Nintendo: There’s A Glitch – Case Study by Joshua Kennedy, Sonian Capital Management

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Executive Summary:

NINTENDO (Japan: 7974) is a global leader in the booming video game industry, with a long history of innovation in both hardware and software in what has become a mainstream, arguably dominant entertainment category. Today, as with other moments in Nintendo’s storied history, the company stands at a pivotal crossroads. Only 8 years removed from the peak of its biggest-ever hardware hit product, Nintendo is contemplating a future in which its core business model: selling software made excusively for its own hardware, may be a thing of the past. In this context, Nintendo carries a balance sheet with half its market cap in net cash and investments, and owns the most valuable intellectual property in the video game business. With 2.5 billion smartphone users in the world, the greatest video game maker of all is about to enter an arena an order of magnitude larger than any in which it has ever played. Why then is Nintendo valued as if it has no future?

This handsome fella here is Carl Gustav Jacob Jacobi.

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Mr. Jacobi was a German mathematician of exceptional brilliance who is known by practitioners of that field (of which I am not one) for his work on elliptic functions, theta functions and differential equations. Also, the Jacobi crater on the moon is named after him, which is a pretty nifty calling card.

He is remembered by stock market investors primarily due to the efforts of Charlie Munger, Vice-Chairman of Berkshire Hathaway. Charlie exhorts investors to “Invert, always invert,” by which he means when confronted with a challenging puzzle, flip it over and try working backwards to gain a new perspective.

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Munger is, in fact, promoting Jacobi’s insight: Man Mass Immer Umkehren. Here is Jacobi translated into English:

“Many hard problems are best solved when they are addressed backward.”

Here is Charlie, taking it one step further:

“Indeed, many problems can’t be solved forward.”

According to the Wikipedia entry on differential equations: “in pure mathematics, differential equations are studied from several different perspectives, mostly concerned with their solutions – the set of functions that satisfy the equation.” I don’t know if Jacobi’s insight about inversion helped him contribute to differential equations, or the other way around, but it totally makes sense.

Normally an investment writeup like this would start with a description of the company, what they do, competitive dynamics in the industry, etc. We all know the drill. We’d do some valuation work, come up with a range of prices, compare them to the market price, and try to conclude that it is a buy or sell, or whether there is a sufficient margin of safety, and so forth.

Nintendo (7974 JP), the Japanese video game giant, is a difficult company to value at the current moment in time. There is an extraordinarily high level of uncertainty about essential features of the company’s near-term future. This makes it kind of a puzzle.

If we invert the problem, however, it becomes pretty clear. If you take the market price – “the solution” – and interpret what that implies about the future of the company, an investment case becomes evident. This is a situation where a high degree of uncertainty is being confused with a high level of risk.

But in fact, the risk of permanent capital loss is very low. Even in a dire scenario, Nintendo can’t really be worth much less than today’s price. And it’s quite possible it is worth much more, possibly multiples of what you can buy it for today.

Nintendo's Long History

Mr. Jacobi passed away in 1851. Only a few decades later a card-playing frenzy was gripping Japan, and Nintendo was established to manufacture playing cards in 1889. The company bounced around from one form of entertainment to another for the next 80 years before embarking on video games in the 1970’s.

Nintendo essentially created the home console video gaming business, and has by turns survived and thrived in the three decades since. It’s fortunes have been closely tied to the popularity of each generation of hardware console. Through the rise and fall of massive hits like the Gameboy and duds like WiiU, however, Nintendo has succeeded in building a massive fan base for the company’s products and in particular, its stable of video game characters like the Super Mario Bros.

Nintendo is an exceptionally well-known company with a long and storied history that, for the sake of brevity, does not need to be re-hashed here. For those interested in a deeper dive, I recommend Blake Harris’ Console Wars.

Instead I will just highlight a couple of salient points that I think any potential investors should draw from studying Nintendo’s past.

1) Business model: Nintendo is relatively unique today (although not historically) in that they make hardware and software. Microsoft and Sony currently make consoles and are involved in a few gaming studios, but are not fundamentally in the video game software business. Activision, Electronic Arts and other game developers make games and strategically prepare them for different platforms, but do not have their own platforms. Smartphones have disrupted this, which will be discussed at length below.

