Nintendo (NTDOY 0.14%) (NTDO.F 0.71%) completed its 10-for-1 stock split in Japan on Sept. 29. This split also affected Nintendo's over-the-counter American Depositary Receipts (ADRs), which trade under two tickers.
Nintendo's NTDOY shares, which each represent one-eighth of the underlying stock in Japan, completed a 5-for-1 split. Its NTDOF shares, which represent a single Japanese share, executed a 10-for-1 split.
Image source: Nintendo.
On their own, stock splits don't change a company's fundamentals or valuations, because they merely break a single share into smaller ones. It's like slicing a single pizza into 20 slices instead of ten, and then selling those smaller slices for half the price of the original ones. However, Nintendo's stock split actually matters for one simple reason: affordability.
The differences between American and Japanese stocks
In America, it's common to buy single or fractional shares of a stock. But that wasn't always the case. A few decades ago, investors were required to place a minimum order of 100 shares, or a "round lot", because smaller "odd lot" orders were more expensive and difficult to process. That's why single option contracts are still tethered to round lots of 100 shares.
However, technological advances have made it easier to bundle smaller orders with larger ones, and smaller investors demanded the ability to buy fewer shares, especially in high-priced stocks that cost hundreds or thousands of dollars. That's why all the major American exchanges and brokerages now let investors place orders for fewer than 100 shares.
Japanese companies never made that transition. To invest in a company on a Japanese exchange, you still need to buy at least 100 shares. The day before Nintendo split its stock, it was trading at 59,700 yen ($413), so a minimum investment cost a whopping 597,000 yen ($41,300). But as of this writing, that bar has been lowered to 60,850 yen ($421), making it a much more affordable investment for younger Japanese investors.
OTC: NTDOY
Key Data Points
Better accessibility, better liquidity
Simply put, Nintendo's stock split matters because it's finally letting people buy single slices of its pizza instead of the whole pie. Nintendo is one of Japan's most celebrated brands, and the Switch is still the country's best-selling video game console, so it's smart to make its stock more accessible to its core consumers. It also makes it easier to trade options in Nintendo.
That increased liquidity might breathe some fresh life into Nintendo's sluggish stock, which has dipped about 4% in Japan over the past six months amid concerns about its declining sales and profits.
But will Nintendo's stock recover anytime soon?
Nintendo's stock split could make it more attractive to Japanese investors, but its American investors still need to worry about the intense currency headwinds. Over the past six months, both of Nintendo's ADRs shed nearly a fifth of their value -- woefully underperforming the underlying Tokyo-listed shares -- as the yen collapsed against the rising dollar. That pressure won't ease as long as the U.S. keeps raising its interest rates while Japan maintains lower rates.
As for Nintendo's core business, its revenue and net profit fell 4% and 1%, respectively, in fiscal 2022 (which ended this March) as a 20% decline in its Switch shipments offset its anemic 2% growth in software shipments. In fiscal 2023, it expects its revenue and net profit to decline another 6% and 29%, respectively, as that slowdown continues.
However, Nintendo's prospects could improve in fiscal 2024 if it finally launches a new console to succeed the five-and-a-half-year-old Switch. If that happens, the stock could be undervalued right now at 15 times this year's earnings.
Investors shouldn't expect Nintendo's stock split to be major catalyst, but it could drum up some fresh retail interest in its shares. And as we've learned over the past two years with meme stocks like GameStop, we shouldn't ever underestimate the untapped bulk buying power of smaller retail investors.
