What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing today we're looking at the rise of the japanese video game company nintendo, which recently claimed the spot of third largest video game company in the world by Sales, this can be attributed to their massively successful nintendo switch gaming console which has surpassed the xbox one to sell an eye-popping 92 million units. Cumulatively, since the switch was announced in 2016, the company's stock has more than tripled in value far surpassing the broad market indices. Nintendo is one of the most interesting stocks to follow because of its extreme cyclicality, roughly once every five years they come out with a new gaming console. Sometimes the new console is a mega hit which sends their revenue and profits to the moon.

But sometimes it's a major flop in the company's sales tank. You can see this clearly by looking at the long run chart of their financials. In 2006, they launched the nintendo wii, which was revolutionary at the time and sold over 100 million units. Their revenue and net profit peaked in 2008 at 16 billion dollars and 2.5 billion dollars respectively.

In 2012, they launched the wii. U, which was a major flop, only selling 13 million units or just 13 percent of wii sales, their revenue troughed in 2016, at just 4.3 billion dollars. Then in 2017 they launched the nintendo switch, which was another blockbuster selling more than 90 million units. Their profitability also exploded with their net profit, reaching a record high of 4.2 billion dollars in the calendar year of 2020..

Their stock reflects the same pattern after the peak. During the wii, the stock price fell close to 80 percent, with the release of the switch as we covered. Almost all those losses currently nintendo is trying to reinvent their business to be less reliant on new video game consoles, they're, focusing more on digital games and new concepts like the metaverse in this video. We'll look at how nintendo grew to be the third largest video game company in the world and whether or not their success can be sustained.

Nintendo can trace its roots all the way back to 1889, when a japanese businessman, by the name of fusiaro yamuchi, founded a small retail outlet in the city of kyoto, they sold traditional japanese playing cards called hanafuda, which were primarily used for gambling. He eventually named the company nintendo, which means leave luck to heaven. This likely refers to the gambling nature of the cards that they sold throughout the early to mid 1990s. They expanded rapidly to become the dominant playing card retailer in japan.

They also expanded into making board games, including chess and various traditional asian games, but there's a limit to how big your company can grow. When you only sell playing cards in board games in the 1970s nintendo president hiroshi yamuchi made the consequential decision to completely pivot the company's focus to the nascent video game industry. In 1980, they released the now iconic donkey kong game, where players try to jump to avoid barrels thrown by a gorilla named donkey kong that same year, they also launched the nintendo game in watch, which was one of the world's first portable gaming devices. It was an immediate success, selling over 40 million units.

If you've ever played super smash brothers. You might remember the primitively shaped mr game watch character. This is a throwback to the very early days of nintendo's video games encouraged by their early success. The company went all in on video game consoles.

They launched hit console after hit console with the nintendo entertainment system, the nintendo gamecube and the mobile game boy device. They also co-founded the wildly popular pokemon video game series in the early 2000s. Their researchers began development for what would be the most consequential product in their history. In 2006, they released their new console, the nintendo wii its motion, sensing and pointing controllers were revolutionary for the video game industry and allowed for games more interactive than previously thought possible.

The product immediately sold out and customers would wait in line for hours in some cases to get their hands on just one long lines at electronics stores persisted for more than a year. The company simply couldn't make the consoles fast enough to satiate the unprecedented demand to say that the wii was a commercial success would be a gross understatement in the first year of launch it outsold the competing playstation 3 and xbox 360 combined in many regions within five Years, its worldwide cumulative sales surpassed 100 million units. The hit game super smash, bros brawl alone, sold more than 13 million copies nintendo generates revenue in two ways. First, they charge 250 each for the wii console itself.

They make relatively low margins on these sales as it costs a lot to build each console. The real money comes from the games. They develop some games themselves and also charge royalties to third party developers who make games for the wii. These royalties come at almost 100 profit margins for most video game companies, revenues and profits peak two to three years after the console's release.