The first important point is that Nintendo is the most successful game developer of all time in no small part because they develop their games exclusively for their own platforms. Company management views this as an elemental component of their competitive advantage: Nintendo develops games for specific, unique hardware. The second key product of this business model is the operating leverage: the success of a Nintendo game is inextricably linked to the success of the current Nintendo hardware platform. So if a console launch is a hit like Wii, Nintendo sells a lot of, say, Wii Sports. If a console is a dud, like WiiU, then there is a cap on how many copies of, say, Super Mario Maker Nintendo can sell.

2) Trendspotting: Since the success of the NES in the ‘80’s, every Nintendo platform has been developed in secret, highly anticipated and hotly debated. And the company has produced both heroes and goats. The essential point, however, is this: Nintendo has repeatedly been criticized for having lost the plot of what gamers want, only to deliver something extraordinary. The best example of this was prior to the launch of the Wii, when it became clear Nintendo’s console would not support high-def, though Xbox and Playstation would. Investors and fans were apoplectic. It’s happening again today: a recent Forbes.com commentary on the company was entitled “Why I’m Angry At Nintendo.”

3) By developing both handheld gaming devices and home consoles, Nintendo has inadvertently ended up with two different gaming platforms that don’t really work together. This is problematic for Nintendo’s game developers, as management has to choose which games go where. But it is also problematic for third-party game developers, and in somes cases inhibits them from preparing their best games for one platform or the other.

Nintendo: The Short View (2015 was quite a year)

2015 was, in Nintendo’s own words, a “transformational” year. The company entered the year trading for about 12,000 yen/share – not substantially above its net cash balance. Sales were huffing and puffing on two tired platforms, the WiiU (home console) and the 3DS (handheld). While the original DS and Wii were each huge hits when released (in 2005 and 2006, respectively), the WiiU and 3DS were follow-on products. Neither had repeated their ancestor’s success. The WiiU was being overshadowed by a resurgent PlayStation4, and 3DS was struggling with the onslaught of smartphones. Speculation was rampant about the end of pure handheld gaming devices. While Clash of Clans, Candy Crush and Puzzles and Dragons were proving to be cash-generating hits with casual gamers, Nintendo steadfastly maintained it would not make games for any platform but its own.

There were some bright spots. In particular, Nintendo discovered it had a stealth hit with amiibo, which sold over 20 million units in 2015. Amiibo is a wireless communications and storage protocol, but for all intents and purposes amiibo refers to thumb-sized figurines that are sold for typically $10-$20. They are toys, basically. But amiibo are equipped with near-field communications devices that can interact with the 3DS and WiiU, and unlock special features and powers for particular characters in the games in which the characters appear.

Nintendo didn’t innovate this concept. Activision and Disney had already both introduced NFC-enabled toys. But for Nintendo there was a significant discovery about its customer base. Amiibo were a weather balloon for whether Nintendo fans were willing to pay for what were essentially additional lines of code embedded in games those customers had already purchased. The demand appeared to be robust, and Nintendo had clandestinely tested a new revenue model – one closely resembling the in-app purchase model made popular by smartphone games.

In March, with the stock at 14,000, Nintendo finally gave the people what they wanted. In a significant surprise move, Nintendo announced they would implement a mobile phone game business. Their commitment was reinforced by the disclosure of a partnership with Japanese mobile game specialist DeNA (Tokyo: 2432). (Full disclosure: just to demonstrate how surprising I personally found this to be, I had no position in Nintendo at the time and was actually short DeNA, which rocketed higher on this news.) This partnership included a share swap, so Nintendo now owns 10% of DeNA's shares. Finally, without disclosing details, Nintendo indicated they would release 4-5 mobile games in 2016, and would make use of existing Nintendo IP.

Hallelujah, the market said, and the stock went to 18,000 in two trading days (+29%).

