, 40 secondsYamchi was a skilled artisan and a lover of cards, and he had early success in the cards business, partially due to 1:471 minute, 47 secondstheir use in the underground gambling industry. Gamblers would typically start a new game of Hanafuda with a fresh deck, leading to strong demand for 1:561 minute, 56 secondsNintendo's cards. After getting access to sell their cards in shops all throughout Japan, Nintendo would become 2:032 minutes, 3 secondsone of, if not the largest card manufacturer in Japan by the 1920s. 2:092 minutes, 9 secondsNintendo would remain in the playing cards business in the decades that followed. And in 1959, Nintendo secured a licensing deal with another globally iconic brand, Disney. Under the deal, 2:212 minutes, 21 secondstoys, board games, and playing cards would be adorned with Disney characters like Mickey Mouse and Popeye. In 1962, 2:292 minutes, 29 secondsthey decided that they wanted to make a push to expand outside Japan. So, the company went public and began to expand into different markets. From there, 2:382 minutes, 38 secondsNintendo attempted to enter several new business segments, including, believe it or not, rice cookers and a taxi service. 2:442 minutes, 44 secondsMost of these new projects would fail miserably, and as a result, by the late 1960s, Nintendo was on the brink of 2:522 minutes, 52 secondsbankruptcy. Nintendo would then refocus on its bread and butter segments, which really had worked for decades. This was entertainment. Around this time, 3:013 minutes, 1 secondcomputers had started to enter the scene. Nintendo was on top of how they could use these new emerging 3:083 minutes, 8 secondstechnologies to create new types of games that their customers could play, 3:143 minutes, 14 secondswhich led to the release of the Beam Gun series in 1970, which was an instant hit and sold more than 1 million units. In 3:213 minutes, 21 secondsthe years that followed, home game consoles started to pick up steam in the West. So, Nintendo partnered with Mitsubishi to help them put together 3:293 minutes, 29 secondstheir first home consoles. They go on to sell a few different types of consoles throughout the 1970s, some of which 3:363 minutes, 36 secondsweren't much more than just a game of Pong. In the 1980s, they launched the Game and Watch, which was a handheld 3:433 minutes, 43 secondsgame that sold millions of units over an 11-year time period. This success gave them the cash necessary to continue 3:503 minutes, 50 secondsinvesting in new games and continue on their growth trajectory. In 1981, the original arcade game Donkey Kong was 3:593 minutes, 59 secondsdeveloped by Shagarro Miiamoto and his team, and it was a culmination of game design at the time. Miiamoto was just an 4:084 minutes, 8 secondsavid gamer himself, and he understood that a game at its fundamental level, it needed to be easy to learn, but 4:154 minutes, 15 secondsdifficult to master. Donkey Kong was an immediate success as it was the number one arcade game that year. This game was 4:234 minutes, 23 secondsalso the debut of the iconic Nintendo character Mario. In the 1980s, 4:284 minutes, 28 secondsNintendo's gaming segment included arcade games, handheld games, and consoles. But Nintendo was starting to 4:354 minutes, 35 secondssee just how difficult it was to be at the center of the video game industry. 4:404 minutes, 40 secondsIt's an industry characterized by booms and busts and a flurry of competition. 4:454 minutes, 45 secondsOne of the most difficult periods in the gaming industry's history was the crash of 1983, which was created by a flurry 4:534 minutes, 53 secondsof third-party game developers just flooding the market with lowquality games. And the crash led to a lack of demand for gaming consoles for around 2 5:025 minutes, 2 secondsyears. But Nintendo was still intent on being the leader in the US market. And after several years of success selling 5:095 minutes, 9 secondsthe Famicom home gaming console, they rebranded the console to the Nintendo Entertainment System, otherwise known as 5:165 minutes, 16 secondsthe NES. In the late 1980s, they would sell more than 13 million units of the NES, and it would be in more than onethird of all US households by 1990. 5:285 minutes, 28 secondsThere was one specific addition to the NES that really set it apart from other consoles, and this was the lockout chip. 5:365 minutes, 36 secondsWhile other video game consoles had no protections for what games could be inserted into the console, this led to several game developers making, you 5:445 minutes, 44 secondsknow, just whatever games they wanted that consumers would then purchase and try out on the console. Nintendo wanted 5:515 minutes, 51 secondsfull control of that user experience. So on the NES, users could only play licensed games. Nintendo would also 6:006 minutesplace a gold Nintendo seal of quality on gaming packaging and cartridges, 6:066 minutes, 6 secondsshowcasing to consumers that their games were licensed and reviewed by Nintendo for quality and family-friendly content. 6:146 minutes, 14 secondsAnd even with this level of gatekeeping, 6:166 minutes, 16 secondsthe NES really had no shortage of games in its library, which included The Legend of Zelda, Duck Hunt, Wild Gunman, 6:236 minutes, 23 secondsand Nintendo's crown jewel, Super Mario Bros. The NES was far ahead of its time in terms of graphics and gameplay, and 6:306 minutes, 30 secondsit was also far cheaper than other consoles that were available at that time. Super Mario Bros. success on the NES led Mario to become a cultural icon 6:406 minutes, 40 secondsin the United States. I certainly have fond memories growing up playing on the NES and the Nintendo 64, playing games 6:486 minutes, 48 secondslike Super Mario Bros. and Super Smash Brothers. The NES would go on to sell over 60 million units around the world. 6:566 minutes, 56 secondsSo, in the 1990s, Nintendo would also go on to release one of my other favorite games as a child, Pokémon. Pokemon was 7:037 minutes, 3 secondsthe brainchild of Satoshi Tajiri, and it was a six-year project before being released in February 1996. The success 7:137 minutes, 13 secondsof Pokemon led to a natural expansion into playing cards and a huge amount of merchandise. This actually reminds me 7:207 minutes, 20 secondsthat I was uh touring a house for sale here in my city the other day and in one of the children's bedrooms, there was a 7:287 minutes, 28 secondsNintendo themed room. You know, you had Mario and Luigi posters on the walls, a Mario themed bed, and all sorts of merchandise in the room. So, Pokémon was 7:387 minutes, 38 secondsyet another success for Nintendo as 80 million units were sold on the Game Boy and Game Boy Color. When I was a child, 7:457 minutes, 45 secondsyou definitely could have considered me a Pokémon addict. I just loved the Pokemon games. Throughout the '90s, 7:517 minutes, 51 secondsNintendo's primary competitor in the gaming console industry was Sega, which really positioned itself as a cooler, 7:587 minutes, 58 secondsmore mature console that targeted older audiences. Sony was also on the rise, 8:048 minutes, 4 secondswhich had just released the PlayStation as well. Nintendo launched the Nintendo 64 in 1996. This featured their first 3D 8:138 minutes, 13 secondsvideo game console, and it included the launch of Super Mario 64, which beautifully showed off the N64's 8:218 minutes, 21 secondscapabilities. However, the N64 had difficulties competing with the PlayStation, as it was more difficult for game developers to develop games, 8:308 minutes, 30 secondsand the games weren't able to store near as much memory, which allowed Sony to gain a lead in the gaming console market. The intense competition between 8:408 minutes, 40 secondsNintendo and Sony, it led to price cuts on the consoles to encourage consumers to get that initial exposure to their 8:478 minutes, 47 secondsecosystem. Nintendo and Sony, they just did their best to get the consoles in the customer's hands with the hope that 8:548 minutes, 54 secondsthey would purchase several games down the line to recoup their losses on the sale of the console. The success of the PlayStation showed Nintendo that they 9:039 minutes, 3 secondsreally needed to continue to innovate and differentiate themselves to stay on top of the gaming industry. So, they had 9:109 minutes, 10 secondsthe Nintendo Gamecube that sold around 21 million units, but the PlayStation 2 sold more than 7x that at 158 million 9:189 minutes, 18 secondsunits. However, Nintendo got the upper hand on Sony through their handheld device as the Nintendo DS sold over 150 9:279 minutes, 27 secondsmillion units, nearly twice that of the PlayStation PSP. Next, Nintendo set their sights on developing the Wii, 9:349 minutes, 34 secondswhich they described as a console that mom would like. They sought to have a console that was unobtrusive and could slip into anyone's home regardless of 9:439 minutes, 43 secondswhether they were a gamer or not. There were so many aspects to the Wii that made it unique, and Nintendo was very 9:509 minutes, 50 secondsintentional in the types of households they were targeting. It was this thin and sleek design, making it easy to fit 9:589 minutes, 58 secondsinto anyone's household. It had a much quieter fan than top competitors, and the Wii remote was very similar and intuitive, you know, to a remote. So 10:0710 minutes, 7 secondsolder generations would intuitively know how to work it and they would just point it at the system similar to that remote. 