Nintendo Earnings: Record Profit Boosted by Zelda Game and Super Mario Movie; Upgrade to Wide Moat

We upgrade Nintendo’s 7974 moat rating to wide from narrow and raise our fair value estimate accordingly to JPY 7,000 from JPY 6,000. Nintendo has been in the game console business for 40 years, and we believe the franchises it has established throughout its history, including Super Mario Bros., Pokemon, The Legend of Zelda, Mario Kart, and Animal Crossing, will help the company to generate excess returns over the long term. Over the past decade, Nintendo has been focusing on actively leveraging its characters on nongaming platforms to increase user touch points, a strategy we believe has successfully enhanced the brand power of Nintendo’s characters. Nintendo’s June-quarter sales and operating income, reported on Aug. 3, reached historical highs due to the contribution of The Super Mario Bros. movie and robust sales of first-party games, even though the Switch platform is nearing the end of its console cycle. We view this strong financial performance as evidence of the success of Nintendo’s strategy of effectively leveraging its characters. We believe Nintendo’s shares are currently slightly undervalued.

Nintendo’s June-quarter operating income was JPY 185 billion, up 82% from the previous year and exceeding our expectations of JPY 145 billion. This is the highest profit recorded in the June quarter and its operating margin exceeded 40% for the second time on a quarterly basis, since three years ago during the pandemic. While the company did not raise its full-year operating income guidance of JPY 450 billion, as Nintendo’s earnings is heavily dependent on the December-quarter sales, we forecast Nintendo’s fiscal 2023 operating income to reach JPY 575 billion, which is the third-highest number in Nintendo’s history. It is surprising that the ongoing Switch platform can generate such a high profit, considering that it is already in its seventh year and heading toward the end of its console cycle.