$12.99 for fireball Mario, must-have in Super Smash Bros

Nintendo had another announcement: a new console was in the works, codenamed "NX." Investors took this as mixed news. On the one hand, Nintendo's hardware platforms needed refreshing and an entirely new console cycle only comes along every few years, and is usually good for sales. But on the other hand, the skeptics seized on this new console as evidence that this was the same old Nintendo, denying that the world of video gaming had changed irrevocably with the arrival of the smartphone. Same old Nintendo would still put its own hardware at the center of its plans. Same old Nintendo wasn't really interested in having a profitable, robust smartphone game business using its best franchises. Same old Nintendo was just throwing a bone to the mobile dogs, while the meat would be withheld for the new hardware platform.

These “same old” whispers would grow into a roar as 2015 went on. At E3, gaming's main event, Nintendo had very little to show, and only made waves for delaying key WiiU titles further.

But it wasn't all bad. Nintendo showed that it was still in top form in terms of delivering new IP, as Splatoon emerged as a hit. This was a key success for Nintendo as Splatoon is a family-friendly interpretation of the first-person shooter game format. First-person shooters are a huge portion of the overall game market, but have long been a conundrum for Nintendo, which eschews the gory violence that was largely considered inherent to the form. Splatoon showed Nintendo had solved that riddle, despite the limited base of the WiiU platform.

Then, in July, tragedy struck. Longtime President and video-gaming legend Satoru Iwata succumbed to bile-duct cancer at the age of 55. While Iwata-san’s poor health had been disclosed, his passing was nonetheless a shock. Iwata had been Nintendo President since 1992, had overseen massive successes like the DS and the Wii, and was beloved by Nintendo fans for his obvious love of playing, not just making, video games. As it related to the stock price, Iwata’s passing was fuel for the mobile skeptics. He had reportedly been the key deciding voice in pursuing a mobile strategy.

Nintendo’s management response to Iwata’s passing was significant. There’s little doubt that Nintendo’s bench is quite deep – it is far and away the most desirable employer in Japan for video game designers. Media speculation focused on two youthful candidates: Genyo Takeda (architect of the Wii) and Sigeru Miyamoto (famed game creator, father of ‘Mario’). But suprisingly, Tatsumi Kimishita became only the 5th President of Nintendo in its 126-year history. 65-year-old Kimishita-san is not from the gaming or engineering ranks. He was a banker by trade, and had previously run both Nintendo’s Pokemon business and Nintendo of America.

Nintendo didn’t let a good crisis go to waste. Concurrent with the appointment of Kimishita-san as President, Nintendo announced a major re-oganization of its management and organizational structure.

Highlights of the changes included:

1) Promoting both Takeda-san and Miyamoto-san to the new title of Fellow, as technology fellow and creative fellow, respectively. They are basically now CTO and CCO.

2) Merging four divisions of the company into two new divisions, covering system development and game development, respectively.

3) Establishing a new division for business development, notably charged with “refining the business model for the dedicated video game system business” as well as growing Nintendo’s smart phone games business and any new businesses that will feature Nintendo IP.

Same old Nintendo?

As Halloween approached, the stock gathered steam ahead of an event at which further details of the planned mobile business would be disclosed – hopefully something about what IP would be involved. The stock traded around 24,000 yen, up approximately 100% YTD in 2015.

But, in October, much like at E3, Nintendo disappointed everyone again. The first mobile game, it turned out, would not be a game at all. It would be an avatar-based chat app called Miitomo. Furthermore, Miitomo was the only title announced, while the others remained undisclosed. Oh, but wait, there’s more: the entire suite of mobile games would be delayed further into 2016, forcing analysts to slash their estimates.

No Mario. No Zelda. No details. Investors punished the stock and kept selling it through year-end, sending it to 17,000 yen.

Same old Nintendo.

Mobile Is The Story

The market is right about one thing: smartphone games are what matters. There are many facets to the Nintendo story, but mobile is the story. Briefly, here’s why:

1) It’s big and growing. Mobile gaming spend will soon become bigger than all other forms of video gaming combined. It should be a $50-$55 billion market by 2019.

