While U.S.-based video game companies like Activision Blizzard and Electronic Arts have delivered phenomenal returns for investors, they're not the only names in gaming stocks. Nintendo (OTC:NTDOY) has surged from its lows in 2017 following the unprecedented success of its Switch console.

But beyond the millions of Switch devices being sold each quarter, company leadership is looking to its popular characters and titles as another lever for future growth. From theme park attractions to feature films and mobile games, Nintendo is still in the early stages of growing its reach worldwide.

A full transcript follows the video.

This video was recorded on Oct. 16, 2018.

Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen. It's Tuesday, October 16th. Joining me in studio is Motley Fool contributor Dan Kline. Hey, Dan! Thanks for coming into Fool HQ this week!

Dan Kline: Thanks for having me! 

Shen: Listeners, I hope you all join me in wishing Dan a very happy birthday today. I really appreciate you coming on the show, buddy. I know it's not the most conventional birthday celebration, being on a podcast.

Kline: [laughs] Actually, I put this up on Facebook, I can honestly think of nothing I enjoy more than doing these shows. So, getting to spend my birthday -- it's a work day. It's not a Saturday. I'm going to Vegas next weekend. We'll celebrate the birthday. But for a work day, to get to be with friends, tape a couple of podcasts, it's really hard to picture anything better.

Shen: I appreciate that! It's great to have you with us, especially because we're going to the Industry Focus mailbag today for this episode. This discussion is actually long, long overdue.

Kline: Do we have a graphic for that, where a mailbag comes across the screen?

Shen: I wish. I'll look into that with our producers. One of our listeners, Matt, reached out to us over the summer, asking about Nintendo. We did not forget you, Matty. The last time Nintendo came up on the show, it was a really brief update on the strong early reception and sales performance for the company's latest console, the Switch. This was maybe spring of 2017. Matt's write up to us is a little too long to quote here on the show in its entirety, but basically, he wanted to know why video game competitors like Activision Blizzard, Take-Two Interactive, and Electronic Arts, typically get the most attention in terms of the gaming and e-sport companies, even though Nintendo has plenty of its own strengths, which we'll get into. 

Matt, we're going to look at Nintendo's business, some of the latest developments. But to start, it's worth noting that Nintendo is a Japanese company. They're headquartered in Kyoto. The stock trades on exchanges in Tokyo and Osaka. Listeners based in the U.S. who prefer to avoid trading on foreign exchanges, which is possible, but I think daunting to most individual investors, you'll have to rely on the American depository receipts, or ADRs. For Nintendo, those ADRs go by the tickers NTDOY and NTDOF. That first one, NTDOY, sees significantly more trading volume, with hundreds of thousands of shares trading hands most days. Eight of those ADRs represent one ordinary share of Nintendo's stock on its home exchange.

Going back to Matt's question, a big reason why I think you don't see Nintendo included in as many stock recommendations for video game exposure is that fact that I think a lot of investors feel uncomfortable trading pink sheet or over the counter ADRs like these shares. Nintendo is not required to report the full detailed financial and business information to the Securities and Exchange Commission as a result. While I can go to the SEC's EDGAR search tool and pull up the Activision, EA 10-K or 10-Q filings, that's not the case for Nintendo, though they do offer a lot of pretty solid reporting on their investor relationship website.

Kline: There's also no earnings call. You lose a lot of the color that you get from questions. You get the straight reporting -- the top sales, the titles, the year over year. But you don't get, what are your plans? Are you thinking about making a Super Mario Brothers movie again? So, some things that might get them news stories in a traditional cycle on another company don't come up for Nintendo. 

Shen: Yep. As you can imagine, that lack of reporting, it's going to give a lot of individual investors some second thoughts before they take a position. But this is a pretty storied, over $40 billion company. I think it deserves more investor attention, and that's why we'll get into the company, its business, and the rest of the discussion. They're enjoying quite the tailwind right now.

Dan, the big catalyst for the company in the past 18 months has been that new console, the Switch. You are a proud Switch owner. What's the special sauce here?