10:1410 minutes, 14 secondsThe Wii was a huge financial success for Nintendo as revenues more than tripled from 2006 to 2010. A few years later 10:2410 minutes, 24 secondsthough, Nintendo had a total flop with the launch of the Wii U. The Wii U had several clear issues. But to summarize 10:3210 minutes, 32 secondshow big of a miss this nextG console was, they were targeting to sell 100 million Wii Us and they ended up only 10:4110 minutes, 41 secondsselling 13 million. So they were totally dwarfed by other consoles in the Xbox 10:4810 minutes, 48 secondsand PS4. And as a result, Nintendo turned slightly unprofitable in 2012. 10:5410 minutes, 54 secondsThe one positive spin from the Wii U was that it sort of forced Nintendo to find that next big win. And this led them to 11:0211 minutes, 2 secondslaunch the Nintendo Switch in 2017. And this allowed for gameplay both at home on one's television and for gameplay on the go, such as when you're traveling. 11:1211 minutes, 12 secondsAfter the failure of the Wii U, the Nintendo Switch would practically serve as the company's saving grace. 11:1811 minutes, 18 secondsRemarkably, the Switch would break Nintendo's records for home console sales and was able to attract interest from thirdparty developers to help build out their library of games. Since then, 11:2911 minutes, 29 secondsNintendo has been riding the success of the Switch as it has released updated versions to help keep the console sales rolling in. So, currently they offer the 11:3811 minutes, 38 secondsregular Nintendo Switch, the Nintendo Switch Light in the OLED model, and then they also have the Switch 2, which we'll be getting into here in a bit. In 2012, 11:4811 minutes, 48 secondswith everyone in the world in a lockdown, Nintendo sold over 20 million Switches in that year alone. The Switch is actually my most recent touch point 11:5711 minutes, 57 secondswith Nintendo. So, when I was back home for Christmas, my younger cousin uh she got us going on the Switch, and it quickly brought me back to my childhood, 12:0612 minutes, 6 secondsplaying fun, intuitive, and competitive games with friends and family. None of us knew how to play this uh game that she had set us up with. So, uh you know, 12:1612 minutes, 16 secondsgoing into that evening, most of us just picked the game up rather quickly, even those who didn't have previous experience with the Switch. And you 12:2412 minutes, 24 secondsknow, this really showcases all the subtle nuances that go into the design of Nintendo's games. So, like I 12:3212 minutes, 32 secondsmentioned earlier, many of these games need to be easy to pick up and get going, but difficult to master. In more recent years, Nintendo has expanded into 12:4012 minutes, 40 secondsnew segments to give the company a broader appeal and give consumers different touch points. So, in 2016, 12:4712 minutes, 47 secondsNintendo first entered the mobile market by developing apps for mobile phones. 12:5112 minutes, 51 secondsAlthough mobile isn't a significant revenue driver for the company, 12:5512 minutes, 55 secondscumulative downloads for Nintendo's apps have exceeded 900 million, indicating, 13:0013 minutesyou know, a pretty broad reach. And although you have the classic Mario games on mobile, the biggest mobile hit was Pokémon Go's launch in 2016. This 13:1013 minutes, 10 secondsdrove huge download numbers and player engagement. Nintendo's stock price initially soared because investors mistakenly believed that Nintendo would 13:1913 minutes, 19 secondsdirectly benefit from that success, but Nintendo did not develop or publish the game. It was uh published under the 13:2613 minutes, 26 secondsPokémon Company, of which Nintendo only has a minority stake in, so the financial impact to Nintendo was rather 13:3313 minutes, 33 secondslimited. They've also followed Disney's lead by entering the amusement park business. They've partnered with 13:4013 minutes, 40 secondsUniversal Parks and Resorts to create Super Nintendo World, an immersive theme park based on its iconic games. They 13:4813 minutes, 48 secondsopened one park in Japan in 2021, in subsequent locations in Hollywood in 2023, and Orlando in 2025. These parks 13:5613 minutes, 56 secondsbring Nintendo characters and environments to life in real spaces, 14:0014 minutesblending cuttingedge ride technology with the gaming elements that fans absolutely love. Amusement parks are yet 14:0814 minutes, 8 secondsanother example of Nintendo being successful in introducing its IP to a wider audience. And finally, they've also been expanding into movies. 14:1714 minutes, 17 secondsNintendo's major entry into big screen movies came with the Super Mario Bros. 14:2214 minutes, 22 secondsmovie in April 2023. The movie grossed $1.3 billion worldwide, becoming the highest grossing film based on a video 14:3014 minutes, 30 secondsgame and one of the top animated films ever. Though Nintendo does not break out film revenue in its own accounts, it 14:3814 minutes, 38 secondsacknowledged that the Mario movie boosted overall awareness of its IP and it helped increase sales of related Mario games and merchandise after the 14:4614 minutes, 46 secondsrelease. Given the success of the Super Mario Bros. movie. Nintendo is actively expanding its movie efforts with planned 14:5414 minutes, 54 secondsfilms, including the Super Mario Galaxy movie in 2026 and a liveaction Legend of Zelda film, which is expected in 2027, 15:0215 minutes, 2 secondsalongside other projects drawing on its key franchises. Nintendo's management has emphasized that movies are a part of 15:0915 minutes, 9 secondsa long-term strategy to extend and preserve its IP beyond games, reaching new audiences and keeping its brands 15:1815 minutes, 18 secondsculturally relevant. Zooming out, what's remarkable about Nintendo is how they've 15:2515 minutes, 25 secondsneeded to produce hit after hit with these new consoles, new games, entering new markets, etc. And overall, they 15:3215 minutes, 32 secondsfound a way to both survive and thrive over the last 137 years. And it's no coincidence that Nintendo is this 15:4115 minutes, 41 secondslong-standing Japanese company, as Japan is home to many of the world's oldest companies that are still in operation today. There are thousands of companies 15:5015 minutes, 50 secondsin Japan that are well over a 100 years old. Japanese companies are known for their focus on longevity rather than 15:5715 minutes, 57 secondsoptimizing short-term earnings. They tend to avoid existential risks by maintaining a strong balance sheet, not getting overly leveraged, and moving 16:0616 minutes, 6 secondscautiously into new categories. Since Nintendo was founded in 1889, they just fit right into this Japanese model by 16:1416 minutes, 14 secondsensuring survival and longevity over appeasing short-term oriented shareholders. Nintendo's balance sheet is rock solid as they have more than enough cash to cover all their debts. 16:2516 minutes, 25 secondsAnd this has given them the optionality to continue to experiment and find new ways to monetize their incredibly 16:3216 minutes, 32 secondsvaluable IP. To further illustrate how long-term Nintendo behaves, consider that Mario debuted in 1981 and more than 16:4116 minutes, 41 secondsfour decades later, Mario remains a cornerstone of Nintendo's monetization strategy. That does not happen by 16:4916 minutes, 49 secondsaccident. That's the result of deliberate stewardship of intellectual property across generations. Now, this 16:5616 minutes, 56 secondslong-term strategy isn't necessarily viewed as a good thing to some investors because if a company is too cautious in 17:0417 minutes, 4 secondsthe way they operate, then they might be leaving quite a bit of money on the table or they may be even doing their customers a disservice by not offering products that there is clear demand for. 17:1517 minutes, 15 secondsSo, that's the big question with Nintendo from an investor's perspective. 