Can Nintendo Use Its Cash to Better Leverage This Competitive Advantage?

Iconic video game company Nintendo (NTDOY -0.33%) is absolutely loaded with cash. According to its most recent financial update, the company had over 1 trillion yen in cash and deposits, equating to around $9.4 billion. Considering the market capitalization of the company is just $55 billion, this cash position is substantial.

More than cash, Nintendo's unrivaled video game intellectual property (IP) is a competitive advantage. In this video from Motley Fool Backstage Pass, recorded on Jan. 10, contributor Jon Quast talks with analysts Sanmeet Deo and Clay Bruning about Nintendo's need to use cash to better leverage this valuable IP.

Jon Quast: Nintendo, this is basically the quintessential gaming company when it comes to intellectual property. Is there anything more iconic than Mario Brothers, Donkey Kong, Zelda? These are all Nintendo properties. They've been around from the very beginning when we were playing arcade cabinets in pizza places. Over the years, they've done a very good job. It's basically the business model of Nintendo over the years has been create a console, then monetize that console by creating games for it. That has worked out well for them over the years, but it does lead to a cyclicality of the business. You release the console, it might do great, it might not do great. They've had a couple of flops. They've also had the greatest consoles of all time too, in things like the original Nintendo, the Super Nintendo, the original Wii as well, but some of the other consoles not as successful. There is that built into the business, it's a little bit hit or miss with the consoles. Then the longevity of those consoles is also in question. Sometimes, it releases a console, but it just doesn't really gain a lot of traction. It's irregular revenue in that regard.

However, this is a company that has been very profitable over the years and currently their console system, the Nintendo Switch, is doing very well. It's basically the top seller, quarter in and quarter out since it launched. I believe there's only one quarter where it wasn't the top-selling game console out there.

Now, as far as opportunity going forward, and this is a company that I ranked No. 6. We're on No. 7 now in our rankings, I ranked it No. 6. I will just share what I like about Nintendo. This is just a chart. Now remember Nintendo does trade over the counter, N-T-D-O-Y. But this is its market cap right now, around $55 billion. You look at the revenue, $15 billion over the last 12 months. Cash and equivalents, I believe that this number on YCharts is actually even a little bit low. I think the cash is a little bit higher than that, but we'll just go with what YCharts has shown here, around $10 billion. When you look at how much cash it has relative to its market cap, that is a lot.

Now the question is, what is Nintendo management going to do with that cash? Frankly, we don't know. It does offer a dividend. It is buying back some shares. But relatively small compared to the cash that they have on hand, but great opportunity considering that it has such recognizable intellectual property. They are talking about investing in theme parks. They are talking about investing in movies. Who does that sound like? It sounds like the Walt Disney Company. If they can really begin to effectively grow this strategy of taking their intellectual property to the next level, this really could be something that has good returns for shareholders from here over the next, let's say five years.

Definitely not something that you can ignore. At the same time, it's not something as predictable as maybe some of the other companies on this list.

Any thoughts there? Let's see here. But I think we all ranked this one. Yeah, six, seven, or eight? We're all in the middle of the pack again, better than some, but maybe some better opportunities in the video games space elsewhere.

Sanmeet Deo: I was going to say, I feel like Nintendo has an opportunity. If they would take advantage of it in terms of creating, I don't know if they were involved in Pokémon GO or own some property rights to it or have done some stuff with it. I feel like Nintendo has an opportunity given that they have an installed base of consoles and pretty avid users and big fans to start delving into the, although we hear the term all the time, the metaverse, I feel like they have the opportunity with the captured audience that they have to push into those things, who wouldn't love a Super Mario metaverse, or something where you're actually in the game playing or they have so much content and so much. It's like they have this hardware, they have the content, they are at the cusp. But I haven't seen anything, at least from what I've looked at, where they're really going to push for that, maybe they are a little bit. But I feel like now is the time to really push hard. If they can do that, then maybe they can really start. I would maybe want to rank them a little higher than where they are now. But they're still a great company. They still generate tons of cash, do phenomenally well. Like Jon said, they have some consoles that are misses, but then they have some consoles that are huge hits. Interesting company for sure.

Clay Bruning: Another potential way to lean into some optionality would. Yeah, I think Jon mentioned a couple of shows ago, the business, I think started with trading cards. When I think about trading cards in today's day, I think Topps cards just got acquired. [Editor note: Topps was set to be acquired but later terminated its deal to go public] Kind of the iconic sports card distributor and manufacturers eventually could lean into NFTs of some sort and actually have validation, this is one of three cards in the world or whatever. Could have an option to partner with someone there and maybe monetize the IP even further in a new innovative way.

Quast: Yeah, I mean, that's the thing when you have the money and you have the IP, the options are on the table. It's just imagination at that point on how you're going to [laughs] monetize it. Other companies are not so fortunate to be in the position Nintendo is in certainly.