Chit Chat Stocks - Why We Own Nintendo (NTDOY)

Episode Date: May 2, 2023

This is our monthly Arch Capital episode. About once a month we will publish an episode that covers a company in the Arch Capital Investors Fund. These episodes will be modeled after our Not So Deep Dive episodes and will also be available on YouTube. Nintendo Co., Ltd. (NTDOY) is a Japanese multinational consumer electronics and video game company that has seen strong sales growth in its Switch console, while also facing supply chain and production challenges. Brett and Ryan dive through Nintendo and outline the investment thesis for why we own the company in our Arch Capital limited partnership. ****************************** What is Arch Capital? Arch Capital is a concentrated, long-only equity fund aiming to compound capital at an above-market rate. Arch managers are perpetual learners with a long-term focus that strive to build wealth with our partners through intelligent capital allocation. Learn more here: https://www.archcapitalfund.com/ ****************************** Timestamps Company Background | (2:18) Brands | (9:16) The Switch | (21:59) Theme Parks | (44:11) Management | (58:55) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode on Chit Chat Money. And today, we have our monthly special Arch Capital episode, which if you don't know, we run a limited

partnership for outside clients that if you're interested in, we'll have the link to the full website and the show notes. But for these episodes, we go through something related to the limited partnership. For the last few months or few quarters, really, we've been covering some of our holdings. And one of those holdings is Nintendo. We've held it for a few years now. And after this episode, we'll hopefully see why we are bullish on the stock for the long term. On future Arch Capital episodes, we might cover some holdings. We might cover things we decided to sell we might cover something that's on our watch list that we really like but we don't we don't like it at the current price or for some other reason but we do one of those each month

and it is on near the end or the beginning of the month kind of depending on how the calendar falls and we plan on doing those because people like them and people seem to you know be viewing either on youtube or listening intently on their podcast player of choice but yes today we're covering nintendo uh ryan anything else i guess yeah if you want any of the data and any of the charts or any of the show notes we have subscribe to the newsletter or go check it out there'll be a link to it in the show notes it'll have all the charts if you're a listener and want to get more of the data on there and we have some links to some interesting things that anyone interested in nintendo should read but yeah let's get right into it ryan i guess for anyone that has listened to

we kind of do an interview to each other. So we'll ask each other questions. Let's get things started. First, give a brief overview of Nintendo's history. What's important for investors? How is that history relevant to the investment today? Yeah. And this one, we've got a lot to get through. So I'm probably going to make, I think the history a little brief. There was also, So I'm a little reluctant to say this right at the start of our own episode, but there's another good episode from another podcast called The Acquired that goes through the history and it's much longer. And so if you're really curious about the history, go ahead, check that out.

But we're going to be focusing more on the investment case today. And some of the history is relevant, but only I think up to a certain point. Nintendo's been around for a long time. They were initially founded in 1889 in Kyoto, Japan, as a playing card game. However, it wasn't really until around the 70s or 80s, and even probably past that, that the current Nintendo, or sort of the modern Nintendo, if you want to call it that, began to kind of take shape. This is when they began their push into gaming, initially starting with arcade-like games and then slowly moving into more advanced electronics. their consoles to kind of, I'm just going to go through all their different consoles because obviously they've had tons of generations. I think Nintendo is a company or a name that brings up

probably nostalgia for older listeners, maybe even younger listeners, because everyone's probably interfaced with one of their products in some way over time. So in 1980, they released the Game & Watch, maybe one that people are less familiar with. 1985, they released the Nintendo Entertainment System, the NES. 1989, they released the first version of the Game Boy. 1991, they released the Super NES. 1995, the Virtual Boy. 1996, the Nintendo 64. 2001, the GameCube. 2004, the Nintendo DS. 2006, the Wii. 2010, the Nintendo 3DS. And 2012, the Wii U. I go through all of these because they were all different in one way or another. Some were big hits for a couple of years, some were big flops, but ultimately there was one trend among all of them, which is that

none of them stuck. None of them are still with us today, really. I mean, you can play them, but no one's really developing games for any of those consoles anymore. And there were some where I think the Game Boy went through three different iterations. However, it's basically just a totally different console. It's not an iteration like the iPhone 8 is to the iPhone 5. It's nothing like that. It's just simply a different console. However, we think some of this or this sort of trend has switched as of late, and we'll talk about why that is. But during these different console cycles, there was this boom and bust effect where if one of the consoles was selling like crazy, and I know people probably understand this, and maybe they're getting bored with this

section, but when a hardware is selling like crazy, there's an eagerness to develop and more of an incentive to develop games for that hardware, both from Nintendo's perspective, so first-party games, as well as for third-party developers. Although third-party, they shoot themselves in the foot a bit by alienating third-party developers, or I guess historically in, say, the 2000s, early 2010s, late 1990s, alienating third-party developers, but we'll talk about how they're hopefully embracing them a bit more today. Yeah, and anyways, during these periods, if Nintendo or even third-party developers, which

