Nintendo: High-Quality Intellectual Property Is Not Enough (OTCMKTS:NTDOY)

Investment Thesis

Nintendo (OTCPK:NTDOY) is a company I have covered extensively on Seeking Alpha, and I’ve written a lot of positive things about the company from the perspective of its impressive portfolio of intellectual property.

While Nintendo has definitely been making great progress recently in monetizing its fantastic IP, unfortunately, this is not enough in my view to warrant its current valuation, given that we are now faced with the massive uncertainty of a new console, which has the potential to perform much more poorly than the bestselling Switch, Nintendo’s bestselling console ever.

Intellectual Property

Let’s start by analyzing Nintendo’s progress in the arena of intellectual property, as they have made great strides in this area recently.

Many investors will be extremely pleased to see that the company is now highly focussed on exploiting its massive portfolio of intellectual property, represented by massive franchises such as Mario and The Legend of Zelda.

After the massive success of the recent The Super Mario Bros. Movie, grossing over $1 billion internationally, it’s been announced that a sequel is now in development for release in April 2026.

I have discussed the potential of Nintendo’s intellectual property portfolio in other articles on this site. But from the point of view of this article, and the transition phase which Nintendo is in right now, and considering how effectively intellectual property is being deployed at the moment, we need to look critically at how much Nintendo’s exploitation of its intellectual property is contributing to its bottom line.

The table above shows that, although intellectual property (and mobile etc.) revenue increased by 81.6% between the last and previous financial year, it only represented 92.7 billion yen of revenue, accounting for less than 6% of the total, versus 1567.8 billion yen from sales almost entirely connected to the Nintendo Switch console and its software (94% of revenue). While lots of analysts (including myself) love talking about intellectual property and its potential, the clear takeaway here is that even when Nintendo is doing really well in terms of monetizing the intellectual property, it is console and software sales which are really generating the billions for Nintendo!

New Console Uncertainty

Given that so much of Nintendo’s revenue inevitably comes from console and software sales, the success of Nintendo’s next console will have a massive impact on the company’s earnings.

Investors in Nintendo, in my view, have a very short memory, and seem to have totally forgotten that the Wii U, the console which preceded the Switch, was a total failure in terms of sales, only managing just over 13 million consoles sold versus over 100 million for the Wii and more than 141 million (and counting) for the Nintendo Switch. Investors should, in my view, not assume that the next console is guaranteed to be a success. If the next console fails, this will have very serious implications for the company’s revenue and profit.

Uncertainty Not Priced In

Nintendo’s stock price has been quite closely linked to annual revenues, historically speaking, but this is clearly a backwards-looking indicator which basically reflects on the success of the current console. In my view, it is difficult to forecast Nintendo’s revenue for the next few years with any degree of accuracy until we know whether the Switch 2 will be a massive success or a flop. Since we have no concrete details on the new console, I would urge investors to approach investing in Nintendo with a great deal of caution.

Considering the console uncertainty, I do not think ratios like a P/E ratio 18x are warranted, even if it does perhaps look reasonably cheap relative to history.

Conclusion

Investors in Nintendo should celebrate the company’s recent successes in exploiting its intellectual property, but they also need to keep in mind the possibility that Nintendo’s next console may not be anywhere near as successful as the Switch. Nintendo products are not always popular or extremely profitable for the company, as the example of the Wii U demonstrates. It’s sensible for investors to wait for more information on the new console before investing in shares of Nintendo, from my perspective.

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