2) Nintendo said they would never do this. Only two years ago Iwata-san was emphatically denying that Nintendo would ever make games for anything other than Nintendo hardware. Of course, it has been a remarkable two years for mobile games.

3) Mobile gaming on smartphones has hurt Nintendo in particular. Smartphone games – so far – have been inherently casual in nature. Nintendo is the traditional king of casual games.

4) The message from the stock market is clear: mobile is the future. Electronic Arts embraced a digital distribution strategy in 2012 and the stock is up 5x. Square Enix change its focus to smartphone games two years ago, and the stock has since tripled.

The Industry: Here’s What Healthy Video Game Companies Look Like

Here is a comp set for Nintendo. These companies are almost entirely game-makers – pure software companies – unlike Nintendo which remains relatively unique in its business model. Microsoft and Sony each have a console business, but are not really game-makers. The numbers are here for reference, but I give a little qualitative color on each company below.

Electronic Arts: $20.5 billion mkt cap, slightly net cash. 20x earnings, 16x EV/EBITDA, 4.2x EV/Sales, 4.7x sales, no yield. EBIT margins exploding from basically zero for several years to 24% in ’15, going to 30%? Gross margin ranges between 50-70%. Company was pretty impaired in terms of profitability for most of the last decade, but when clicking has done 25% returns on equity. Key franchise: Madden, Star Wars

Activision: $27 billion market cap, slightly net cash. 25x earnings, 14x EV/EBITDA, 5.6x EV/Sales, 5.8x P/S, 0.6% yield. GM has ranged 40-65%. Activision has been solidly profitable more or less all along, and have generated 4 straight years of EBIT margins between 22-30%. Key franchise: Call of Duty

Capcom: $1.65 billion (USD) market cap, again slightly net cash. 20x earnings, 2.5x sales, 11x EV/EBITDA, 2.1x EV/Sales, 2.4x P/S. Does great gross margins: 50-80%, EBIT margins have ranged from 10-18%, double-digit ROE’s. Both Capcom and Square actually have hardware divisions (making pachinko machines, health clubs, arcades, etc). Key franchise: Monster Hunter

Square Enix: $3 billion (USD) market cap, significant net cash, yields 1%. 10x EV/EBITDA, 2x sales, 20x earnings dropping to 15x. Has done lower GM’s and OPM’s, at 30-40% and single digits respectively, but EBIT is expected to zoom to 15% in 3/17. Key franchise: Final Fantasy

King Digital: King is kind of a unique case, but worth having here. $5.6 billion cap, slightly net cash. Bought by Activision for about 10x earnings, but earnings had flat-lined. Was doing 65-70% GM’s, 30-40% EBIT margins, 2.3x EV/Sales, 6.5x EV/EBITDA, 2.7x P/Sales. Key franchise: Candy Crush

Ubisoft: $3.2b cap (USD), slightly net debt, EBIT margins a bit like EA in that it struggled badly with profitability for years, but now doing 10% on the way to 15%. 20x earnings, 2.6x sales, 2.6x EV/Sales, no yield. Key franchise: Assassin’s Creed

Nintendo: $19.5b cap (USD), significant net cash. PE of 50 this year going to 40. 1% yield. 25x EV/EBITDA, 3.4x sales, 1.9x EV/Sales, 1.7x book value. GM this year 38%, relatively steady around 40% with exception of ’12-’14. OP margin has been 20-30% when things are right but was negative in ’12-’14 and just broke even this year. Key franchise: Super Mario Bros, Zelda, Pokemon

It is hard to draw too many conclusions from this group because Nintendo’s sales are depressed. It is fundamentally not healthy. It is also, under its current business model, considerably more cyclical. And it is significantly overcapitalized.

But at least we can come away with a picture of what a healthy videogame company looks like: 20-25x Price/Earnings, 10-15x EV/EBITDA, 2-4x EV/Sales, adjusted for size and quality of IP. Slightly net cash balance sheet. Current multiples reflect the rude health of this group: expanding margins in a growing market where IP represents a significant moat.

Two Things to Keep in Mind

Prior to discussing Nintendo’s valuation, I want to introduce two factors I think it is important to keep in mind.