Kline: It's important to say that while the Nintendo brand was in a strong position before the Switch. They own a lot of great IP. Tons of games you've heard of, characters you know. They were struggling in the console business. They had the Wii, which was a megahit. When that cycle died off, the Wii U was, let's just say, not a megahit. The Switch was really a home run in that it's something totally different. It's a video game console in that you can plug it into your television and play video games on your television console. It's also a tablet portable device. You can carry it, like I'm holding it now, and play it with controllers on the sides. You can prop it up and take the controllers off and use it as a mini-television. It sort of gives families a device that they can all play around the living room television. That's sort of why I bought it. And, while they're traveling, it's an alternative thing for the kids to do. It doesn't need to be internet-connected for the vast majority of gameplay, so you don't run into the kid playing on his iPad and then it loses the connection and he can't play. It's a very different take. Also, they didn't go for, the highest resolution, a million pixels, 4K. It's just a good game experience, so they were able to keep the price down, comparatively.

Shen: For Nintendo, the management philosophy has always been about that fun, unique entertainment experience. I want to talk a little bit, though, about the financial impact that the Switch has had. 

Kline: On the company or me personally? Because it's cost me quite a bit of money. [laughs]

Shen: In the games, I'm sure. But, I can't overstate that the success of the Switch has really helped to breathe new life into Nintendo's business. If you look at the financials, Nintendo reports their results in Japanese yen, which we converted to dollars. There might be small differences in our numbers if you guys calculate something on your own, depending on the conversion rate you use. Overall, revenue declined for eight years straight starting in 2010. During that weak period, as you mentioned, Nintendo had released the very ill-fated Wii U. Investors pretty much watched as the top line went from a peak of $16.4 billion to $4.6 billion. Huge decline. Then, that lead-up period to the Switch, fiscal 2017, for example, which ended in March of that year, revenue was down 3%. That was, of course, though, the month the Switch made its debut. March 2017, Switch makes its release. The company's definitely on a weak streak. Fast forward to one year later, as of March 2018, fiscal 2018 results, that year saw revenue more than double to $10 billion thanks to all the momentum from the blowout sales of this new console. As of June 30, Nintendo has sold almost 20 million units of the Switch. It took less than 10 months for the Switch to outpace the lifetime sales of the Wii U. That's how bad the Wii U was and how strong the Switch is.

Kline: The Switch filled the market niche. Go you go back to the Wii, unless you only had young kids, very few people only had a Wii. The Wii was the secondary gaming device in the house, the one that mom and dad played with, as well. The Wii U didn't really fit that niche. It was a little too expensive. The Switch was just a very logical package. And, those numbers were actually hurt by the fact that they couldn't make them as fast as they were selling them. They were very difficult to get in the first four or five months it was out.

Shen: That's also because these things were absolutely flying off the shelves. I think overall, the approach that management has taken to the Switch and some other small but really fast-growing parts of the business, like digital, like mobile, that to me right now is the most compelling part of the Nintendo investment story.

We go back to Matt's mailbag question. He cited specifically the strong company brand, their reputation for innovation, very valuable intellectual property, mobile apps, e-sports potential. These are all tailwinds and opportunities for Nintendo. I think he's really on point with this list. If you read the letter to shareholders from company president Shintaro Furukawa, he lays out some of the company's goals and strategies going forward in the 2018 annual report. These include the desire to, No. 1, expand the digital business, including Nintendo Switch online, which we'll talk about; No. 2, leverage the company's IP in the massive installed base of smart devices around the world; and No. 3, make Nintendo characters available for theme parks, film, and other merchandise -- exactly some of the things that Matt highlighted.

We'll talk about each of these efforts. In the context of the Switch, it's good to see management learn from the mistake that they made with the Wii U. A big part of the failure there, I think, was to draw interest from some third-party developers -- any, really -- which really limited the library of titles available for that console. By opening up the Switch platform to all these other developers, this deeper library of third-party titles -- which includes, sometime, some more intense games, like action games, for example, that Nintendo doesn't produce themselves. 