there hasn't been as much of, are developing a lot of games, there's more options to play. Because if you're a gamer, then you have more options to buy. You're probably buying more games in general because there's more options. And so it's kind of this flywheel effect where when there's a big installed base that have all adopted the hardware, you're selling more games to them, you start to see huge operating leverage, or at least some operating leverage, where profits begin to soar. However, when things turn and a competitor like Sega did throughout the 80s and 90s comes out with a console that other people want to play, you get this huge negative effect where that operating leverage starts to work in reverse. There's less people

buying the games. You're developing those games into a market that doesn't want to buy them because they're playing more on the Sega console, something like that. And so it kind of lends itself to wanting to be conservative with the cash that you have on hand. And this is going to be a theme that we talk about kind of throughout the show, where you want to save money for a rainy day because you don't know how long your console is going to be the console. And so it's better to kind of preserve the culture

or preserve the actual company than to be, I guess, aggressive with returning capital to shareholders. And so that's a theme that's kind of been throughout Nintendo's history. However, we think a lot of that changed or some of that changed in 2017 when they launched the Nintendo Switch. And I'm going to talk about why the Switch I think is different in another section. And so I'll kind of save that. But we think in general, this is going to be sort of a common theme throughout the show, we think things have changed. Sort of a side note here on Nintendo's culture. In 2015, Satoru Iwata was the president at the time of Nintendo. He died. He was replaced with sort of an interim president and then

finally replaced with the now current president, Shuntaro Furukawa. I find this stat amazing. The company was founded in 1889. Shuntaro Furukawa, sorry if I'm botching the name, is only the sixth ever president of Nintendo. So it shows you the longevity and the tenure of a lot of the executives that when you're at Nintendo, especially if you're the president, you're a four lifer basically. Yeah. And just for reference on what the Switch is, because we want to make sure anyone that doesn't know the company that well understands what we're talking about, because it can be confusing if you don't play it. The Switch is the only hardware they're selling today. They usually in their history would sell handheld devices like the

Game Boy or DS along with the console devices like the Nintendo 64 or the Wii, but the Switch combines them so you can turn it into a handheld device or play it on a television screen for the more immersive AAA experience. And then Ryan, I know most people understand what Nintendo owns, Mario, Zelda, et cetera, but are there any important brands you think that people should know, and maybe talk without going into full detail about the relationship to the Pokemon company and how that's like a hybrid subsidiary with that really deep relationship they have. Yeah. I'm not sure when their relationship started with the Pokemon company, but, and I maybe should have mentioned some of the brands, but over the years they've developed

the Mario franchise. Mario was actually, it was named after the landlord of their Taquilla property, whose name was Mario. And that's Seattle. That's in Seattle. Yeah, it's really close to where we live usually. So they've developed that over the years. Some of the other properties, Zelda is probably the second most popular Pokemon, which there's a separate company called the Pokemon Company, which we know for sure Nintendo owns 30% of, but it's basically split into thirds. And one of the thirds, it's unclear how much Nintendo owns. Apparently, one of the thirds is owned by another company who Nintendo owns or has a huge investment in. And so basically, Pokemon is kind of a hybrid independent company while also being a subsidiary that publishes games exclusively for Nintendo consoles. They have some stuff on mobile, but it's really purely for Nintendo. And so that's why we kind of call it their IP, but it's not necessarily their owned intellectual property. Other games that are really popular, Splatoon has become a really popular game over the years, a popular brand. Animal Crossing.

Animal Crossing became really popular in the last, I think, two years. Some recognizable characters from there. Trying to think if there's any that I'm forgetting. Mario has been built out over the years. So more characters have kind of been added to that Mario world. So Mario, Pokemon, Zelda, Animal Crossing, Splatoon. yeah those those are the big ones commercially there's a lot smaller ones that aren't truly that relevant like metroid or maybe kirby which is sort of related to the mario universe and then yeah i mean the mainline games people know mario kart zelda mainline games mario super smash bros which is kind of interesting combination of all these characters but yeah i think i think that covers it commercially all right how about the revenue drivers today what and it's not necessarily clear because I think people get this kind of mixed up. What are the primary revenue drivers for Nintendo and how does the integrated hardware model work? Okay. Yeah. So Nintendo's business

model is to sell dedicated gaming hardware. For example, right now, the Switch, but Ryan mentioned over the last few decades, once they started going into this line of business, there have been different names over the years, but right now it is the Switch and they sell this dedicated gaming hardware at a small profit, sometimes at a loss, and then make money developing their own games and selling them, and this is important compared to a lot of other publishers, exclusively on their gaming hardware. So when you see a Mario, Zelda, or another game from a Nintendo IP available for purchase, it will almost always be made by Nintendo or the Pokemon company or one of the developers that they either have an investment stake in or a

deep relationship with, usually these companies are over in Japan, and they're almost always exclusively sold on Nintendo hardware. And if it's the mainline game, you can bet. So say like Mario Odyssey was a recent one in 2017, Mario Kart, the newest Pokemon mainline games, those will definitely be exclusively sold on Nintendo hardware. You're not going to be able to play it on Xbox or PlayStation. And importantly, Nintendo's culture, which we'll talk about a bit more in detail later, maybe give our opinions on this and what it means for investing in the stock. Nintendo's culture is to keep extremely tight control over how people can view or interact with their entertainment characters. To give context for the rest of the episode,

