After the incredible success of Nintendo's (NTDOY 3.03%) Wii, which has sold over 100 million units since it launched in 2006, the follow-up Wii U has been a resounding failure. Nintendo's original goal of selling 9 million consoles during fiscal 2014, which ended in March, ended up being laughable, as the company only managed to move 2.7 million units, leading Nintendo to post a loss for the third year in a row. Sony's (SONY -0.13%) PlayStation 4 has already surpassed the Wii U in sales, despite being launched a year later, and Nintendo only expects to sell 3.6 million Wii U consoles during fiscal 2015, a modest improvement at best.
While Nintendo's future may appear dire, the company is far from dead.
It's all about the games
While the Wii was, by far, the least powerful console in the previous generation, it managed to outsell its competition because of its games. Mario Kart, for example, sold 34.5 million copies, while New Super Mario Bros. sold 27.4 million copies. For comparison, Grand Theft Auto V sold a total of about 31 million copies between both the PlayStation 3 and Xbox 360.
These are the types of games that sell consoles, and the recent release of Mario Kart 8 for the Wii U has already provided a boost to sales. The Mario Kart series almost has a cult-like following, which began with the Super Nintendo system in 1992, and the most recent release has been extremely well-received. A Metacritic score of 88 trumps that of the Wii version, and if the Wii U had a larger install base, Mario Kart 8 would have likely sold tens of millions of copies.
Source: Nintendo
Wii U sales rose more than 600% in the U.K. when Mario Kart 8 was released, with over 80% of the copies sold being part of a bundle that included both the console and the game. During the week ending on May 31, which included the Mario Kart 8 launch, the Wii U was the second-best-selling console in the world, slightly behind Sony's PlayStation 4 and more than triple the Xbox One. The Wii U actually beat the PlayStation 4 by a factor of three in Japan during the week, and worldwide, Mario Kart 8 sold roughly 1.2 million copies in its first weekend.
While it's unlikely that the Wii U will come close to matching the success of the Wii or Sony's PlayStation 4, big games like Mario Kart 8 can at least make the console profitable for Nintendo. Super Smash Bros. for Wii U, another highly anticipated game, is expected to be released sometime this year, which should provide another boost for the console. The Wii version sold over 12 million copies, and the Wii U version could also prove to be a system-seller.
Nintendo is drowning in cash
Beyond Nintendo's roster of extremely popular game franchises, there's another reason why the company isn't going anywhere -- cash. At the end of fiscal 2014, Nintendo had over $10 billion in cash and investments, based on the current exchange rate, and no debt. With a market capitalization of approximately $15 billion, a full two-thirds of Nintendo's value is in cash, and the market only values Nintendo's future earnings power at roughly $5 billion.
Nintendo's net loss in fiscal 2014 was nearly $225 million, and at that rate, Nintendo could survive for over 40 years before running out of cash. Clearly, there's no risk of the company's demise any time soon, even if the current problems continue for quite some time. Nintendo is projecting a net gain of about $200 million in fiscal 2015. Excluding the cash, this puts the company's adjusted P/E ratio, based on that projection, at about 25. In Nintendo's best year in terms of profit (fiscal 2009), the company earned $2.7 billion using today's exchange rate.
While Sony's games business seems to be doing well with the success of the PlayStation 4, the rest of its businesses are doing poorly. Sony reported a net loss in fiscal 2014, and while the PlayStation 4 will help going forward, Sony has still projected a net loss for fiscal 2015. Nintendo is strictly a gaming company, and while its recent results haven't been good, a turnaround will be simpler, compared to the far more diversified Sony.
Is Nintendo a good investment?
While Nintendo is currently struggling, the company has plenty of time to turn things around. The continued popularity of its games, based on characters first introduced in the 1980s, is a testament to Nintendo's game development abilities. Ultimately, consumers buy the platform that has games they want to play, and while the Wii U is off to a poor start, things can only get better as highly anticipated games are released. It's hard to bet against Nintendo in the long term, and for those confident in the staying power of Nintendo's games, the stock looks attractively priced.