17:2017 minutes, 20 secondsIs this a company that is shareholder friendly and looks to maximize long-term value for its shareholders? So, around 17:2717 minutes, 27 seconds2018, Nintendo made a strategic shift in their business model by focusing more on generating recurring revenue through a 17:3517 minutes, 35 secondssubscription model rather than continuing to start from scratch and need to have yet another hit console and new set of games in order to survive. I 17:4417 minutes, 44 secondsthink back to my childhood. One of my all-time favorite games was Super Smash Brothers on the Nintendo 64. It's a game 17:5117 minutes, 51 secondsthat I could pick up years later and feel like I enjoyed it just as much as when I played it when I was a kid with my brothers or my friends. But Nintendo 18:0018 minuteswas only able to monetize the sale of the console and then the one-time sale of the games. I was getting tremendous 18:0918 minutes, 9 secondsvalue from those games for years, but Nintendo only captured those one-time sales, which brings us to this 18:1618 minutes, 16 secondsfundamental shift that they've made over the past few years. So, to frame it another way, Nintendo is delivering 18:2418 minutes, 24 secondsextraordinary amounts of value to many of their customers, but they're only capturing a small portion of that value. 18:3118 minutes, 31 secondsSo, by implementing more of a recurring revenue model, they can position themselves to increase each customer's lifetime value to the company. Over the 18:4018 minutes, 40 secondsyears, I'm sure Nintendo has looked at how Apple's business operates and in what ways they could replicate Apple's success. Apple implemented a business 18:4918 minutes, 49 secondsmodel that's known as the iterative hardware model. This business model is built around releasing consistent incremental upgrades on a predictable 18:5818 minutes, 58 secondsannual cycle rather than reinventing its products all at once. Each new device typically keeps the same core design but 19:0719 minutes, 7 secondsimproves key components like processing power, battery life, cameras, and displays. Over time, these steady 19:1319 minutes, 13 secondsenhancements, they compound into major performance gains while reducing manufacturing risk and smoothing revenue 19:2119 minutes, 21 secondscycles. The approach also strengthens ecosystem lockin as hardware, software, 19:2619 minutes, 26 secondsand services evolve together in a controlled coordinated way. Investors also tend to favor this model because it creates more predictable demand, 19:3619 minutes, 36 secondssteadier cash flows, and lowers the risk of major product missteps. Now, how is Nintendo implementing this playbook? 19:4419 minutes, 44 secondsPrior to the release of the Switch, 19:4619 minutes, 46 secondsNintendo's earnings essentially always relied on the success of their gaming consoles and handheld devices. So the 19:5319 minutes, 53 secondscore of the idea of this transformation was creating customer lockin once a customer entered Nintendo's ecosystem. 20:0120 minutes, 1 secondSo in the past once a customer purchased let's say the Wii, they might have had that customer for 5 years and then they would just hope that that customer would 20:0920 minutes, 9 secondsthen purchase the next generation console. But now with the creation of the Switch, the hope is that once a customer purchases the Switch One or the 20:1720 minutes, 17 secondsSwitch 2, they're now in Nintendo's ecosystem for a much longer period of time. Nintendo has been able to add more 20:2420 minutes, 24 secondsvalue to its customers by developing a softwarebased ecosystem that features a library of games. users would not only 20:3220 minutes, 32 secondsbe able to access the current generation of games, but it would also be backwards compatible, meaning that you'd be able to play many of the games that were 20:4020 minutes, 40 secondsavailable on past consoles, offering more selection. Furthermore, if a customer buys the Nintendo Switch in, 20:4620 minutes, 46 secondslet's say, 2018, they still may be able to play some of the new games that are being released today. The simple way to 20:5320 minutes, 53 secondsthink about this is that smartphone apps that are developed today might work best on the newest iPhone, say the iPhone 17, 21:0221 minutes, 2 secondsbut those apps also work on previous generations of the iPhone. So, the release of the Switch represented that shift in their business model where each 21:1021 minutes, 10 secondsnew console had a much longer shelf life and it created this strong customer lockin. Sony's PlayStation and 21:1721 minutes, 17 secondsMicrosoft's Xbox, they followed the subscription model years ago. The Xbox 360 was the first console to put online 21:2421 minutes, 24 secondsplay behind a payw wall through a service called Xbox Live Gold back in 2005. In PlayStation, they followed suit with the PS+ in 2013 with the launch of 21:3421 minutes, 34 secondsthe PS4. Nintendo launched the Switch in March of 2017 and then the Switch 2 in June of 2025. The Switch was just a big 21:4221 minutes, 42 secondshit. It sold 155 million units worldwide, making it their bestselling console ever. As of year in 2025, Switch 21:5221 minutes, 52 seconds2 sales have come in at 17 million units, which is selling at an even faster pace than the Switch One. In the first 4 days of the Switch 2's launch, 22:0122 minutes, 1 secondsales exceeded 3.5 million units, making it the bestselling release for any video game platform in history. The UK sold out their stores in less than 2 minutes. 22:1122 minutes, 11 secondsFrance sold out in less than an hour and the website in Japan was repeatedly breaking due to so much traffic. Are you looking to connect with highquality people in the value investing world? 22:2222 minutes, 22 secondsBeyond hosting this podcast, I also help run our tip mastermind community, a private group designed for serious 22:2922 minutes, 29 secondsinvestors. Inside, you'll meet vetted members who are entrepreneurs, private investors, and asset managers. People who understand your journey and can help 22:3722 minutes, 37 secondsyou grow. Each week we host live calls where members share insights, 22:4122 minutes, 41 secondsstrategies, and experiences. Our members are often surprised to learn that our community is not just about finding the next stockp, but also sharing lessons on 22:5122 minutes, 51 secondshow to live a good life. We certainly do not have all the answers, but many members have likely face similar challenges to yours. And our community 23:0023 minutesdoes not just live online. Each year we gather in Omaha and New York City, giving you the chance to build deeper, 23:0723 minutes, 7 secondsmore meaningful relationships in person. 23:1023 minutes, 10 secondsOne member told me that being a part of this group has helped him not just as an investor, but as a person looking for a thoughtful approach to balancing wealth 23:1823 minutes, 18 secondsand happiness. We're capping the group at 150 members, and we're looking to fill just five spots this month. So, if 23:2623 minutes, 26 secondsthis sounds interesting to you, you can learn more and sign up for the weight list at thevestorpodcast.com/mastermind. 23:3423 minutes, 34 secondsThat's thespodcast.com/mastermind or feel free to email me directly at clay@theinvestorpodcast.com. 23:4523 minutes, 45 secondsIf you enjoy excellent breakdowns on individual stocks, then you need to check out the intrinsic value podcast hosted by Shaun Ali and Daniel Mona. 23:5523 minutes, 55 secondsEach week, Shan and Daniel do in-depth analysis on a company's business model and competitive advantages. And in real time, they build out the intrinsic value 24:0424 minutes, 4 secondsportfolio for you to follow along as they search for value in the market. So far, they've done analysis on great businesses like John Deere, Ulta Beauty, 24:1324 minutes, 13 secondsAutozone, and Airbnb. And I recommend starting with the episode on Nintendo, 24:1824 minutes, 18 secondsthe global powerhouse in gaming. It's rare to find a show that consistently publishes high quality, comprehensive 24:2524 minutes, 25 secondsdeep dives that cover all of the aspects of a business from an investment perspective. Go follow the Intrinsic Value Podcast on your favorite 24:3324 minutes, 33 secondspodcasting app and discover the next stock to add to your portfolio or watch list. 24:4024 minutes, 40 secondsWall Street's initial consensus on the success of the Switch 2 was that they'd sell around 18 million units in the first year, and it's looking like 24:4824 minutes, 48 secondsthey're going to far surpass that. This also illustrates the pricing power that Nintendo has, considering that the Switch 2 launched at a meaningfully 24:5624 minutes, 56 secondshigher price point than the original Switch One. So, initial sales for the Switch 2 have been strong, which I don't think should be a surprise since it's been 8 years since the original Switch. 