Nintendo (7974.T, NTDOY)

I haven’t looked at Nintendo for a couple of years but it doesn’t seem too high price right now and could be a decent growth runway as the game catalogue for switch 2 gets built out and the movie/media business grows. Nintendo has a $64 billion market cap, $12 billion in net cash, and an EV of $52 billion. It earned $2.7 billion in operating profit in the last 12 months. This might be a reasonable estimate of mid-cycle earnings. In the last peak in 2020-2021 it was earning more than $5 billion in operating profit. In the last trough, fiscal year ended March 2025, they earned $1.8 billion. That 2020-2021 era is probably not going to repeat again. But now they have this movie/media business to put their IP to work, the switch 2 has been selling okay but faces some headwinds from memory prices, and game sales have been slow but the catalogue of games is still getting built out. The movie/IP business seems like it has been going well, and might be a little less cyclical than the old console and game business. If they can start producing a couple of decent movies per year, I’m guessing the movie business could add something like $400-500 million to the operating income line. The switch 2 sales have been roughly in line with projections. It launched in June 2025 and by March 2026 it had sold about 20 million units in the first fiscal year. This is better than the switch 1 did at a similar time point after its launch. This was above Nintendo initial guidance for 15 million units. The guidance is now for 16.5 million units in the fiscal year ended March 2027. One problem has been the rising price of memory because of the AI boom. Another has been tariffs. Both of these make the switch 2 more expensive. Looks like these combined led to a $640 million hit on the operating income line. Recently the stock was falling on these memory price concerns. For a while it looked like it was inversely correlated to the memory stocks. It has started to bounce back a bit now. Memory pricing has stopping increasing at insane rates and is now just increasing at high rates. But the switch doesn’t need super high end memory chips, and with China’s expanding supply of memory chips, I’d expect they will work out better memory prices in the next couple of years, at which point they could price the switch a little cheaper and get some more unit sales. I think this is a temporary problem not a permanent one. The company got a tariff refund and it looks like Japan is probably going to get a fairly favorable trade deal with 15% or lower tariffs. The game sales per console has been inching up from 2.18 in December to 2.45 in March and 2.46 in the last update from June 2026. The original switch ultimately had around 10 games per console over a lifetime. The catalogue for the switch 2 is still filling out so we’ll see how this goes as more titles come out. The game sales are super high margin to the company. If we assume a total of 36 million units by March 2027 (19 million in the first year, 16.5 million in the second year), each 0.1 games per console equates to 3.6 million games. Let’s assume around $70 per game, and let’s estimate 60% margin for first party games, and very little incremental operating cost per unit sold. So each 0.1 games per console increase ought to be worth an extra $150 million that drops to the operating line. If they can hit 3-4 games per console, that would be $750-$2250 million in additional operating income. So you get something like 19x pretax operating earnings, which isn’t cheap, and game catalogue which might put it more like 15-16x forward operating earnings, or maybe lower if they hit it out of the park with their new game catalogue. My question is does that look cheap? Is Nintendo a quality enough business to warrant this sort of multiple? Maybe…