Kline: It also includes -- and this is, I think, a very smart play -- some inexpensive retro titles. If you have an Xbox One, maybe you can buy a compilation that has a bunch of old games. But you can't just be like, "I want Tekken 2," and it's $4.99 in the game store. That's how it works on the Switch. There's all sorts of price points you can hit. Some of it is just, they ported over other cool old titles that maybe were out of print. 

Shen: All this serves to expand the Switch's target market. Even the more dedicated adult gamers, people who usually will turn more to the PlayStation or Xbox or PC games, they have something to enjoy now, in terms of titles available for the Switch. 

Nintendo reports the top-selling games for the Switch that it publishes specifically. These are names like Super Mario Odyssey, Mario Kart 8 Deluxe, Splatoon 2. Of the ten best-selling Nintendo titles, together, they've already moved 48 million units as of the end of June 2018. 18 months into its release, 87 million games sold for the Switch. That already puts it within reach of the lifetime game sales of the Wii U, which came out to about 102 million units. Again, you can see how quickly it's ramping up.

Shen: They've also approached game releases really well. They handle them more like a movie coming out. It's not a crowded schedule, and when something like Mario Kart came out, you knew it was coming. There was a heavy pre-order push. They've been very smart. They have all this intellectual property, but there isn't a new Mario Kart every year. There isn't a New Super Mario Brothers every year. They space these things out to meet consumer demand. I would say, those top games you talked about, I bet most Switch owners own 80-90% of the top titles. 

Shen: On top of all the success that they've had, not only in terms of the console unit sales but the titles themselves, management offered sales guidance for fiscal 2019 to be very bullish. 20 million Switch console units expected to be sold in this current fiscal year. 100 million software units. I have one Wall Street analyst estimate, they put total Switch sales topping 130 million units by 2022. That would be an incredible run. It would even beat the original lifetime sales for the Wii. Really something, in terms of momentum here for this console.

As optimistic or bullish as that is, I think there's some truth and beauty to the innovation in this device. You mentioned how it can play in all these different ways, how it appeals to these different target markets. Based on historical sales, handheld devices tend to enjoy a longer shelf life. Nintendo with their Game Boy, their Game Boy Advance, Nintendo DS and 3DS, those four handheld devices, they together average 106 million units sold per device and an average of 550 million games sold per device. You can say that it adds a potential longer tail for the Switch.

Kline: Those devices solve a problem for parents. You don't have a kid. I have a 14-year-old. When my son was eight, I didn't necessarily want to hand him a $400 device. A 3DS -- maybe it wasn't a 3DS at the time. Whatever the current handheld was, it was an inexpensive, under $200 device I could buy him with hundreds of archived titles, some of which I wanted to play, that took care of long car rides and plane trips. As a parent, it's a little hard to justify the $400 console that my kid's going to be sitting inside playing video games on. It's not that hard to justify the distractor on a long trip. That's a purchase for you. That's sort of been the Nintendo bread and butter, and the 3DS kept them going along. 

But the most important thing about the Switch, and it touched on the other forms of revenue you talked about, is that if the Switch hadn't worked, they were going to have to license all their content to other platforms from a position of weakness. You talked about digital and mobile. They're bringing Mario Kart to smartphones. But they can do it in the best possible deal because they don't need smartphone distribution for Mario Kart to be successful. They would have if the Switch hadn't worked. 

Shen: Yep. We're going to get into those efforts in the second half of the show. The 3DS, even, that was released in 2011. Sold over six million units and 36 million games in fiscal 2018. All this time later, it's still selling pretty well. The Switch is priced at about $300 right now. That price will go down, as all consoles experience that price decline over time. You're right, in terms of it occupying this space for kids and more dedicated gamers alike, as a really solid option that fills this unique niche that I think Nintendo has done a very good job doing. 