25:0725 minutes, 7 secondsThe Switch 2 includes several upgrades, 25:1025 minutes, 10 secondsincluding a significantly more powerful processor and GPU, up to 4K resolution when docked, a larger screen, and a 25:1825 minutes, 18 secondsmajor increase in storage capacity. It also has built-in game chat, and an integrated microphone with noise cancellation. Overall, there's this 25:2625 minutes, 26 secondsstrong incentive for customers to upgrade from the Switch One to the 2, 25:3025 minutes, 30 secondsassuming that they're just big fans of Nintendo. Turning back to the Apple analogy, part of what would make the Switch a long-term success is 25:3825 minutes, 38 secondsencouraging third-party developers to develop games that could then be sold within Switch's ecosystem. Nintendo has taken several steps to encourage 25:4725 minutes, 47 secondsdevelopers to do just that. They've created a developer platform which provides support for developers throughout the process of creating 25:5425 minutes, 54 secondsSwitch games. They've lowered the technical barriers by supporting popular engines that are used by most developers. and they've improved 26:0226 minutes, 2 secondsrelationships with thirdparty publishers and collaborated more directly with companies like Microsoft, EA, Capcom, 26:0826 minutes, 8 secondsand Sega. Overall, they've made it much more attractive for developers to develop games for the Switch, and it seems to have worked out beautifully. 26:1826 minutes, 18 secondsThe Nintendo Switch now has a library of over 13,000 games in their ecosystem, 26:2326 minutes, 23 secondsand the vast majority of these games are coming from thirdparty developers. To help put this into perspective, the Wii U offered just 600 third party titles. 26:3326 minutes, 33 secondsIt's also important to mention that since Nintendo has such a vast base of users, this gives developers even more 26:4026 minutes, 40 secondsof an incentive to develop for their ecosystem rather than one of their competitors. The more users they have, 26:4726 minutes, 47 secondsthe greater the profit potential for developers, which leads to a wider moat for Nintendo. But I think that Nintendo still wants to keep their firstparty 26:5526 minutes, 55 secondsgames at the center of the user experience and, you know, staying true to their mission of creating these unique, intuitive, and family-friendly 27:0427 minutes, 4 secondsentertainment that just put smiles on the faces of everyone they touch. So, 27:0927 minutes, 9 secondswhat do the economics look like for the Switch? Starting from the beginning, the Switch 2 console, which includes two controllers, it sells for $450 in 27:1827 minutes, 18 secondsstores. In the Switch one, it sells for $340. 27:2227 minutes, 22 secondsOther consoles sold by Sony and Microsoft are sold at a loss with the hopes of recouping their money through the high margin video games. But 27:3027 minutes, 30 secondsNintendo is unique in that they actually sell their hardware at a profit with something like a 10 to 20% gross margin. 27:3727 minutes, 37 secondsAfter buying the console, games will need to then be purchased as well. There are three tiers of games that you can purchase within the Switch's ecosystem. 27:4627 minutes, 46 secondsYou have indie, which is short for independent, double A, which you can think of as a mid-tier level, and then AAA. Indie games are around $10 to $30, 27:5527 minutes, 55 secondsand they can be produced by a single developer or a small team. It's more of your basic games. DA games are $30 to 28:0228 minutes, 2 seconds$50, and they tend to be put together by midsize studios. These can be solid games, but they're not quite uh blockbuster level. And then you have the 28:1128 minutes, 11 secondsAAA games. These tend to run around $60 to $70. Teams that have huge budgets are putting these AAA games together. Some examples include The Legend of Zelda, 28:2128 minutes, 21 secondsDiablo III, and Skyrim. Third-party developers collect revenue on games sold within Nintendo's ecosystem and end up 28:2828 minutes, 28 secondspaying Nintendo a 30% fee in return. In case that sounds familiar, that is exactly the fee that Apple charges its third party developers for iOS purchases. Now, you might be wondering, 28:4028 minutes, 40 seconds"But what if users only buy a couple of games and they don't need anymore? 28:4428 minutes, 44 secondsDoesn't that mean that you just have the same problem as before where users would buy the consoles, buy the games, but then no further value would be captured? 28:5228 minutes, 52 secondsWell, this is where Nintendo Switch Online comes into play. Nintendo Switch Online or NSO is their paid subscription 28:5928 minutes, 59 secondsservice for the Switch and Switch 2. NSO includes online multiplayer for supported games, clouds save backups, 29:0629 minutes, 6 secondsaccess to a library of classic games from previous hardware consoles, and online features like voice chat integration. Individuals can pay $20 for 29:1529 minutes, 15 secondsa year and families can pay $35 for a year. For Nintendo super fans, they also have a higher tier which includes additional features such as retro 29:2429 minutes, 24 secondslibraries. This runs at $50 per year for individuals and $80 per year for families. And I think it's increasingly 29:3029 minutes, 30 secondsimportant that Nintendo has invested significantly in their online infrastructure to allow for users to play online with their friends or other 29:3929 minutes, 39 secondsusers. It's also pretty attractively priced as PlayStation charges $80 a year for PlayStation Plus for the Essentials 29:4629 minutes, 46 secondsplan and then $160 per year for the premium plan. And then Xbox's Game Pass Ultimate, it runs at $360 per year. So, 29:5529 minutes, 55 secondsit may be that Nintendo is just beginning to tap into, you know, further monetizing their user base through the 30:0330 minutes, 3 secondsgrowth of Nintendo Switch Online. To paint some more numbers around Nintendo's size and their scale, they've been successful in growing their number 30:1130 minutes, 11 secondsof annual playing users within the Switch ecosystem. This metric grew from 16 million all the way back in 2018 to 30:1930 minutes, 19 seconds129 million today. The surprising finding, at least what I thought, on this metric is that it's basically been flat in recent quarters despite the 30:2730 minutes, 27 secondslaunch of the Switch 2. This suggests to me that a lot of consumers who bought the Switch 2 were simply upgrading from 30:3530 minutes, 35 secondsthe Switch One. And it also showcases that Nintendo is going to need to come up with more creative ways to attract 30:4230 minutes, 42 secondsnew users into their ecosystem. Of the 129 million active users, around 34 million were NSO users. That was as of 30:5130 minutes, 51 secondsSeptember 24. And it looks like Nintendo quit reporting this figure altogether. 30:5630 minutes, 56 secondsIf that is representative of where the number of subscribers are at today, then I think there's still room for this 31:0331 minutes, 3 secondssegment to continue to grow. Nintendo has seen this transformation to a more capital light recurring revenue business 31:1231 minutes, 12 secondsand it is making an impact on the financials. So, prior to the launch of the Switch, operating margins were around 6% and then prior to the launch 31:2031 minutes, 20 secondsof the Switch 2, you saw margins rise all the way to 30%. So this is a result of a higher mix of their business coming from software sales which of course have lower input costs and higher margins. 31:3131 minutes, 31 secondsSoftware overall is just a much much better model for Nintendo as consumers become accustomed to purchasing most of 31:3931 minutes, 39 secondstheir games online. That has profound implications on Nintendo's business. 31:4331 minutes, 43 secondsThey don't need to ship a physical product to retailers like Best Buy and Walmart. They don't need to give those retailers a cut. Consumers don't need to 31:5131 minutes, 51 secondsdrive to the store to get a game. And for thirdparty developers, they also get a better end of the deal as there's less friction involved in making the purchase 31:5931 minutes, 59 secondsand they're also cutting the retailer out of the equation as well. I was reading a Morning Star report this morning on Nintendo's business. And 32:0732 minutes, 7 secondsMorning Star estimates that 80% of Nintendo's gross margins come from software sales and around 75 to 80% of 32:1532 minutes, 15 secondstheir software sales come from selling their own firstparty games. So the rest of their software sales come from those third-party titles. So Nintendo's growth 32:2432 minutes, 24 secondsis somewhat contingent on them being successful with the release of new firstparty games going forward. So you 32:3232 minutes, 32 secondsknow they have a very good track record of doing that time and time again. 