One of the most dominant video game companies of the last few decades is Nintendo (NTDOY -1.25%), the purveyor of popular franchises like Mario and Zelda. The Japanese company has sold hundreds of millions of gaming devices and billions of games throughout its storied history. With a market cap of over $50 billion and $12.3 billion in annual revenue, it is one of the largest entertainment companies in the world. But the company is not stopping at just selling video games. With a new console and subscription strategy, plus a big expansion into theme parks, Nintendo is setting itself up to grow its entertainment empire substantially this decade.
Here are three reasons Nintendo stock belongs in your portfolio today.
1. Long-running video game franchises have maintained their popularity
Nintendo has a lot of new initiatives coming down the pipe, but the core of its business is still selling video games. These include titles from popular franchises like Mario, Zelda, and Animal Crossing, as well as an agreement to distribute Pokémon games through its devices. Nintendo owns approximately one-third of the Pokémon Company, a meaningful relationship as it is the top-grossing entertainment franchise of all time. Its upcoming flagship game, Pokémon Scarlet and Violet, will likely be one of the top-selling games of 2022 when it launches later this year.
These long-running franchises are fantastic assets for Nintendo and can bring in consistent demand for games, especially for family and kid-oriented content. For example, the first Mario Kart game was released way back in 1992. Thirty years later, the series is still popular among game players. Mario Kart 8 Deluxe, the latest Mario Kart iteration, has sold almost 47 million copies since its release on the Nintendo Switch back in 2017. With 30 years of demand durability, I think investors can be confident gamers will buy the next Mario Kart game whenever it is released.
2. A new hardware and subscription strategy is playing out
Unlike other game publishers, Nintendo has always built its own gaming hardware that it can exclusively sell its games on. Historically, the company invested in both handheld and console hardware lines but has recently consolidated both lines into a hybrid handheld-console system called the Nintendo Switch. This unique device -- combined with Nintendo's fantastic gaming library -- has made it the most popular gaming device since its release in 2017, selling over 111 million units.
On top of this new hardware strategy, Nintendo is investing heavily in its online subscription product. There are three pillars to this strategy. First, it wants to offer basic live services to players so they can play games with friends around the globe (this is a standard service for video game consoles these days). Second, it is adding historical games from previous consoles for online subscription members so they can play old games in a bundled product. Lastly, it is bundling add-on content for free for online members that are die-hard fans of a certain game. For example, the new Mario Kart downloadable package is available for free for Nintendo Switch Online Expansion Pack members.
Right now, Nintendo has two subscription tiers. A basic one costs $20 a year, while the expansion pack is $50. As of the end of September 2021 -- the last time management gave an update -- Nintendo had 32 million online subscribers. This is still a small part of Nintendo's overall revenue right now but can be a big growth driver over the next decade.
3. Nintendo is expanding into theme parks
Maybe the most exciting part of Nintendo's future is its expansion outside of just selling video games. It is exploring new retail and licensing opportunities as well as making a Super Mario movie. But what I want to focus on today is the company's partnership with Comcast's Universal Studios to build Nintendo theme parks around the world. Dubbed Super Nintendo World, the company will be opening four theme park lands, with the first one already opened in Japan.
The others will be in Singapore, Hollywood, and Orlando. With so many different entertainment characters and millions of fans around the world, these parks have a ton of potential. It is still early days, but I think these theme parks will help Nintendo vault itself from just a gaming company to a Walt Disney-esque global entertainment powerhouse.
Is Nintendo stock a buy?
At a market cap of $51 billion, Nintendo trades at an enterprise value of $39 billion when you subtract out its large cash position. With $3 billion to $5 billion in annual profits generated each year, this looks like a cheap price to pay for the stock right now, especially if the company can execute its expansion into non-gaming entertainment. That makes the stock an easy pick for anyone's portfolio.