Nintendo's guidance for its latest fiscal year, which ended in March, but they haven't reported what the last three months of that year have been yet. As we're recording this, it's on April 28th. I believe their earnings are sometime in early May. Their guidance for revenue is about $12 billion in US dollars and $3.6 million in operating profit. And that is using the current yen to USD conversion. They guide to everything in yen. So when we convert it, it really depends what conversion you use. Now, first party game sales, I think this is important thing to note, have incredibly high incremental margins. So driving higher unit volumes for first party games what nintendo will refer to as software unit sales and this also

includes some other stuff that we'll talk about later is vital for profit generation i would take a look at this chart and i'll describe it for everyone it's pretty easy to understand uh actually let me let you share your screen first in case you want to do that later so if we look at their software unit sales which again includes mostly game sales for me their first parties or third parties, but mainly first parties is what's important. When they launched the switch, if we look at fiscal year 2018, there are under 50 million software unit sales for the first three quarters of the year. But through the last three years, they've been above 150 million in software unit sales. And during that time, operating profit went from around $1 billion

to over $3 billion for each of the first nine, or excuse me, three quarters of those fiscal years. Does that make sense, Ryan? Am I explaining that easy enough? Basically, the more households that have a Switch device, the higher the incremental margins are on games sold or hit games, basically, because you have this huge installed base to sell to. And I don't know if we touched on this. They have to be active players too. Right. I mean, it's got to be people buying the games. But the other part is a lot of these are now digital downloads. And I don't know if we touch on this throughout the rest of the episode.

Yeah, I was going to let you do that in the next section, but if you didn't write it down, go ahead and hit on it now. I don't think any other console, and I'm not 100% sure about the Wii U, has had the ability to download the games online as opposed to going out and buying a physical cartridge. And so that is theoretically a much higher margin because you don't have to pay for the distribution,

you don't have to pay for the manufacturing of the actual physical discs, and anything supply chain related. However, unlike the Xbox and the PlayStation, a shocking amount of people still buy physical cartridges for Nintendo's games. I believe the split is right around 50-50 right now. Is that correct? Yeah, and it depends how they define it

because they might include their Nintendo Switch Online sales in there. But I believe in the investor presentation that they shared with everyone in, I think it was November of last year, They give a good overview of that and how it has developed over time, and they actually don't push anything on consumers. So they leave both options open, and they've said that that change over time of increasing amount of digital sales is just consumer preference. So they don't really care because they'll make money either way, but over time, it has gone more to digital, which has higher margins. All right.

Anything else, Ryan? No. anything on uh i guess anything else on the revenue streams yeah yeah yeah i do have some stuff here i have so i think what's important here is i guess understanding how they relate with third-party sales because with first-party sales and mario game they're going to keep all the revenue but they have expanded their offering for third-party game publishers something they really haven't embraced since the 1990s with the nintendo switch system and they now offer an online services subscription called Nintendo Switch Online, which I'll hit next. Like other

gaming platforms, Nintendo takes about a 30% cut of third-party game sales. And according to Nintendo's latest earnings, there were eight different third-party games that have sold over a million copies so far in fiscal year 2023. So that was for the first nine months of the year. So pretty sizable amount of sales there. However, a lot of the popular games from other publishers have low selling prices below $20, so they are not nearly as important financially compared to a first-party game that goes for $60 or higher. I would argue, though, that it is very important in keeping people engaged with their Nintendo hardware, since an individual customer might not buy a mainline first-party game from Nintendo every two years, if not longer. So it's important

to keep that active installed based up, which, again, I don't know if we have it in this episode, But the active players has grown over the last five years, which we think is a very, very good sign. And then if we look at the Nintendo Switch Online, as of September 2022, Nintendo Switch Online, which we might shorten to NSO, had 36 million subscribers. Let's say that has grown to about 40 million today. Do you want to explain what that is? Oh, yeah. Yeah, so, yeah, sure. So that gives you access to play with friends online, to play with random people online,

sort of like Xbox Live or what it is with PlayStation. And then it gives you access to extra downloadable content for first party games and then access to some legacy titles from the older consoles that they have a library that's built out over time. They have two tiers here, one that costs about $50 a year and one that costs $20 a year. So very, very cheap entry price point. And then the $50 tier will get you more legacy titles from past Nintendo hardware. And then a lot of in-game add-ons compared to the $20 tier, like the Mario Kart 8 Booster

Pass series, which is apparently very popular. They don't give out an ARPU number, an average revenue per user number. But if we split that down the middle at $35 and assume they've reached 40 million NSO subscribers today, that would be $1.4 billion in annual recurring revenue for Nintendo. That ARPU number may be a bit high right now, but this shows, compared to just $12 million in overall sales, this is becoming an increasingly important revenue generator for Nintendo. Much more important, I'd say, than third-party sales at just about 10% of the revenue estimate. Last thing on just overall how revenue works, since profit generation, this is kind of how I would close things out

as we transition to the next section. Since profit generation from software sales is tied to hardware sales and software sales generate all the profits, Nintendo's financials are tied to hardware sales and active users, which Ryan is going to cover in the next section. All right.