32:3632 minutes, 36 secondsWhat's also important is that more than half of Nintendo's firstp party titles come from their longestablished and classic franchises. Think Mario, Zelda. 32:4632 minutes, 46 secondsAnd this helps the company continue to generate this strong and consistent earnings and returns over time. I'd like 32:5432 minutes, 54 secondsto talk a little bit more about the Switch 2 here as well. While the Switch 2 may look similar to the previous generation, Nintendo re-engineered the 33:0333 minutes, 3 secondshardware and its accessories from the ground up. The Switch 2 features a larger display screen, upgraded controllers, and it includes 33:1133 minutes, 11 secondssignificantly more powerful processing and graphics capabilities. Nintendo wants to encourage the existing Switch 33:1833 minutes, 18 secondsusers to upgrade. So, they need to provide enough additional benefits to try and incentivize them to do so. And 33:2633 minutes, 26 secondsthis would prove to be a challenge given that the Switch 2 is priced a decent amount higher than the original Switch. 33:3233 minutes, 32 secondsThey also did a few more things to help encourage users to upgrade. So, first, 33:3633 minutes, 36 secondsthey strategically bundled the system with the highly anticipated Mario Kart World. So, if you go to their website, 33:4333 minutes, 43 secondsyou'll see the option to purchase the Switch 2 for $450 or purchase the bundle, which includes Mario Kart World 33:5033 minutes, 50 secondsas well for $500. Nintendo is also, as I outlined earlier, they've taken these major steps to secure a suite of 33:5833 minutes, 58 secondsextensive third party games. So, the Switch 2 includes a custommade Nvidia chip that showcases graphical 34:0534 minutes, 5 secondsimprovements and increased memory and bandwidth. This new chip also allows more third-party AAA games, which puts 34:1234 minutes, 12 secondsthe systems capabilities more in line with the PlayStation and Xbox. Most third-party AAA games weren't really 34:2034 minutes, 20 secondsavailable on the original Switch due to its limited hardware capabilities, but now that's no longer an issue. They 34:2734 minutes, 27 secondsadded game chat, which is a built-in voice and video communication feature, 34:3134 minutes, 31 secondsand the first console that has allowed players to talk, share screens, and even video chat while gaming. This is important because gaming for a lot of 34:3934 minutes, 39 secondspeople is a social activity. They might hop online just to spend time with their friends in the comfort of their own homes. This helps make many of their 34:4834 minutes, 48 secondsgames more engaging, leads to longer play sessions, and it pairs well with the more complex multiplayer games so players can better communicate with each 34:5634 minutes, 56 secondsother. It also opens up a whole new segment of the types of games that developers may want to create which 35:0335 minutes, 3 secondspreviously, you know, just weren't interesting due to the lack of the voice chat feature. What's also interesting about game chat is that players can be 35:1135 minutes, 11 secondsplaying different games and still be in communication with each other. So perhaps you're playing on the Switch with three of your friends. You and one 35:1935 minutes, 19 secondsfriend might decide to go and play a round of Mario Kart World. And perhaps your other two friends would rather play The Legend of Zelda. So, in the midst of 35:2735 minutes, 27 secondsall that, all four of you can remain in constant communication with each other if you'd like. They also introduced mouse functionality, allowing Joy-Cons 35:3635 minutes, 36 secondsto function like a mouse and even supporting standard USB mouse inputs. That may sound like a small addition, 35:4335 minutes, 43 secondsbut it significantly expands the types of games that work well on the platform, particularly firsterson shooters, 35:5135 minutes, 51 secondsstrategy games, and simulation titles that benefit from precise cursor control. By removing that control limitation, Nintendo makes the Switch 2 36:0036 minuteseven more attractive to thirdparty developers and more competitive with PC and other console ecosystems, which really increases the Switch 2's total 36:0936 minutes, 9 secondsaddressable market. With all of this put together, there's been a fairly significant increase in the value proposition now that users get with, you 36:1836 minutes, 18 secondsknow, they get the best of the best Nintendo games, backward compatibility for games from previous generations, and many of the best third-party games, 36:2736 minutes, 27 secondsincluding those of which that are AAA. 36:2936 minutes, 29 secondsAdding the AAA gaming capabilities, I think, was huge for Nintendo. For years, 36:3436 minutes, 34 secondsthey opted out of this AAA arms race and they left it to Sony and Microsoft to invest just crazy amounts of money in 36:4236 minutes, 42 secondsdeveloping games like Call of Duty and Grand Theft Auto. The most popular AAA games, they can cost hundreds of millions of dollars per year to develop 36:5136 minutes, 51 secondsand have carried significant financial risk because the developers don't know exactly how successful the games will be. The cost of developing these games 37:0037 minuteshas also risen just a lot that both Sony and Microsoft have opted to go this 37:0737 minutes, 7 secondsmulti-platform route to help recoup that upfront investment. Meaning that they're allowing users on other consoles to 37:1537 minutes, 15 secondsstart playing their first party games because the users on their consoles aren't enough to have them recoup that investment. Thanks to Nvidia's custom 37:2337 minutes, 23 secondschip, the Switch 2 now has the capability to run these modern AAA games, which opens them up to a whole new segment of gamers. Historically, 37:3337 minutes, 33 secondsNintendo has catered to families, casual gamers, and younger demographics. And now they're able to also capture some of 37:4137 minutes, 41 secondsthose older demographics and hardcore gamers. And this is also a win for Sony and Microsoft as well because it opens up their games to the largest gaming ecosystem that exists with the Switch. 37:5337 minutes, 53 secondsNintendo still won't have the most powerful hardware in the market. It's not the game they're trying to play. 37:5937 minutes, 59 secondsInstead, they're expanding their capabilities just enough to participate in the broader AAA ecosystem while still 38:0638 minutes, 6 secondsleaning into what makes Nintendo Nintendo. That's the iconic first-party IP, innovative gameplay, portability, 38:1438 minutes, 14 secondsand a focus on providing games that are fun instead of having, you know, this incredible raw horsepower. Another added bonus is that not only does Nintendo 38:2338 minutes, 23 secondstake a cut on the sale of each Nintendo game, they also get the 30% cut on any upsells. So, these upselles are pretty 38:3238 minutes, 32 secondsprevalent in AAA games through downloadable content and in-game purchases. And similar to Apple's model, 38:3938 minutes, 39 secondsNintendo takes a cut of these transactions without incurring any costs. So, as I highlighted earlier, 38:4538 minutes, 45 secondsNintendo's expansion into movies has given them a great opportunity to both further monetize their IP and use movies 38:5338 minutes, 53 secondsas a tool for marketing to selling their gaming consoles and games. Nintendo's first successful film was the Super Mario Bros. movie which was released in 39:0239 minutes, 2 seconds2023 and that was in partnership with Illumination and Universal Pictures. The film was a hit because it combined this 39:1039 minutes, 10 secondsnostalgic appeal for the longtime fans with familyfriendly humor, strong animation, and global distribution 39:1839 minutes, 18 secondsthrough their partnerships. And this allowed the movie to resonate across generations and just be a a blockbuster 39:2639 minutes, 26 secondshit. So, this past weekend, I actually went back and watched the movie and thought it was just wonderful. You have Mario and Luigi. They're going about 39:3339 minutes, 33 secondstheir normal lives before they get sucked into this magical warp pipe and uh separated from each other. Mario 39:4039 minutes, 40 secondslanded in the Mushroom Kingdom ruled by Princess Peach. And then Luigi, he ended up in the dark lands controlled by 39:4639 minutes, 46 secondsBowser. It was just so nostalgic to say the least, considering my childhood memories playing Mario games. And it 39:5339 minutes, 53 secondsproved to me that Nintendo could in fact successfully take these iconic characters to the big screen without 40:0140 minutes, 1 secondnecessarily losing their appeal. So the success of the film helped give Nintendo that confidence to continue to release more movies going forward. In April 40:1040 minutes, 10 seconds2026, they'll be releasing a sequel to the Super Mario Bros. movie. And in 2027, we'll see the Legend of Zelda. 