http://blogs.forbes.com/wallaceforbes/2011/07/26/video-game-industry-isnt-playing-around-why-nintendo-is-a-good-investment/
And here's some piece of advice that Nintendo isn't going down.
Chris Richey: It has been an interesting couple of years, and particularly a “hot” year in international investing. The MSCI EAFE (stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada ) was up 31% for the year, which is remarkable in and of itself. That’s something we don’t expect to see happen every year. But, as you know, keeping up with hot markets is pretty difficult for value investors, because we’re looking for sound balance sheets and solid businesses, which are often unexciting. But now that QE2 has come to an end and the bill collectors are knocking at the door in Greece – and perhaps Portugal, Spain, Italy and Ireland as well – we’re seeing markets soften up and some of that heat dissipate. We’re starting to see some new and very interesting value ideas appear on our screens.
One of them that we’ve come across is Nintendo, a Japanese company. Readers with children or teenagers will recognize them from the Nintendo DS or the Wii console and the hours their children spend on these things. Nintendo has an un-sponsored level one ADR that trades in New York and is fairly liquid.
It’s got a $27 billion market cap, so it’s a large cap stock. And it has been around for over 100 years, which may surprise some. It’s one of the inventors of card games in Japan, back in the early part of the 20th century, and has evolved through the Game Boy and Mario Brothers and all those games. The two most recent products are the DS and the Wii. Both were wildly successful, but they’re coming to the end of their useful technological lives because, over the last five to seven years, there have been some tremendous advancements in the technology through which you can deliver these games — both electronically and over the internet.
Nintendo has 0% debt, which we like to see. That is comforting — particularly in the gaming space. As I said, this is a trough year and the stock price is down some 20% over the last three months, after the introduction of the replacement for the DS – the 3DS – which is the first product to use 3D technology in a hand-held game space without the need to use special glasses. When you go to the movie theater, or generally on home 3D televisions, you’ve got to wear glasses. Nintendo was able to get the technology so that you look at the screen and it shows 3D images.
Wallace Forbes: That’s a terrific advance.
Richey: They just recently announced the Wii U, the successor to the Wii, which has some interesting aspects to it. But the market does not seem impressed with either the 3Ds or the Wii U, and the stock price has taken a tumble.
What attracts us to the stock is the fact that of the $27 billion in market cap, $14 billion is in unencumbered cash. So more than half of the value in the company is held in short-term, cash-like instruments. Which means – even with the depressed earnings and the market down on them – when you take out the cash, it’s trading at about 11.5 times earnings and one-and-a- half times book, including the cash, and under book if you exclude the cash.
Plus, you get a 3% dividend yield, which is why it shows up on our screens. Those are a lot of the metrics we look for: Zero debt, low earnings multiples, low book multiples, and some sort of current payment on your money. I will admit that my colleague and I both have young children in these age brackets, so we’re very familiar with the products.
Forbes: So you’re getting educated at home.
Richey: We’ve gotten an education. We’ve played these things, and even the competitors as well. Nintendo is impressive because they have about 40% of the console market out there, and they compete against two pretty staunch competitors, Microsoft and Sony. And they also have about 70% of the hand-held market.
Now, I think what people are anticipating is that there’s been a radical sea change in the video gaming community – both hand-held and consoles. We agree with the consensus about the hand-held gaming space: the iPhone, iTouch, and smartphones in general have forever changed the hand-held gaming world. They’re no longer dedicated purely to games; you can do multiple things on the devices.
I think that’s a major sea change, even with a 3D capability on the 3DS. And so we don’t anticipate Nintendo getting anywhere near the peak sales they had on the DS. In fact, we think they’ll only get about a third of the sales they got on the DS with the new 3DS, including software, which is an important business component of the gaming industry.
However, we disagree profoundly with consensus view on the console market and the Wii U. The market is discounting sales of one half or lower for the Wii U versus those of the Wii. We think it’s going be about two thirds – and about half the software sales – below what you saw with the Wii. But even with those numbers built into our model, we still see the stock trading at steep, steep discounts if you assume these numbers we’ve presented.
We think they’re going to double earnings over the next two years, and double or triple free cash flow, which is the most important measure for us. And, as a result, we think we’ll see the stock price rebound from this current level of about $22 a share. Even if they only get partial credit for all that, we think it will trade well north of $33 to $35 on a fair value sensible basis.
Forbes: What kind of a time frame are you talking about?
Richey: We think this is two years out. The 3DS will take time to build market share, and then the Wii U will be introduced some time in mid-2012, leading up to the all-important Christmas holiday season. In these companies, that November-December timeframe makes a large portion of their sales.
So patience is required with Nintendo. But you have an undergirding of $14 billion in cash, of which they only spend about $500 million a year in capital expenditures. In fact, the biggest problem that they have, in terms of cash usage, is rolling their short-term investments over in Yen, Dollars, and Euros.
So the cash pile is very attractive, but in many ways, ironically, it has been a detriment trying to roll it forward. If interest rates do start to increase in Europe and the U.S., and possibly Japan, they’ll get a higher return on their money.
Forbes: Meanwhile, it sounds like you’ve got a pretty sound investment with a tremendous amount of cash.
Richey: It’s an unusual investment for value, since value investors have tended to shy away from technology. But the truth is that what was cutting-edge technology 15 years ago is now everyday technology, and you can’t just see the word “technology” anymore and run for the hills.
Forbes: The world has changed.
Richey: Yes, absolutely. There’s no going back.
But we think that the console space is a fairly safe space for the next ten years. It will be safe through this generation of televisions and what we anticipate is the transition from the LED flat screens to OLED flat screens. That transition will start in about 2015, and actually may prove a boost in the longer term. We think, at that point, 3D TV – without glasses and on an OLED screen – will be enough of an immersive experience to finally spawn the 3D age we’ve all been anticipating for the past 3 to 5 years. That, we think, will give another boost to the console space. Because right now 3D, in its current form, is not immersive enough, whether at the movie theater or on your home television.
Forbes: But if you can do it without glasses, that changes it.
Richey: Absolutely. Nobody likes those dorky, clunky glasses. And when you improve the resolution by several magnitudes – which is what will happen with the OLED screens that Samsung, Sony and LG are developing right now – that will extend the life of the console gaming business to the 2020s.
Forbes: Sounds good.
Richey: We’re out on a limb making these predictions, but we already hold Corning and Samsung, so we are very sensitive about what is going on in the television set industry.
) think about the direction Nintendo has taken over the past five years, its financial health and success is undeniable. This success is by no means guaranteed to continue, but Nintendo is in its best financial shape since the SNES.
I would actually put "I was being the antagonist". All we need is a mustache and a cool hat....and viola! 