And some people, I've heard gripes about the frustrations around you buy the game and then you have to buy $20 extra to get the booster pass to get the extra courses for Mario Kart. And I will just kind of make this comparison where it's like, and gamers are just like a naturally complaining group. It's a really hard group to please.

But it's very similar to like FIFA, where FIFA, you buy the initial game, but then you're paying throughout because you're wanting the in-game currency, that kind of thing. So it's really no different. It's just a way for them to kind of increase the lifetime value of those users. And theoretically, they could continue to build out new courses, new booster packs for people to buy. So I liked it. I liked that move. And I think it proves that this is very different than previous consoles in a couple of ways uh because it's it's monetizing the life of the user uh or it's increasing the life of the user and and the value of the game and and can

really kind of make those incremental margins that much higher yep and the price to value is still much much lower than almost all other entertainment whatever anyone listens to or reads or whatever they do out there. All right. Next up, we're going to talk about more details of the switch kind of analysis of any staying power. So Ryan, why do we think the switch has staying power? How will we know if it doesn't? And maybe some more details on why that is important for stable earnings, because that is the most important thing we're looking at from an investment today. Yeah. And if you're a bull or a bear, or you look at Nintendo for the first time, the number one thing you'll see is that Nintendo's cyclical.

And we talked about it. Every console has ended, basically. And so essentially, why do we think this is going to be different is the question we're trying to answer. And so I guess before I get into some of the supporting evidence for why I think the Switch is a little different, it's important to talk about the Switch, like the actual hardware itself, or the console, I should say.

So, we've kind of alluded to it, but the most important thing here is that users are no longer tied to their specific piece of hardware. If you think about the Game Boy, you weren't porting over, you weren't downloading content and then being able to access it on the 3DS when they uploaded or updated the model. You were tied to that specific piece of hardware. That was your account. Same with the Wii. um and that's why we saw the wii u kind of flop is because you basically have to re restart that entire install base from zero and their tech was very very poor it was quite at least compared to the standards of the time for for that stuff yeah right and so now if users have a nintendo online account very similar to an xbox account or a playstation account where um a it provides for backwards or, or I guess upwards. Now it'll be backwards compatibility once you move to the next console, but you can save your progress. You can access the same games across other devices. It makes the upgrade cycle way more seamless. And so we've kind of seen this play out to some

extent, which is you've had the switch original, the original switch in 2017, the switch light, which I think was released in 2020, might've been 2019. And then the Switch OLED model, which was a slightly nicer, but really it was kind of just meant to be sort of a slight upgrade. And then we're waiting to see the next version. I'll talk about that in a second, but each of these has sold well. And now I think the majority of hardware sales are all Switch OLED models. And there's still some Switch Lite sales and some Nintendo Switch sales, but Switch OLED makes up the majority. And so that's kind of, I think, a little bit of proof that the upgrade cycle is a lot easier and much less of a hurdle. And you don't have to essentially restart from

square one if you're a user. This obviously makes it much easier to sell software if you're Nintendo. And so while it hasn't been officially confirmed, there's rumors that there's going to be a more advanced version that releases sometime within the next year. If you really want to get into the weeds there are some obscure online chat rooms that apparently had some for uh some employee that was leaking news as we just learned from the nfl draft though do not trust those with 100 certainty right however he he was dead right on the past three so that's why people kind of believed him uh i think he may have been fired but um so it's it's kind of uh you kind of have to really kind of i don't know you got to be really nerded out i guess to to have a jump on whether

or not there's going to be official when or or what the new switch version will look like um there's also nintendo nintendo changes their mind a lot so right you never know yeah there's also been a uh patent application from nintendo for a more advanced electronic device um which our friend Ryan O'Connor found and tweeted out. And so that isn't to confirm, but that's kind of where the rumors are at, is that there will be a more advanced version. You can also kind of read between the lines with NVIDIA's chips to see what kind of chips Nintendo will be using and that kind of thing. And you can tell that it'll be a more advanced version. So anyway, that's kind of around the hardware. But beyond the hardware, there is other proof that we think the platform

is staying alive. So the level of usage and the volume of software titles continue to trend upwards. And those are two really big things. I have a chart in here, but I'll try to describe it. This is probably the leading reason that I think the Switch console is different from previous ones. So we are now officially six years past the launch of the original Switch and the number of software titles being released, both first party and third party, is at an all-time high and continues to move up. If you look at all of Nintendo's previous console cycles, the Wii, the Wii U, DS, 3DS, Game Boy, GameCube, the number of software titles peaked basically between years three and five after it was launched and then trended downwards. We're not seeing that. We're