40:1840 minutes, 18 secondsMovies help introduce Nintendo's franchises to a global mainstream audience. many of whom may not own Nintendo consoles. And this expands the 40:2740 minutes, 27 secondsbrand beyond, you know, its traditional demographics. Down the line, Nintendo is targeting to release around one movie per year, and it helps just accelerate 40:3540 minutes, 35 secondstheir flywheel. The more people who see their movies, the more consoles they should expect to sell over time. To wrap up the discussion on the business 40:4340 minutes, 43 secondsitself, I'd like to highlight some of the sources of Nintendo's moat and competitive advantage. The most obvious source of their moat is the intellectual 40:5240 minutes, 52 secondsproperty. Nintendo owns some of the most valuable entertainment franchises in history, including but not limited to 40:5940 minutes, 59 secondsMario, Pokémon, and Zelda. These franchises transcend generations and are essentially embedded into cultures 41:0641 minutes, 6 secondsglobally. While anyone can create playing cards, build a console, develop games, or put together a movie, what 41:1341 minutes, 13 secondscannot be replicated is the emotional attachment that people have with Nintendo and the franchises they own. 41:2241 minutes, 22 secondsThis makes Nintendo fall into a similar category as Disney. But judging Disney's stock performance over recent years, 41:2841 minutes, 28 secondsthat might not make too many of our listeners that excited to compare the two. If we consider the intellectual property through the lens of Hamilton 41:3641 minutes, 36 secondsHelmer's Seven Powers, this primarily falls under the category of branding. 41:4141 minutes, 41 secondsEven though other types of video games exist, many people choose to purchase Nintendo's consoles and games. The brand they've built allows them to charge 41:5041 minutes, 50 secondsthese premium prices for their consoles and games, and this leads to high returns on invested capital over time. 41:5641 minutes, 56 secondsThe second source of their mo is counterpositioning. Nintendo benefits from counterpositioning by deliberately avoiding the graphics and performance 42:0442 minutes, 4 secondsarms race that Sony and Microsoft compete in. Instead, it focuses on differentiated hardware and unique 42:1142 minutes, 11 secondsgameplay experiences. Their competitors are structurally locked into serving these hardcore gamers and relying on 42:1942 minutes, 19 secondshigh-powered consoles. So, if they tried to copy Nintendo's strategy, they would risk alienating their core audience and undermining their existing strategy. 42:3042 minutes, 30 secondsWith Sony, Microsoft, and Nintendo owning a lion share of the US video game market, Nintendo has uniquely positioned 42:3742 minutes, 37 secondsitself to continue to thrive in an everchanging environment. Another aspect of their remote to consider is switching 42:4342 minutes, 43 secondscosts. As users purchase games and play games with their friends within the Nintendo ecosystem, leaving the platform 42:5142 minutes, 51 secondsbecomes less and less attractive, and parents who purchase multiple firstparty titles and accessories for their households are also more likely to stay 43:0043 minuteswithin that ecosystem for the next console cycle. While switching costs aren't as high as some software platform, for example, they still create 43:0943 minutes, 9 secondsmeaningful stickiness that supports recurring engagement and sales. I don't know how things were for you as a 43:1643 minutes, 16 secondslistener growing up, but I would tend to get one console per generation of releases. So, if I ended up getting a 43:2343 minutes, 23 secondsWii, I didn't also get an Xbox or a PlayStation. I would typically have to wait a few years until Christmas time to 43:3143 minutes, 31 secondsask to play another console after I had already made use of the previous console that I received as a gift. Nintendo also 43:3843 minutes, 38 secondsbenefits from network effects and scale advantages. A large installed base of Switch users attracts thirdparty 43:4643 minutes, 46 secondsdevelopers, which in turn brings more content to the platform and reinforces its appeal. And as hardware sales grow, 43:5443 minutes, 54 secondsNintendo can spread development and distribution costs across a wider audience, improving margins on firstparty titles. While these forces 44:0344 minutes, 3 secondsare not as dominant as its IP and brand power, they still strengthen the overall durability of the ecosystem. And since 44:1144 minutes, 11 secondsAI is just all the rage today and it's just top of mind for so many investors who are thinking more and more about the potential for disruption coming from AI, 44:2144 minutes, 21 secondsI thought it would be interesting to touch on how AI might impact Nintendo's business going forward. It seems like AI 44:2844 minutes, 28 secondswill improve the development efficiency and thus expand their margins over time. 44:3344 minutes, 33 secondsAI tools can help with things like game development, game testing, leading to shortened development leading to shortened development cycles, allowing 44:4244 minutes, 42 secondsNintendo's team to focus more on the user experience, which is where the company tends to really differentiate itself. AI could also strengthen 44:5044 minutes, 50 secondsNintendo's ecosystem by improving online safety and personalization. As Nintendo expands, social features like game chat 44:5844 minutes, 58 secondsand online multiplayer, AI powered moderation, anti-cheat systems, and smarter content recommendations could make the platform safer and more 45:0645 minutes, 6 secondsengaging. Lastly, AI at the hardware level could enhance performance and further broaden their addressable 45:1345 minutes, 13 secondsmarket. ondevice AI upscaling, smarter battery optimization, and improved graphics processing can allow Nintendo 45:2145 minutes, 21 secondsto deliver stronger performance without investing these absorbent amounts like Sony and Microsoft. So AI empowers 45:2945 minutes, 29 secondsNintendo to continue to innovate without necessarily sacrificing its profitability levels. One risk to monitor, however, is industrywide 45:3845 minutes, 38 secondscontent over supply. So, as AI lowers the barriers to game development and floods digital storefronts with more 45:4445 minutes, 44 secondstitles, you know, this would increase competition for player attention and and make the discovery of games even more 45:5145 minutes, 51 secondscritical. Over time, AI likely won't change Nintendo's core advantage, which is the IP, but it can make the business 46:0046 minutesmore efficient, more scalable, and more defensible in an increasingly competitive gaming landscape. Speaking of overupplying competition, one 46:0946 minutes, 9 secondsinteresting tidbit I came across was from one of the co-founders of Xbox, 46:1446 minutes, 14 secondsSheamus Blackley. Blackley shared that Microsoft is very focused on the future of AI and they're just not interested in 46:2246 minutes, 22 secondsmany of these business segments that aren't in AI. He stated, "Exbox, like a lot of businesses that aren't the core 46:2946 minutes, 29 secondsAI business, is being sunseted. They don't say that, but that's what's happening." End quote. So, Xbox, they currently have 40 million plus active 46:3746 minutes, 37 secondsusers, which might be a huge plus for Nintendo if they discontinue uh the release of new Xboxes. So, we'll see how 46:4546 minutes, 45 secondsthis plays out. I think PlayStation would likely benefit from this more than Nintendo, but undoubtedly it would help 46:5246 minutes, 52 secondsNintendo as well. Turning to the valuation, Nintendo's stock price got a big boost after the early success of the Switch 2. And as of the time of recording, the stock is down over 35% 47:0347 minutes, 3 secondsfrom the highs it set in August 2025. 