First, Nintendo is the greatest video game maker in the world. It is not just another player in this space. It is Ali, Jordan, Serena, Beethoven, Picasso, Buffett – take your pick. The G.O.A.T. This is obviously quite a subjective assertion but I will do my best to back it up.

Of the 25 best-selling games of all time, Nintendo has made 17 of them. Of the remaining 8, 7 of those are iterations of either Call of Duty (Activision) or Grand Theft Auto (Take-Two), both of which are first-person shooter format games. Nintendo is not just resting on past franchises, either. Splatoon – Nintendo’s family-friendly, first entry into a shooting style game – won the ‘Best Shooter’ and ‘Best Multi-Player’ categories at the 2015 Game Awards.

Splatoon is not based on existing IP. It is an entirely new game and amply demonstrates that Nintendo has a game creation culture in place capable of delivering hit games from scratch. That being said, however, it is Nintendo’s existing IP that represents a huge competitive advantage. Any game based on Mario, Legend of Zelda, Pokemon or Starfox is a virtually guaranteed hit, limited only by the reach of the platform on which it is released. A hit game released this year, Super Mario Maker, is based on the original 8-bit version of Super Mario Bros. from 1985!

It’s squid ink paintball, basically

Second, the scale of the mobile platform compared to Nintendo’s traditional hardware platforms is absolutely enormous. The potential audience for Nintendo’s games is an order of magnitude larger if they are already carrying a gaming device in their pocket.

The two best-selling Nintendo hardware platforms in the company’s history, the DS and the Wii, have a combined install base of about 250m units. So the absolute pinnacle of Nintendo’s reach was 250 million potential users. Today, over 2.6 billion people have smartphones. By going mobile, Nintendo’s potential customer base is expanding by a factor of 10x. Finally, smartphone ownership continues to grow steadily. Networking firm Ericsson expects that number to explode to 6.1 billion by 2020. That frankly seems kind of high, but regardless, the growth is relatively unimportant compared to the already established scale.

Mr. Market Is Offering You His Shares at ~15,000

Mr. Market, three-statement DCF model addict that he is, is having trouble with valuing Nintendo. Nintendo, right now, is a high uncertainty situation. Here are things that we don’t know:

1) What is the NX?

2) What does the NX cost?

3) Is the NX a handheld or home console device?

4) Will Nintendo have a single platform now for third-party titles?

5) Will the NX be ready for Christmas 2016?

6) What IP will be used in Nintendo’s mobile games?

7) What will the revenue model for Nintendo’s mobile games be?

8) What is DeNA’s role? What is their take of revenues?

9) What market share can Nintendo capture in mobile gaming in 2016 and beyond?

How do you model this? We literally don’t know the answers to any of these questions. Edwin Lorenz would have a field day with this. One of Mr. Market’s fatal flaws is his tendency to confuse uncertainty with risk. Nintendo at today’s price is a textbook example of a high uncertainty, but low risk proposition.

So, invert the problem. What does the market’s price (15,500 yen) say about the future of Nintendo?

Is this fair? You can certaintly see how he gets here.

Here is Mr. Market talking in an investment committee meeting about Nintendo (in my imagining): “Nintendo has significant cash and investments, fine. They have two tired hardware platforms and will likely replace both with a single new console by Christmas next year. I give them 15% sales growth in 2016 and 2017 on the new console, backweighted and off a low sales base. But units are going to be low so there is no expansion in platform. Hardware platforms are shrinking overall because everything is going to mobile, so they get a multiple below EA and Activision, their peers of similar size. AND THEY NEVER MAKE MONEY IN MOBILE.”1

Here is the sense check on that: the day before Nintendo announced they would enter the mobile gaming business, the stock was at 14,000. Today, the stock is at 15,500. And they announced the NX on the same day! So Mr. Market has made his call: Nintendo fails at mobile. Either they backtrack and don’t enter the space at all, or fail completely. Or maybe they just produce free games as a form of advertising, but that strategy is utterly ineffective in driving sales? Anyway, whatever scenario you envision, its pretty bad.