seeing more development. There's more incentive to develop because you have this installed base that continues to grow because it is sort of this iterative hardware platform that you're constantly selling into this ever-growing installed base. So that's one trend that I really like. Additionally, Nintendo gives out an annual playing user number each quarter that I think is helpful in assessing the ongoing engagement with the platform. Once again, I've included a chart here, but I know it kind of annoys listeners that aren't watching or aren't aren't reading the newsletter. Basically, what this chart says is that in 2020, annual plane users kind of skyrocketed because there were stay-at-home orders. Everybody was buying a

switch in 2020 to 71 million. So that was what they were seeing in annual plane users. As of the most recent quarter, and you're not going to see this in the chart, it sits at 112 million annual plane users. Now, I will say this figure is not perfectly indicative of engagement because it's basically the number of people that have played a game once in the last 12 months. So they might not be playing as much as they once were, but it shows that people are still logging on and playing at least within the last 12 months, and it continues to grow. And it's a huge chunk of the overall Nintendo Switch sales. I would imagine it's probably, what do you think, 95%, 96% of the households with a Switch are

annual playing users maybe more yeah it's very darn what's the exact number i mean it's hard to say it's like 122 million and some have recycled so they're upgrading yeah the oled so i think generally i wouldn't overthink it if they went from like 20 million users at the first year of the switch launch and now they have over 100 million annual playing users if we keep the annual users at over 100 million i would not be upset i think they will do just fine Yeah. And then I guess to kind of conclude here, if you've seen Brett's chart or what he was talking about, you see that software unit sales have been decreasing or basically flatlining over the last three years. They've been essentially flat, slightly down. It's important to remember

that people usually buy more games when they first purchase a console and console sales have really dropped following 2020 for a number of reasons. Chip shortage was one, there was accelerated demand or demand that was pulled forward in 2020. So there wasn't as much incentive to buy a second console. They also haven't released a Switch 2 or anything like that. So console sales have come down substantially,

but software sales, I think I said that right. So consoles sales have come down, software sales have kind of flatlined. That tells you that the users that have been around for a while are still buying new games. So it's kind of, in my opinion, further proof that the Switch is here to stay.

All right, let's move outside of video games. I think anyone that's watched the Mario movie and I guess maybe gone to a park is probably excited by this. I know a lot of people kind of looked at the stock for the first time after seeing the movie. So what has Nintendo said about its expansion beyond video games?

What gives us any confidence that they've made an actual philosophical change here. Yeah, and we'll hit more details about what the movie and visual content can mean and then what the theme parts can mean financially. But I want to talk about their philosophical change, which has happened over the last decade. So again, we are going to talk

throughout the end of this episode, probably in the management section, about how Nintendo management is notoriously secretive, vague, and confusing when discussing any future plans. However, over the last decade, they have repeatedly talked about expanding outside of the core gaming business and are finally starting to succeed here so starting a year or so after the wii u disaster nintendo exec

nintendo's executive team started exploring an entrance into new modes of entertainment this was reported by them and by third-party sources some japanese newspapers you know video game blogs the like uh this was spearheaded by president kimishimi in 2015 and then continued with current president shun furukawa last president wrong that was i thought he died yeah he was yeah that was the interim right because there was a president that died and then we had kimishima as he was there for a significant amount of time and he really helped this uh but he was still yeah the interim um they started looking for a partner to make a film they landed with illumination in 2015 and then invested a lot in making smartphone applications uh the

smartphone applications. I've gotten a lot of downloads, but I've been a bit of a disappointment so far financially. But they're trying, from what I would say, a lot of shots on goal outside of gaming, which I think is smart. So some will stick, some will end up flopping. I mean, this is the entertainment business. You can't bat a thousand. And there's a lot of information here. Nintendo is a very covered company within the news. There seems to be news that happens every weak and most of it are relevant to the long-term thesis and you can do a lot of you know quote unquote reading the tea leaves uh you know you can see what they're making in the investments here you can check those online chat rooms but i think two things stand out to me showing the importance

of what these new forms of entertainment outside of gaming mean to nintendo and why they are so important to them one is that shigeru miyamoto who was the what i would call the walt disney of nintendo we'll discuss him in the next section he's invented the vast majority of all of their first party characters uh he is leading the charge here so he's been spearheading the theme parks and spearheading the movie along with illumination and their partners at universal studios second is this slide i'm about to show uh on the video here which again i'll describe it's pretty easy It's a more simple model of the Disney flywheel. So in the center, we have the integrated hardware software business.