As the installed base of game buyers increases for nintendo. This came in 2008 when they generated the equivalent of 16 billion us dollars. In sales and 2.5 billion dollars of net profit, this was their best year by far in their more than 100 year history. This caused the stock price to increase six-fold, giving them a valuation in excess of 70 billion dollars, but the success was short-lived by 2011.

Just three years after their peak, their revenue had declined by 64 as the hype around the week gradually wore off. They also swung from profitability to an almost 400 million net loss. This is what makes the video game console industry so difficult. You have to continually make new consoles every 5 years or so to keep up with the competition and when the previous console is a mega hit like the wii, it's very difficult to recreate the success.

Nintendo's upper management knew they needed a new product to replace the wii. So in the early 2010s they started development of their next generation console the wii. U the wii! U was a complete disaster, there's no way to sugarcoat it. It had a separate screen on the controller, so you can play games without a tv.

However, the controller is just the screen. It doesn't actually have the hardware in it to operate a game. It has to be connected to a separate console machine to play. This means you can't play on the go and it almost completely negates the entire purpose of having a mobile screen.

The wii. U's graphics and processing power were far inferior to the competing playstation, 4 and xbox one also the developer kits they gave to third-party developers were reportedly very difficult to use and they changed it multiple times. This alienated third-party developers, who shifted their focus to xbox and playstation games. In fact, within a year after the console's release, both electronic arts and ubisoft said they would stop making wii u games altogether, because it simply wasn't worth their time.

They had a few successful titles. Such as mario kart, 8 and splatoon, but their lineup of games was much shallower than that of their competitors, who had the likes of call of duty and halo. Another problem was that the wii? U was basically the exact same thing as the wii. It didn't have any revolutionary new features.

Besides the touchscreen display, which was pretty useless because they couldn't be played on the go by 2016, they'd only sold 13.5 million wii. U consoles or 13.5 percent of the wii sales. This was the worst console launch the company had experienced since the 1990s. Between 2012 and 2016, their revenue decreased every single year for a grand total decline of 23 percent, the sluggish wii.

U sales were not nearly enough to replace the wii in 3ds, their stock price fell by almost 90 from the peak wiping out roughly 60 billion dollars of shareholder value. These were the darkest days for the company. Most analysts wrote them off as a one-hit wonder with the original wii. They were no longer viewed as a serious competitor in the video game console industry, but nintendo wasn't going to go down without a fight almost immediately after the wii.

U's disastrous rollout, ceo, satori iwada realized the company needed to completely reinvent the console offering their next product would be a make or break. If they have two flops in a row, the company would almost surely descend into irrelevancy. After almost five years of development, they launched the nintendo switch in 2017.. The product immediately received critical acclaim and it was a massive commercial success similar to the wii.

U it has a screen on the main controller, all the hardware and software of the switch are housed within the controller. This means you can either play at home with your tv or on the go just using the handheld screen and importantly, the graphics and processing power were far superior, holding their own against the competing playstation and xbox devices. The switch was basically everything that people hoped the wii. U would be and more, they showcased the power of the switch with the concurrent release of zelda breath of the wild.

The new zelda game had the largest and most beautiful open world of any nintendo game. By far and was an immediate hit with the longtime fans of the franchise, while nintendo would previously sell a tv console and a handheld console simultaneously, they would now focus exclusively on the switch as it had. Both functionalities in the year ended march 31st of 2017. They sold 2.7 million units of the switch, despite only having been released for less than a month in the next year, sales increased to 15 million, and they likely would have sold more if it weren't for capacity constraints at their manufacturing facilities.

Sales continued to increase to 17 million in calendar year 2018 and 21 million units for the calendar year of 2019.. When the pandemic struck in early 2020, people thought that video game sales would plummet along with people's disposable income, but the opposite happened and nintendo became one of the biggest covered beneficiaries. With people forced to stay at home. They were desperate to find new ways to interact with their friends online, as it turned out.

Nintendo's recently released. Animal crossing new horizons was perfect, for this players can create their customized villages in the game, and, importantly, friends can travel to each other's islands to interact. Thus, it became more like a virtual social hangout room than a traditional video game. You might even be able to call animal crossing a basic form of metaverse at the end of 2020, amazon put out a list of the best selling video games on its ecommerce platform.