This Can’t Be Right

And yet … there are some things that we do know. Nintendo is entering the mobile space. They have announced and subsequently confirmed and re-confirmed that they will make games (not just chat apps like Miitomo), they will make money from mobile games, and they will use “major” IP to achieve these goals. In fact, they have announced that they will deliver four games within the next 12 months, just not what the games are.

Briefly, an aside about the mobile game business and how it is different from Nintendo’s traditional game business. It’s early days still, but so far the dominant model is ‘free-to-play’. The vast majority of players of the most popular games never pay a dime. But some portion of users will pay for in-app purchases – essentially additional features, levels or powers in the game. As a result, the drivers are pretty straightforward: how many people can you get to download your game? Of those, how many are willing to pay? Of those that are willing to pay, how much are they willing to pay monthly, and for how long?

This is starkly different from Nintendo’s customary business model. Nintendo’s users have typically paid hundreds of dollars for a console, then $20-$60 for games, and more recently, $13 for amiibo which are analagous to in-app purchases. Nintendo fans are accustomed, in other words, to paying a lot of money for Nintendo’s gaming experience. The implications of this new business and distribution model are two-fold and difficult to predict. First, will Nintendo cannibalize traditional users with mobile users, essentially turning high-earning customers into low-earnings customers? Or conversely, is the bar so high for the Nintendo gaming experience that there are tens or even hundreds of millions of potential customers who will be drawn in by a lower-commitment experience?

Time will tell. But let’s look at what an extreme position it is to take to assert that Nintendo never makes profits in mobile games. Below I have outlined three scenarios. The first is somewhat capricious, and the third is somewhat fantastical. The conservative one, though, actually is conservative (and therefore appropriate) in my opinion. I will explain assumptions below. But keep in mind – we have no way to know how this plays out.

Smartphone install base: 2.5 billion is where we are as of 2014. This number will grow, but it is so huge that growth is meaningless. Each scenario gets today’s number.

User %, MAU: What percent of people with smartphones will have a Nintendo game downloaded? Candy Crush, when it was acquired in 2015, had 533 million monthly average users, which means more than 1 in 5 people with a smartphone globally had Candy Crush on it. Can Nintendo, with a stable of higher-quality and more widely recognized games, meet or exceed that hurdle? I bet they can do half that number. Sense check: Nintendo themselves have identified a target of several hundreds of millions of users.

Paying Users: Candy Crush looks weak here – of those 533m users, barely 8m were paying users, which is only 1.6%. Then again, look at GungHo’s Puzzles and Dragons (a Candy-Crush type puzzle phenomenon in Japan) – they were able to convert 10% of their users to paying status. Nintendo’s fans have demonstrated a willingness to spend money in addition to games on memberships, amiibo, etc. And keep in mind, Candy Crush and P&D are just puzzles – Nintendo’s stuff will be real games. Let’s say 8%.

ARPPU: Average Revenue Per Paying User. This is another number that could be anywhere. Candy Crush was doing $25, while Puzzles and Dragons reported getting 5000 yen ($42) – that’s per month. There are many examples of games generating these kinds of numbers. But Nintendo is not a blood-sucker and will not be tweaking every detail to make their games as addictive as possible. Nintendo wants their games to be fun, full-stop. Here I went with $10.

OPM: This is incremental OPM for just the mobile business, so this number will be higher than Nintendo’s overall OPM. King does OPM of 30-40%, and EA is pushing toward 30% for their entire business. EA has been clear in conference calls that the mobile business has significantly better profitability than the traditional business. I think the incremental margin on Nintendo’s mobile business should be very high, especially if they are using widely recognized IP that reduces the need for advertising. Here I will use 35%, but I think that’s low.

Mobile market share: Finally, as a sense check, if the mobile gaming market hits $50 billion in they next few years, what would this mean for Nintendo’s share of that market? Here if the conservative case is correct, Nintendo’s only at 5% share of mobile gaming revenues.