They have it just as a switch. I believe it's the OLED or whatever it is. Surrounding it is the Nintendo account, which they say connects everything, where if you have a Nintendo account, you get discounts, you get updates, you get connected. And I believe they're closing it on 300 million Nintendo accounts. And then on the outside, they have these prongs that include theme parks, visual content, mobile apps, and merchandise. And they say, all of this will expand the number of people who have access to Nintendo IP and create a virtuous cycle to invigorate the integrated hardware

software business. So that's the key here. The most important thing for them is not making money on these new entertainment divisions, although it's nice in the movie, as Ryan will mention, it's going to make them a few hundred million dollars, if not much more. it is really about driving more people to the gaming business which is the most profitable form of entertainment in the world uh anything to add to rank because i know that's you might have some takes here no i think that's pretty comprehensive and i'll uh dive into the movies specifically but there are a number of ways that they can kind of expand the franchises and the touch points with consumers outside of just nintendo specific games uh yeah and then the

Last thing, there's a slide that I will not describe because it's hard. I would just recommend reading it if you subscribe to the newsletter that outlines their proposed investments. It's unsurprisingly a confusing slide because I have no idea whether it's a one-time investment or these are their annual investments. But the line that popped out to me that I want to share is that they're spending 50 billion yen, which is close to about $500 million in US dollars, depending on the exchange rate, of course, that is going to visual content research and development. They just bought a

small studio and renamed it Nintendo Pictures. Again, subscribe to the newsletter or look at that investor presentation to get the full overview. But next, we're going to talk about movies. So Ryan, what could the potential impact of movies and visual content be financially to Nintendo? Yeah, this is a spot where I think it's been kind of debated both long-term and short-term the financial implications as well as kind of the i don't want to say cultural implications but it's it's it's been people don't know what kind of impact this is going to have but i'm going to try to run through the best i can so as many people know now um nintendo just released a first of its kind super mario brothers movie apparently there was one in like the 80s that was

like it was not animated it was like two guys acting out and they luigi they licensed yeah Mario, the characters out, and they had no creative control, which I think led them to their current philosophy of almost very, very straight creative control on how people see their characters, because that was a complete disaster. Yeah, it's kind of a meme now at this point, but this was the best-selling animated movie of all time on its opening weekend. I will say it had a five-day opening weekend versus other ones were basically on a three-day, but still a huge success. And as of April 26th, so that was 21 days after the official release, it has now crossed $900 million in total box office sales globally. So going to surpass a

billion for sure. That's a really strong first three weeks and estimates for total box office sales now are anywhere in the range. I mean, I've seen estimates in the range that it could be north of 2 billion. That seems like it might be a little high, but I think at a minimum, you're getting probably $1.2 billion in total box office sales, more likely probably $1.5. It kind of remains to be seen. But what's important to remember is that box office sales only account in kind of the modern day for about 20% to 30% of a movie's total revenue. So they also earn money from at-home movie sales, TV distribution deals, Streaming deals are a big one.

So if we are conservative and we assume they only reach $1.2 billion at the theaters, that would mean they could potentially generate $4 to $5 billion in total growth sales over the life of the movie. So that's revenue beyond the theaters. Now, Nintendo obviously doesn't get all of that. On average, theaters get 50% of the box office sales. Nintendo reportedly paid $100 million to make the movie and $50 million of marketing. Plus, I believe they split the revenue with Illumination, who helped them make the movie,

but Illumination is owned by Universal. So they split the revenue with Universal. I'm not sure what that revenue split is. Brett, if you have any input here, feel free to- I think, yeah. And I don't know if Illumination is owned exactly by Universal, but I believe they have a deep relationship. I was a bit confused looking at that.

For some reason, I couldn't find the details. But yeah, it's both of those companies. I would think of them as almost like one. But Illumination, they have the founder of Illumination on the board of Nintendo. So that's the key relationship that Nintendo, who Nintendo works with when they're building this stuff. Yeah. And Illumination, for those that don't know, they've been a very successful animated movie company. Minions is one of their big hits.

All the Minion movies. I'm trying to remember any of the other ones. That was Despicable. Yeah. The first one was Despicable Me. I think that spawned the minions, right? That's their whole universe. Anyway, so there is a lot of revenue splits here. So if we assume that... I'm going to assume it's a 50-50 split with elimination. It could be different or universal. So if it's 50-50 split on $1.2 billion in box office sales, that would net Nintendo between $200 and $300 million in earnings because you take 50% off the top, kick it back to the theaters,

$50 million on marketing, $100 million developing the movie, 50-50 split from there. You're looking at $200 to $300 million in earnings. However, streaming and the at-home portion are much higher margin. So those are much higher margin business lines. So estimates have it that they could do at least a billion dollars in earnings from the movie. For context, Brett already said this, they did $3.5 billion in net income over the last 12 months. So it's not trivial, even though it wasn't intended to be a huge financial contributor on its own. It could be a huge help here in terms of adding money to the bottom line. Where this gets a little more interesting is thinking about the long-term. Immediately following the release of the Mario movie,

game sales for all the hit Mario titles jumped significantly week over week. That was according to UK data, which I'm assuming is similar, if not better, throughout the rest of the world. So we're going to see basically, I think, in Q4, assuming that that is accounted for in the quarter, basically the impact that having a really successful Mario movie can have on the business overall. That movie and gaming combination also gives fans a new way to interact and kind of experience Nintendo's IP. This is kind of that flywheel effect that maybe people talk about. And so at first, it was just hints that there would be kind of more of these movies. I think Chris Pratt said in an interview that he hopes there's a whole universe of these Nintendo movies.