For these other long-term opportunities that Nintendo sees, you've mentioned a couple of them. Let's talk digital and online. Nintendo reported that digital sales for the Switch were up 87% in fiscal 2018, but still a very small part of the business at just $573 million, about 6% of total revenue. Fast growing, though.

Kline: It's something Nintendo can do better than other publishers. Because most of the biggest-selling titles are actually titles they own, cutting out the middleman is a huge increase in revenue. In theory, it could allow them to sell you a game directly cheaper and still make more money. The negative on digital downloads, and what's been holding them back, is speed. I don't know, do you own a game console? 

Shen: Yes, I do, but not the Switch.

Kline: Have you ever downloaded a game?

Shen: Yes.

Kline: It's slow. It can take all day.

Shen: They're huge files these days.

Kline: Yeah. The Switch games are simpler because they don't have the top-tier resolution. Some of the Switch games, you could decide at dinner, "I'm going to download this game," then by the time you're done, it's done. This is an improving technology that creates a really easy way to put games into people's hands. You no longer have to stand in line in stores, you can get things on release days, you can charge more to get it three or four days early, which they've done on some of their games. This is going to be a growing area. But it's something that's more dependent on internet than it is necessarily Nintendo.

Shen: Their Switch Online offering only launched last month, on September 18th. This gives players the ability to access online multiplayer, certain voice chat services, cloud saves, and other features. The corresponding online subscriptions for the PlayStation and Xbox made a lot of money for Sony and Microsoft. We've talked before, in the context of these video game companies, how digital downloads, not only in terms of the lower cost of distributing games digitally, but all the different add-ons and in-game purchases that can be made are really boosting the margins for those companies. The Switch Online requires a monthly or annual subscription. It's $4 a month or $20 a year. I think there's another three-month option, as well. That's a lot cheaper than the competing services. The rationale for that has been that Nintendo's Switch Online offers less functionality than what PlayStation or Xbox offers.

Kline: They've always had digital downloads. Since the Switch launched, you could always buy games, but there was no multiplayer. The reason they waited is because Nintendo has to build something with family friendly tools in place. I can subscribe and know my child is going to be playing games in a PG environment, which is certainly not the case with Sony and Microsoft.

Shen: Sure. There were delays for the Switch Online. It was actually originally slated for fall 2017, ended up being pushed a full year. But I think this shows us that, as innovative as Nintendo can be with their devices, management also has a reputation of being pretty conservative when approaching certain uncharted territory -- in this case, with this digital online offering.

Kline: The potential for backlash for them is very huge. I'm sure you've dealt with some of the negativity in online gaming. You're playing a game, and there might be words you don't want your kids hearing, there might be racism or taunting, or who knows what. Nintendo goes very carefully because they don't want to be in a situation where any of their family friendly games -- even when they take an NC-17 game or an adult game and port it to Nintendo, they generally tone it down a little bit, take some of the blood out, take some of the violence out. This was all in the traditional line of Nintendo very carefully protecting its brand. 

Shen: Another feature of Switch Online is access to some of the games from the company's very long history, their storied library. The popularity and value of the Nintendo library of titles, I think it's really undeniable at this point. A good example of just how valuable it's been for the company is in the limited runs that they offered for the NES Classic and the SNES Classic. These were shrunken-down versions of those original classic consoles. The first one, the NES Classic, had 1.5 million units, limited. It sold out in no time. The SNES Classic for fiscal 2018 sold 5.3 million units. Each of these holds about 20 or so games.

Kline: You simply couldn't find them. I would love to own either one of them, and they were not available.

Shen: People love some of these classic titles that much. They still love them. That's something that's also offered with the Switch Online subscription.

Kline: It fits the age group. If you have an eight-year-old and he's never played Castlevania before, he's not going to feel like it's outdated. Because the Switch doesn't have the whizz-bang graphics of the Xbox One or PS4, the younger user, who's been playing games on their mobile phone or their parents' mobile phone, all of those archived titles are very fresh and very exciting because they haven't started playing Call of Duty and the very immersive, high-end games. So, that subscription price, I'd be shocked if they don't achieve a pretty high penetration pretty quickly. It's almost an incidental cost at this point.