Unsurprisingly, animal crossing took the top spot in fact of the top 10 best-selling games. Eight of them were for the nintendo switch part of the reason for nintendo's out performance is because their games are family friendly with people stuck at home with their kids. Mario kart and super smash brothers are more appropriate than the more hardcore first person shooters of the playstation and xbox for the 12 months ended march 31st, 2021 nintendo sold 28 million units of the switch. This is more than double the wii: u sales! During its entire lifetime.

To date, the switch has sold 93 million units and 681 million games. That puts it within striking distance of the 101 million units that we sold in its lifetime and while sales have slowed down, they still sold more than 3.8 million units in the most recent quarter. This is quite impressive for a console that was launched more than 4 years ago. At the current rate, the switch will probably surpass the wii within the next year, or so, when the switch was launched in 2017, their revenue more than doubled to 9.3 billion dollars.

This has continued to increase and for the current fiscal year ending march 31 2022, the company expects to make 14.1 billion dollars in sales, and while their revenue is slightly below their 2008 peak, their net profit is at all-time highs. This could be attributable to their net profit margins, increasing from around 15 to more than 20 percent. The margin expansion is thanks to an increasing proportion of their sales being digital. You can now download games directly from the nintendo eshop without needing to buy a physical disk.

If a game costs 60 dollars, nintendo keeps almost 100 of this from a digital download when you buy a physical disk from somewhere like gamestop as much as 25 of the purchase price goes to the cost of packaging shipping and the retailer's gross margin. Nintendo also has over 30 million subscribers to their nintendo online service, which allows you to play online. Save data in the cloud and complimentary access to classic nintendo games, adapted for the switch they charge around four dollars per month for the subscription, which comes at close to one hundred percent gross margins, as an increasing proportion of their sales come from digital downloads and subscriptions Their profit margins should continue to expand. So what is the outlook for nintendo going forward? Can their stock price keep up with the momentum they've had over the past few years, sales of new switch units have decreased substantially over recent quarters and will likely continue to decline as the potential user base saturates.

However, their sales of games have stabilized a little under 50 million per quarter. They don't disclose the revenue breakdown between hardware and games, but based on the disclosures that they give about units shipped. We can estimate that roughly 30 percent of revenue comes from new consoles and about 70 comes from games and subscriptions also consoles are relatively lower margin, so more than 70 of their profit comes from games and subscriptions. If they can maintain the strong sales of games, they should be able to maintain most of their revenue and profits going forward even as new console sales declined.

But this is a big if they have a strong pipeline of new games coming out next year, including pokemon legends arceus and a sequel to legend of zelda breath of the wild. However, the switch is almost 5 years old. Now the recently released xbox series x and playstation 5 have superior processing power and could start taking market share from the switch historically they've released a new console every five to six years. Based on this cadence, we should theoretically expect a next generation console within the next year or so.

In a recent investor presentation nintendo showed a timeline of their next generation console. They say it will come out by the year 20xx. This just means it'll come out sometime before 2100, not very helpful. Another interesting thing to notice on the slide is the absence of the wii.

U, it appears that they want investors to forget about the disaster that it was. There is widespread speculation in the gaming community that nintendo is working on the switch pro. It would be more powerful than the existing switch. It's unclear how different the pro will be from the existing switch models.

Current switch games will almost certainly be backwards compatible, but we don't know if there will be new games that can be exclusively played on the pro we just have to wait and see. The good news is that the nintendo switch appears to be more durable than the wii. In 2008, revenue peaked three years after the wii's initial release and declined sharply thereafter for the switch it took. Four years for revenue to peak profit margins are higher and revenue appears to be declining more slowly, with the switch being perhaps the most successful product in the company's history and the share price near its all-time highs.

The bar is set very high, but based on their track record of turning the company around after the wii. U debacle, they appear to be on the right track: alright, guys that wraps it up for this video. What do you think about nintendo? Do you think their success is sustainable? Let us know in the comments section below, as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.