But then Shigeru Miyamoto, who's kind of the creative genius behind most of Nintendo's brands, confirmed to a Japanese news site that there is no doubt he will make another film based on Nintendo's franchises. In my opinion, and people have debated this, they can go a lot of different places with their IP. I think there is definitely room to do a Mario Bros. sequel. You could easily do a Mario character spinoff for reference. And I don't want to spoil it. But there was a teaser at the end of the Mario movie that indicates there will be probably some sort of a sequel. I think you could do a movie around Luigi, a movie around Donkey Kong, Yoshi, Zelda. Just copy the game.

Just basically copy some of the main concepts of the games. I mean, just with Mario, there's so many. Since it's an entirely made-up world, they have all these ones. They have Mario Builder, which probably wouldn't work. But they have the Super Mario Galaxy one, which is very, very popular. I mean, think about that. right you're that that's a perfect movie for animation you have the super smash bros i don't think mario kart really works that well you have those ones luigi's mansions donkey kong mountain

and all that stuff it's just it's perfect i for anyone that's concerned about their lack of potential ip i would just go through their gaming catalog and not all their potential game not all their games could translate to a movie but they have a bunch of ideas just sitting there from their 40 years of game development yeah so ultimately i think movies could not only as evidenced by the success of the mario movie uh not only contribute to the bottom line but help serve as a a very good retention tool for gamers so people experience uh the or they watch the movie and then all of a sudden they want to play mario games my household has a uh a nintendo switch i gotta say we played mario kart for like a week straight after it was i mean you honestly

have like this different connection with the characters after you watch them in a movie and then did you mention that there was data on the game sales up week on week for three straight weeks or did i yeah or at least one from the uk uh i didn't realize it was three straight weeks so i guess that's even better but um it's also on a way for fans who haven't experienced mario games or don't have a switch to interact with the brand like a new touch point i think there's probably a lot of people who watch the movie and don't have a switch and now they say okay let's go out let's i mean let's either buy a switch or let's uh let's play a game let's try to try to interact with the brand again so i think movies could be a huge pillar uh of their strategy

moving forward over the next decade um it i don't know what the cadence will look like knowing Nintendo's culture, it'll probably be slow. But for the people that think this is a one-off, I would say it's probably not going to be. And I think this could be a huge new, entirely new revenue line for the business and significant revenue line. The 2026 Chevrolet Trax is the stylish SUV for those on the move. And with the standard Chevy safety assist package, you have the backup to handle every turn with confidence. the 2026 tracks start your build at chevrolet.ca all right what about theme parks because that's i guess the other maybe possibly big contributor yep this is the bigger the second big potential

financial contributor in the near term nintendo like with visual content has partnered up with universal studios to bring its entertainment characters to four universal theme parks around the globe. That is Singapore, Japan, California, and Florida. On the current timelines, these parks will be fully operational by 2025, with two of them already operational in Japan and Hollywood, California. With the theme parks, Nintendo, which again is led by Miyamoto, has collaborated with Universal in designing the theme park land. But unlike with the movies, Universal is putting in all of the capital investment in building the parks. So this makes it less expensive on Nintendo's end. You didn't really see the capital investment show up on their

financial statements, but they will earn a smaller chunk of the ticket merchandise or food sales. The economics and revenue share for the theme parks are not clear at all right now. But in talking to an investor who talked to someone that works with Universal, it looks like Nintendo will earn a 4% take rate on all ticket sales plus a flat annual fee for each park. This could equate to around 250 million dollars in high margin revenue each year for nintendo uh by 2025 we'll know for sure if this is an underestimation or overestimation because i frankly have no idea what the correct number is going to be i think it should be noted though that the nintendo officially announced an expansion for the japanese theme park already bringing a donkey

cock themed area sometime in 2024 and with dozens of the different family friendly characters out there there is room for universal to expand these theme parks for basically forever into the as really as much as nintendo lets them and really obviously the capital investment is high for a theme park so they can't do it all overnight and while not game changing for nintendo financially these earning streams will diversify nintendo's into income statement and hopefully smooth out its earnings this decade compared to the previous two even if they hit a little bit of a any sort of hiccup one year, two years with a console transition. But more importantly, especially with the theme parks, they are profitable marketing products that convince Nintendo

customers to buy more games, which again, is where they're going to make the majority of their earnings. Remember, Nintendo's first party titles have incredible incremental margins, especially the digital sales. So if theme parks drive 1 million more people around the world to spend $60 on Mario Kart 8, which is the current iteration, or really insert any Nintendo game, that is $60 million in extremely high margin revenue added to its income statement. Lastly, what I would say here, and I think this is the most important part with the theme parks, is when you interact in person with an entertainment character at a theme park, that can make a young child a fan of that character for life. Example, going to Disneyland,