Shen: Yeah. An even bigger opportunity than Switch Online, in my opinion, is taking all this intellectual property that Nintendo has, these very famous franchise characters, and leveraging it outside of Nintendo's core territory, in terms of video games. That's why a lot of investors are tracking the company's progress in mobile. In the annual report, management said about its smart device games or mobile games, "We plan to expand our smart device business into one of our major pillars of revenue, and in doing so, strengthen the foundations of the business, generate synergy with our dedicated video game business, and maximize business for Nintendo as a whole."

The smart devices business grew 62% year over year to $370 million in fiscal 2018. Again, this is a small but fast-growing part of the Nintendo empire. What do you think?

Kline: I think it's important. It used to be a very walled world. If you wanted Nintendo characters, you had to buy a Nintendo device. I don't think they should take every game and port it to every platform. We've seen recently, Sony having the new Spider Man game exclusively was a driver for video game sales. But I do think selectively taking titles -- bringing a version of Mario Kart that's appropriate for a smartphone to a smartphone -- is probably going to make people want to play the full version of the game and do all the things you could do in Switch. Or, if you've ever played it in a Dave and Busters, all that kind of stuff. You can't do that on a smartphone. But you can bring the experience, you could build the base. Look what they've been able to do with Pokémon. Pokémon Go is a Nintendo-related product -- the ownership of all that is complicated. That took a character that was previously only a 3DS character, in terms of video games, a Nintendo console character, and made it, if not still the biggest, for a time the biggest mobile game. That showed the enormous potential of taking Mario or Donkey Kong or Zelda --- actually, it's not Zelda, it's Link who's the character in Zelda -- and bringing all those to other devices. If they do it carefully, it could be very, very big. 

Shen: Yeah. An example here. Super Mario Run was the first mobile title. It launched in 2016, has been downloaded over 200 million times. Again, this is a case where Nintendo was late to the game, just as it was with online multiplayer service. But this part of the business reminds me a little bit of Walt Disney. You have all these beloved characters. All the company has to do is bring them to more mediums. In the process, they expand their fan base and their audience, which ultimately attracts more people to its core video game business. It's a nice ecosystem play, if they can develop it successfully.

Kline: They have the IP. We've talked about this before, it was always a little strange that they didn't license it out. And I understand when consoles were the whole video game world, you weren't going to take Super Mario and bring it to Xbox, because maybe people wouldn't buy a Nintendo console at that point. But now, a console is not competing with a smartphone. Those are different gameplay experiences. It's different times of day, different locations. They really should bring as much as they can everywhere, as you said, to grow their fan base, to make everything bigger and make these characters bigger. We're going to talk about movies and other things. The more people who know these characters, the more T-shirts you sell, the more licensed ice cream or whatever it might be.

Shen: And hopefully get video game titles, too.

Kline: Hopefully video game titles, too.

Shen: Let's get into the stuff that you mentioned. I've heard a bit about a potential new Super Mario movie in the works.

Kline: I don't think it can top the old one. [laughs] 

Shen: It's potentially currently going through the production phase. But they've also gone through more licensing stuff in terms of theme parks, which you brought to my attention. Can you talk a little bit about that?

Kline: Right now, at the Universal Studios location in Japan, they're actually already under construction on what's called Nintendo Land. It's a handful of rides. They've been very secretive. We know there'll be a Mario Kart ride. Think of it like the Star Wars expansion at Disney, a very immersive land, a big deal. In Orlando, they've said, "We are going to build out Nintendo properties." But they've been very cagey about where. The rumors had always been at the original Universal Studios. There's a kids' area that's a little bit lifeless, it would make sense. But then, about a month ago, it became public that Universal Studios is building a fourth gate, another theme park, and they've amassed a big chunk of land to do that. So, it's very logical to think that Nintendo is going to be the cornerstone, the Harry Potter, of this new theme park. And maybe there'll be something tying it to one of the other theme parks, like the train ties the two Harry Potter Worlds together to help sell multi-day tickets. This is a risk for Universal and a huge win for Nintendo, because they're getting the licensing fee whether it's an instant success or not.