47:0647 minutes, 6 secondsInvestors have the option of buying the shares on the Tokyo Stock Exchange, 47:1047 minutes, 10 secondsticker 7974. And there's also an ADR that trades under the ticker NTD. 47:1747 minutes, 17 secondsThe market cap of the business is around 10.1 trillion Japanese yen, which seems like a ridiculously high number. It's 47:2447 minutes, 24 secondsreally equivalent to 65 billion US or so. In the trailing 12 months, the company had record revenue coming in 47:3247 minutes, 32 seconds13.5 billion. Net income over that period was 2.5 billion. This gives the stock a PE ratio of around 26. Nintendo 47:4147 minutes, 41 secondsis not a company whose valuation should be judged on current revenue, current profits, because there's just so much more to be seen as it relates to the launch and the success of the Switch 2. 47:5247 minutes, 52 secondsSo, despite the stock selling off, the company seems to just continue to be firing on all cylinders. The Switch 2 has been outpacing sales of the prior 48:0148 minutes, 1 secondrelease of the Switch One despite, you know, them hiking prices. There were concerns in 2025 related to tariffs impacting Nintendo's business, but 48:0948 minutes, 9 secondsrevenue and earnings post tariffs continue to surpass expectations, and investors anticipated a uh weak holiday 48:1748 minutes, 17 secondsdemand for the Switch 2, which it looks like really did not end up materializing. But in early February, 48:2448 minutes, 24 secondsNintendo announced its Q3 results that ended December 31st, 2025. Revenue over the 9-month period was up nearly 100% 48:3348 minutes, 33 secondsyear-over-year and net profit was up 51%. So, it's pretty remarkable that the stock has sold off as much as it has despite the Switch to being, you know, 48:4248 minutes, 42 secondsstill managing to be so far make it the bestselling console ever, at least is on track to be. And the market does also seem a bit concerned about the rising 48:5148 minutes, 51 secondscosts of memory chips used for the Switch hardware. Memory prices have been rising globally due to supply constraints and increased demand from 48:5948 minutes, 59 secondsdata centers and AI infrastructure. And this puts pressure on the cost structure of Nintendo. If those component costs remain elevated, Nintendo either has to 49:0849 minutes, 8 secondsabsorb, you know, that or consider raising prices and investors are trying to gauge how that might impact 49:1549 minutes, 15 secondsprofitability going forward. Investors are also uncertain about the pipeline that Nintendo has for firstparty games. 49:2249 minutes, 22 secondsbeyond that initial launch window. So Nintendo's fairly secretive about its release schedule and this creates 49:3049 minutes, 30 secondslimited visibility into what major titles might drive engagement and software sales over the next 12 to 24 months. And in a hardware driven 49:3949 minutes, 39 secondsbusiness, that lack of clarity can make the market nervous even when the long-term fundamentals remain intact. 49:4549 minutes, 45 secondsFurthermore, I think there is some element of the market assuming that Nintendo will continue to be a boom bust 49:5249 minutes, 52 secondsstory that has historically characterized much of the video game industry. Video game engagement has traditionally been cyclical with player 50:0150 minutes, 1 secondactivity and software sales surging around you know when the consoles are launched and uh then tapering off in the 50:0850 minutes, 8 secondsyears that follow. Investors have seen that pattern you know play out repeatedly across the industry. So even with the strong early success of the 50:1550 minutes, 15 secondsSwitch 2, there's still a lingering concern that growth could normalize once the initial upgrade cycle fades. So when we look at the valuation, the first 50:2450 minutes, 24 secondsthing that comes to my mind is how does Nintendo's financials develop over the next 5 years now that we are roughly 1 50:3150 minutes, 31 secondsyear into the launch of the Switch 2. If we look back at how things played out for the Switch 1, the launch of the Switch One was a clear step change for 50:4050 minutes, 40 secondsNintendo's business. So from fiscal year 2017 to 2018, revenues increased by 115% 50:4850 minutes, 48 secondsand they continue to increase through fiscal year 2021 before declining in 2022 and 23. Additionally, Nintendo 50:5650 minutes, 56 secondsexperienced significant margin expansion after the launch of the Switch 1 as operating margins went from around 6% to 51:0351 minutes, 3 secondsmore than 35% in 2021. But with that said, it shouldn't be a surprise that the stock price performance from the launch of the Switch One to the Switch 51:1251 minutes, 12 seconds2's launch was just phenomenal. It increased by more than 4x in around 8 years. The launch of the Switch 2 has 51:2051 minutes, 20 secondsput downward pressure on margins since the sale of hardware just isn't as profitable for them, which is what happens with the launch of each new 51:2751 minutes, 27 secondsconsole. So, I would expect Nintendo to experience expanding margins over the next few years as more of their revenues come from these digital games and their 51:3651 minutes, 36 secondssubscriptions. And to put some numbers around this digital shift, Nintendo's digital sales have grown from just 32.5 51:4551 minutes, 45 secondsbillion yen in fiscal year 2017 to 443 billion yen in fiscal year 2024. That's 51:5251 minutes, 52 secondsmore than a 13-fold increase in just 7 years. These digital sales carry significantly higher margins than 51:5951 minutes, 59 secondsphysical copies since there is no manufacturing, packaging or retailer costs involved. And that mixed shift towards digital should act as a good 52:0752 minutes, 7 secondstailwind for profitability. Given the stock's decline of around 35% in recent months, if any time was a good opportunity to buy shares in Nintendo, I 52:1652 minutes, 16 secondssure think now could potentially be that time. The market's concerned about margin pressures, increased hardware costs, and the Nintendo's pipeline of 52:2552 minutes, 25 secondsfirstparty games. But I see reasons to be optimistic about Nintendo's future over the next, say, 3 to 5 years. So 52:3252 minutes, 32 secondsNintendo is gearing up for the release of the Super Mario Galaxy movie on April 1st, 2026, in part to celebrate Mario's 52:4152 minutes, 41 seconds40th anniversary. The first Mario movie was seen by over 170 million people across theaters worldwide. So, this 52:4952 minutes, 49 secondsshould not only be a profit generator on its own, but it should also help accelerate demand for Switch 2. In the gaming side of things, Ryan O' Conor 52:5852 minutes, 58 secondsfrom Crossroads Capital, he wrote about Nintendo in a recent letter to shareholders. He writes, "Keep in mind, these films aren't a cost center, 53:0653 minutes, 6 secondsthey're a profit center. The first Mario movie generated roughly $559 million in net profit on a hund00 million 53:1353 minutes, 13 secondsproduction budget, which means the 250 million plus consumer impressions it generated to the core gaming franchise 53:2153 minutes, 21 secondscame at a negative cost of customer acquisition. In effect, Nintendo has built an infinitely scalable self-funding marketing machine, one that 53:2953 minutes, 29 secondspays Nintendo to advertise its own games, and it's about to start compounding annually with every new MCU 53:3653 minutes, 36 secondsrelease." End quote. And more importantly, Nintendo is riding the success of the Switch 2 and solid software sales with a strong pipeline 53:4453 minutes, 44 secondsgoing forward as well. They're sitting on the richest firstparty software pipeline in its history over the next 2 to four years of the Switch 2 life 53:5253 minutes, 52 secondscycle, which includes titles like 3D Mario, The Legend of Zelda, Super Smash Bros., Animal Crossing, and the next gen 54:0054 minutesPokémon. Nintendo wants to ensure that the Switch 2 has that sustained momentum across the 5 to 7year life cycle by 54:0754 minutes, 7 secondsbackloading its biggest franchises rather than front-loading them and seeing a drag on the financials towards the end of the cycle. And as I've 54:1554 minutes, 15 secondsmentioned, Nintendo has positioned the Switch 2 to be one of, if not the most successful console they've ever released. With the PlayStation 6 54:2254 minutes, 22 secondsreportedly expected to launch in late 2027 or early 2028, Nintendo likely has a clear runway to continue building 54:3154 minutes, 31 secondsmomentum and expanding its installed base before the next major competitive hardware cycle begins. As a result, 54:3754 minutes, 37 secondsmargins are likely to increase on a growing revenue base. Because of the inherent nature of this business and it 54:4554 minutes, 45 secondsjust being fundamentally different than your typical quality company that tends to just grow earnings year after year. 54:5154 minutes, 51 secondsIn my view, Nintendo is just a more difficult company to accurately value. 