How Nintendo Is Reinventing Itself

With the significant success of Switch, Nintendo (NTDOY -0.41%) has piqued the interest of investors. In this clip from "The Gaming Show" on Motley Fool Live, recorded on March 7, Motley Fool contributor Ryan Henderson discusses how the entertainment giant is reinventing itself and why it might be a gaming stock that investors should keep on their radar.

Ryan Henderson: I just want to go through Nintendo. I know it's a company that a lot of people have heard of but, for some reason, it's a stock that a lot of people have not heard of. I've said this before and, like I've mentioned to my friends, they're a publicly traded stock. They had no idea. It's pretty big. I think part of that, I guess, is lack of awareness or investor awareness likely since they're headquartered in Japan and the corporate culture is notoriously conservative. It's more about durability over current shareholder friendliness, and so it previously has not attracted a lot of investor money from the US. But, they have an enterprise value, so market cap, minus net cash of $45 billion. Their market cap is $60 billion and their enterprise value is $45 billion. They're just sitting with $15 billion essentially in cash and equivalents on the balance sheet. That tells you how conservative some Japanese boards or executives can be, and part of that for Nintendo, specifically, is they've been pretty cyclical in their history and so there are periods where they're generating a ton of cash and then there are periods when the Wii U flopped or the Wii fell out of favor and they're losing cash or they're burning it, so they need that for those periods. But, in the last 12 months, they generated roughly $5 billion in operating profits. It has fluctuated around there. They've been really successful recently because of the Nintendo Switch. It's been the best-selling console, I believe. Thirty-five in the last 36 months, might be 36 out of 37 now, and that is on units shipped not necessarily because they sell it for cheaper than like the PS5 or the new consoles. They have more than 100 million total Switch Consoles sold. But Switch Console includes Switch, Switch Lite, Switch OLED model. If you think Nintendo is trying to reinvent themselves, that's part of the concept. Previously, Nintendo was really a hardware business. So, if you bought the Wii, you were tied to that piece of hardware. Now, for a Nintendo user, you're tied to an online Nintendo account and, if you get a Switch Lite, you can still plug into that same account. They were very slow to adopt this but the idea is that it's going to be new iterations of the existing Switch. That way, it should smooth out their earnings and software sales or sales of games should become a larger percentage of their business over time. That 79 million number was for the first six months of this year. The idea is that we're not going to have essentially what you saw with the Wii where it was very, very successful, 100 million consoles sold and then the Wii was just a total flop, and no one played Nintendo up for like six years. The idea is that this is going to be different. Now, we're seeing them basically iterate and use that IP that they built up. They have tons of different Pokémon games that they've now released on Switch. They've got a bunch of different Mario games. They can do Mario Kart 9, and it sells just as well as Mario Kart 2 or whatever it was. That is the, I guess, investor thesis today if you're investing in Nintendo.