Shen: All the new people going to this park and enjoying those rides, potentially bringing them into this world for Nintendo.

Kline: In theory, you're going to get people who go on the ride not knowing what Mario Kart is, or never having played Pokémon, and they're going to enjoy the ride experience and then go out and experience the video games.

Shen: Yeah. The last topic, we only have a couple of more minutes, I do want to talk about e-sports since that's one of the more popular trends at the moment in the entire video game sector, and where Nintendo is with this trend. If you're a listener and you guessed that Nintendo is a little bit late to the game again, you'd be right. In e-sports, Nintendo has typically taken a more hands-off approach, allowing independent tournament organizers to basically set up their own events and prizes with very limited input from the company. Maybe Nintendo will offer some marketing support, some hardware support, providing consoles, for example, to the tournament or the event. But their efforts have ultimately been nothing like what Activision and EA have in the works, in terms of these multimillion dollar franchises, major tournaments, thousands of spectators, and these really big cash prizes. 

But Nintendo's experimenting more with formal e-sports as of this summer. They had the Splatoon 2 world championship and also the Super Smash Brothers Invitational tournament to showcase those titles, especially the upcoming Super Smash Bros Ultimate, which is coming in December for the Switch. Very, very highly anticipated title for that console. It should be a huge seller in the holiday season. I think Super Smash Bros alone could be a big tailwind for increased software sales or game sales, and also console sales for anyone who's been holding out for this, one of the most popular multiplayer titles of all time.

Kline: They've really built the case for buying the Switch by -- at first, it's like, "Well, OK, Mario Kart, I kind of want that." Then they add one title every quarter. Then, eventually, you're like, "Boy, I have to get this. There's like 10 things."

But in terms of e-sports, they have to engineer some of their games a little differently. If you look at older versions of Super Smash Brothers, they're not purely competitive games. There's a level of goofiness to it that takes away from the e-sports. I haven't played the new title, but I would assume it's going to at least have the option of a purer who-is-better competition, as opposed to, we were playing and then I stepped on something that made me super powerful and I kill you and it had nothing to do with who's better. I would assume they're going to have to either have loose, more fun tournaments that aren't as competitive; or, they're going to have to put out games that work to that world. 

Shen: Yeah. We're running out of time. Final thoughts from me, Matt, this is definitely a case where I can see where you're coming from, in that Nintendo does not get enough love compared to some of the other U.S.-based video game companies. But I think the turnaround, thanks to the success of the Switch, is undeniable. And I do really like some of the other investments and focuses that management is taking, in terms of what they can do with all that valuable IP that they have. Any final thoughts from you, Dan?

Kline: If you look at the life cycle of consoles, the success of the Switch gives them 10 years to plan for what happens next. I think what happened is, they'd had a steady stream of always having a successful console. That got them a little bit complacent. They didn't have to license, they didn't have to partner, they didn't have to do theme park deals. Now, if the Switch is the last successful Nintendo console, I think they'll be ready for the world that could represent that, where they're licensing, they have partnerships, they've worked with Apple, they've worked with other people. This sort of resets the company, and gives them time to become a growth story, when they were definitely a shrinking story that owned some really good IPs. This makes me very excited about the future of Nintendo. 

Shen: And it certainly helps to be able to make some of those investments, go through some of these experiments when you're on a swing and you're doubling revenue in the past fiscal year. 

Thanks, Dan, for being here again! Happy birthday, buddy!

Kline: Thanks for having me!

Shen: Thanks again to Matt for writing in! Remember, listeners, if you ever want to reach out to the Industry Focus team, you can send us an email, industryfocus@fool.com, or go to Twitter. You can find us @MFIndustryFocus. Thanks, Fools, for listening!

People on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.