54:5654 minutes, 56 secondsBut as Buffett says, it's better to be roughly right instead of precisely wrong. So if Nintendo bulls are correct 55:0355 minutes, 3 secondsabout the thesis and how it could play out over the next few years, then shares may be attractively priced today. So, 55:0955 minutes, 9 secondsdoing some quick math here on the numbers, at roughly a 16% revenue growth rate through fiscal year 2029, that's over the next 3 years, we get 22.8 55:1855 minutes, 18 secondsbillion in revenue. This business is certainly difficult to forecast, but I wouldn't be surprised if the actual numbers do come in higher. Margin 55:2755 minutes, 27 secondsexpansion, that's what I expect in the near future. I penciled in operating margins to increase from roughly 15% 55:3455 minutes, 34 secondstoday to 30% in 2029. At this margin level, this would give Nintendo roughly $6.8 billion in operating income. If I 55:4255 minutes, 42 secondsapply an earnings multiple of 16 and discount that back to today at a 10% 55:4755 minutes, 47 secondsdiscount rate, that gives me an estimated intrinsic value of $82 billion. Today, Nintendo trades at around $65 billion in market cap, which 55:5655 minutes, 56 secondswould imply a 20% discount to this estimated intrinsic value and an expected return of around 19% over that 56:0356 minutes, 3 seconds3year time frame. Now, again, this is just back of the napkin type math, and there's a lot of nuance to Nintendo's business. It sort of feels like a 56:1156 minutes, 11 secondsbusiness that just has this wide range of different outcomes that could play out in such a short period of time. So, 56:1856 minutes, 18 secondsto invest in a business like this, I would need to get more comfortable with understanding the full picture from the perspective of both the Bulls and the 56:2556 minutes, 25 secondsBears. It's also worth noting that Nintendo maintains a substantial net cash position on its balance sheet. They 56:3256 minutes, 32 secondshave over $14 billion in cash and short-term investments with zero long-term debt. That's around 22% of the 56:4056 minutes, 40 secondsmarket cap. So, this is a substantial cash position. This level of cash adds long-term durability and strategic 56:4756 minutes, 47 secondsoptionality to the business, allowing management to invest through console cycles, fund new IP and experiences, and 56:5556 minutes, 55 secondscontinue thinking in decades rather than quarters. However, this cash pile can also be seen as a liability to some investors. There's only so much value to 57:0457 minutes, 4 secondscash sitting on the balance sheet because cash that is sitting idle is cash that could otherwise be used to reinvest into the business or distribute 57:1157 minutes, 11 secondsback to shareholders. The company currently pays around a 2% dividend and at the moment they are not buying back any shares, but they do do a bit of 57:2157 minutes, 21 secondsshare repurchases. You know, you look back to 2022, 2023, and I would expect as cash continues to pour in and it becomes clear that they have far more 57:2957 minutes, 29 secondscash than they would ever need, they would then decide to likely pull the share buyback lever again and likely increase the dividend as well. So, it 57:3857 minutes, 38 secondsseems clear to me that management is shareholder friendly and focused on delivering returns, but like many Japanese companies, they are also pretty 57:4757 minutes, 47 secondsfocused on the long-term durability and ensuring that they're going to be able to monetize that IP for decades to come. 57:5557 minutes, 55 secondsThis can also be seen in the way they approached their movie segment. All the way back in 1993, Nintendo debuted the Super Mario Bros. movie, which for all 58:0458 minutes, 4 secondsintents and purposes was a total flop and disappointment. The experience reinforced how easily beloved characters could be diluted when creative control 58:1358 minutes, 13 secondsis loosened. As a result, Nintendo became highly reluctant to license its core IP for movies for decades afterward. It wasn't until the company 58:2158 minutes, 21 secondscould maintain meaningful creative oversight and partner with the right studios that it felt confident bringing Mario back to the big screen. And I 58:2958 minutes, 29 secondsthink it's very reassuring for shareholders to see how big of a success the Mario movie was back in 2023. When 58:3758 minutes, 37 secondsstudying Nintendo and considering where the business will go from here, I do think the most important takeaway is that historically Nintendo was much more 58:4458 minutes, 44 secondsprone to these big swings in its core business. Because each console cycle could dramatically reset the company's trajectory depending on whether the next 58:5258 minutes, 52 secondsplatform was a hit or a flop. That made the business inherently higher risk as they relied on continuing to 58:5958 minutes, 59 secondssuccessfully launch the next piece of hardware. But today, the picture looks much different. Nintendo has created a 59:0659 minutes, 6 secondsmuch stronger customer lockin with the Switch ecosystem. They have a rapidly growing base of digital game sales that expand margins and a recurring revenue 59:1559 minutes, 15 secondssubscription model through NSO that monetizes engagement beyond one-time purchases. In addition to the massive installed user base that attracts 59:2359 minutes, 23 secondsthirdparty developers and strengthens the overall ecosystem. Putting it all together, Nintendo is far less dependent on the binary success of each new console cycle than it was in the past. 59:3459 minutes, 34 secondsHowever, cyclicality I think will always remain an inherent part of Nintendo's model, at least for the time being. As 59:4159 minutes, 41 secondseach new console launch brings higher upfront hardware costs and marketing spend that can temporarily pressure margins before the installed base scales 59:4959 minutes, 49 secondsand higher margin software and digital revenues once again take the lead. To wrap it up, Nintendo is just an iconic company that is sitting on some of the most valuable IP in the world. And yet, 1:00:001 hourafter backing out their huge cash position, this IP today is valued at around $50 billion. If they're able to 1:00:081 hour, 8 secondsnavigate this transition to a recurring revenue model effectively, then I could see shares compounding at a high rate from today's prices. That wraps up 1:00:171 hour, 17 secondstoday's episode. Thanks a lot for tuning in and I hope to see you again next time. 1:00:221 hour, 22 secondsThanks for listening to TIP. Visit the investorspodcast.com for show notes and educational resources. This podcast is forformational and entertainment 1:00:311 hour, 31 secondspurposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, 1:00:381 hour, 38 secondsfinancial situation or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results. Listeners 1:00:451 hour, 45 secondsshould do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other 1:00:541 hour, 54 secondsfinancial product. Hosts, guests, and the investors podcast network may hold positions in securities discussed and may change those positions at any time 1:01:011 hour, 1 minute, 1 secondwithout notice. References to any third party products, services, or advertisers do not constitute endorsements, and the investors podcast network is not responsible for any claims made by them. 1:01:101 hour, 1 minute, 10 secondsCopyright by the Investors Podcast Network. All rights reserved. 1:01:171 hour, 1 minute, 17 secondsTry and think about what you would have to offer someone to use Branch Out instead of LinkedIn. Once LinkedIn has already been the established user base, 1:01:251 hour, 1 minute, 25 secondsthere's very little incentive for people to switch. The amount of capital it would take to convert a significant portion of LinkedIn's user base is an 1:01:331 hour, 1 minute, 33 secondsunthinkable amount. So, it just wouldn't be worth a new player trying to enter the market. And if they do, they would essentially just be throwing money down 1:01:401 hour, 1 minute, 40 secondsthe drain. As a result, network economies tend to be a winner take all industry once the leader has crossed some sort of tipping point. Once the 1:01:491 hour, 1 minute, 49 secondsleader achieves a certain scale, then the other firms are just forced to throw in the towel. In my view, network economies have brought us some of the 1:01:571 hour, 1 minute, 57 secondsbest businesses in the world because their modes are just so difficult to disrupt and they're extraordinarily profitable.