In summary, the optimistic case is … well, quite optimistic. But is it really that crazy? Nintendo is a heavyweight with a huge built-in fan base. Remember the track record: 17 of the 25 best-selling games of all time. And there are ways to view this scenario as plausible – for example it doesn’t include any price to buy the games themselves, which could be a source of revenue. So, to induldge the fantasy for a moment, look at that EBITDA number of $10.8 billion. Nintendo’s enterprise value is about $12 billion. Since we’re going whole hog here, (why not?), let’s use the high end of the comp range, 15x EBITDA. That’s a (crude) valuation of $162 billion just for Nintendo’s mobile business. That’s 13.5x the company’s current enterprise value.

OK, OK. You can’t invest that way. You can’t take the best assumptions in each case and multiply them all together, that’s not responsible.

But here’s what is equally zany: saying Nintendo never earns a dime from this opportunity. But that’s what the market is saying today. Mobile gaming is, in fact, a massive opportunity for a company uniquely prepared and positioned to capture at least some portion of it. In other words, Mr. Market can’t have this right.

Conclusion

Nintendo is not going swiftly to a $100 billion valuation, that’s a pretty safe assumption. But with more than half its market cap in net cash and investments, the stock can’t go down too much, either. Activision recently paid $5.9 billion for King Digital, and all they had was Candy Crush. $5.9 billion for a company with one, ex-growth game, that only 8 million people had ever paid a dime to play. What then is Mario worth? If Nintendo decided to put Legend of Zelda up for sale by itself, what would EA or Disney bid? If Pokemon -- which as a retail brand does $2 billion in sales annually in just toys and apparel – were on the block, what would Tencent or Hasbro or Sony offer? Simply the liquidation value of this company is enormous compared to its market price today, and the intangible assets – not just the characters but the people and the culture – are irreplaceable.

2016 is going to be a year where aggregated uncertainty about Nintendo’s future is progressively stripped away. Nintendo will unveil, market and launch four smartphone games in addition to a new membership service. In June it will likely reveal the details of the NX at E3, and begin a marketing blitz for Christmas 2016. Recent speculation suggests that NX may be a “dual” device – the controller is a handheld you can slip in your pocket and take with you, while the console is for shared gaming on the big screen. Imagine for a second: what if they get this right? Sony is exiting the handheld console business. The NX could be the only dedicated gaming device left in town.

Speaking of Pokemon, please take a moment to watch the trailer for Pokemon Go (https://www.youtube.com/watch?v=2sj2iQyBTQs). Nintendo has teamed up with Niantic Labs, the maker of a uniquely successful geo-location game called Ingress, to create a new Pokemon mobile game. This will also be released in 2016, and is not one of the four Nintendo games in question. Niantic is the brainchild of John Hanke, who created Google Earth. Nintendo took an equity stake in Niantic in 2015, as the co-anchor investor. The other anchor was Google. This doesn’t seem to be in the price.

Nintendo has experimented extensively with augmented reality gameplay on its 3DS platform. Smartphones are excellent devices for augmented reality and Nintendo should certainly be considered a leader here, at the very least regarding gameplay, but also for the aged – Nintendo created Brain Training. Also, what about virtual reality? Doesn’t Super Mario World seem like a potential asset there? This also doesn’t seem to be in the price.

Nintendo has no China business, because China has banned video game consoles since 2000. But China lifted this ban in 2015. Will Nintendo make the NX available in China? By releasing smartphone games, is Nintendo for the first time making its iconic characters available to Chinese gamers? Any way you think about this, it doesn’t appear to be in the price.

I’m just trolling at this point. There’s loads more to talk about on Nintendo. But actually, this investment is exceptionally straightforward. This company has been around since 1889. This company makes decisions with an eye on a long past, and so a long-term future in mind. That’s the way it manages its balance sheet, its brands, its people. But the market is treating it like it has no future at all.

Gimme the cash, Mr. Market, plus the 15% of its own shares Nintendo owns in treasury. I’ll take the Seattle Mariners while I’m at it, along with the stake in DeNA (2432 JP). And video game legends like Takeda and Miyamoto. Also, half a dozen or more massive call options on the future of video gaming. You got me. Sold.

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