meeting Mickey Mouse. If you are a listener to the podcast with a child between the ages of 5 through 12, I would just imagine how much fun they would have meeting Mario or Luigi at Super Nintendo World or Yoshi or Kirby or any of the other dozen Nintendo characters pick their favorite. Now imagine it is November and you are thinking of a perfect gift for the family this Christmas or holiday season after turning your kid into a fan of Nintendo characters or deepening their fan fandom by taking him to the theme park i think it is much more likely you'll buy a switch this holiday season if you didn't go to super nintendo world and if you already own a switch you will you know i say be more inclined to buy another nintendo game one that you know is going

to be family friendly given their culture for your kid to play so i think this one is even more important if these theme parks get a consistent amount of people going to them each year and they're in the perfect spot you know california florida people go hey we went to disneyland for a day why don't we go to super nintendo world we've been in disneyland three times um yeah i think it's perfect i also note that this is the perfect time for them to launch it because there are millions of gamers who are now 30 to 50 years old who became fans of nintendo when they were kids now a lot of them have families and are young children do you think they'll want to take them to super nintendo world i think the answer is a hundred percent yes um the competitive advantage

You sound like a promo. Yeah, I mean, look, I just want to put that. I think that just hopefully describes how we're thinking about the theme parks. And I believe the competitive advantages here are clear because there's no other company in the world that can make something like this except Disney. But maybe if we have time, we can discuss that. And I'd also add that it's going to be much more affordable than Disneyland or Disney World. I think that helps a bit, but it's not important over the long term. Okay. As we try to close things out over the next 15 minutes here or so, Ryan, why don't you go through merchandise, stores, and mobile applications, stuff that they're working on, but is less important financially?

Yeah, I'll make this pretty quick because it's not a big segment now, and it probably won't be a big segment in the future, in my opinion. But I think it adds to the ecosystem. So on the store side of things, Nintendo is trying to roll out or is in the process of rolling out additional touch points all around the globe. They have a number of official stores as well as pop-up stores that primarily sell merchandise. So think like Zelda clothing or Legos or collectibles, kind of figurines, stuff like that. But it can be big, I think, as a way for people to kind of connect with the brand in an additional manner. But it's not going to be the leading revenue contributor by any means. They also offer a variety of mobile apps for smartphone users.

These are typically free-to-play limited versions of Nintendo's IP. So they have things like Mario Run, Mario Kart, Pokemon Unite, and several others. um if i've played some of them they've the mario kart for the mobile phone is it's fun but it's really kind of a very limited version of what you get with mario kart on the switch and i think that's intentional and i like that they've made it fun enough that you can interact with the characters because i think that's the goal here is they i mean they have more than 800 million downloads in total across all their apps which there's obviously a lot more people that own smartphones than own Switches. So I think this is a way for people to basically kind of get a free

trial with Nintendo's IP, and then potentially you can upsell them to the Switch over time. So like I said, I don't think either of these are going to be huge contributors, but it's just ways to once again, kind of diversify the brand. There's other things they're doing as well. I know they're doing an in-person event in Seattle, which I think I'm probably going to end up going too yeah it's a little boots on the ground for us it'll be fun yeah and i think it's what is it basically just a nintendo everyone shows up you can have there's gaming tournaments and i may think yeah if we have more time i might go we i think i might predict that this one that's when they're gonna launch the new switch but we'll see um seems like perfect timing but i think yeah

yeah big game announcements and obviously they live stream it around the world which yeah they have a competitive advantage because so many people watch their live streams and it's free marketing. But yeah, anything else, Ryan? No, I think we should get to maybe the most important part. How are we valuing stock? Yes. So before going into our simple valuation framework for Nintendo, I would say any listener should take note that its financial guidance is in Japanese yen. And then for us, where we care about US dollar earnings, it's a bit tougher to forecast if the yen is depreciating or appreciating rapidly versus the US dollar, which has happened over the past few years. I would also note that we're excluding the stake of the Pokemon company

for this valuation work. Some people estimate it to be worth about $10 billion, but it is unclear if that will ever be monetized. And the value already shows up from Nintendo's exclusive releases of Pokemon games on its hardware. So that's going to show up in the income statement. Regardless, let's go through the simple valuation work and give some context. As of this recording, Nintendo has a market cap of $49 billion USD. It has around $13 billion in cash and no debt. So if we subtract that out, enterprise value comes down to $36 billion. If we subtract out some of their small minority investments, which we value their Niantic stake, which is the Pokemon Go developer that's worth probably in between $5 and $10 billion, we value their stake at about

$1 billion there, which they have a big stake in partnership with them. They have a small stake in Seattle Mariners baseball team, which shout out, they saved the Seattle Mariners. So I'll always have a soft spot for Nintendo. And they have some stakes in gaming studios. I can't ever pronounce the name, Bandai Namco and D-E-N-A, so I think D-N-A. Regardless, we get their enterprise value down to about $34.5 billion. That's the most important thing. Well, from market cap, $49 billion, very conservative balance sheet with some investments, we get that enterprise value down to $34.5 billion. If we look at this year's guidance, they're guiding for $3.6 billion in operating profit and one that will rise if the yen and euro stop depreciating.

Nintendo was already trading at around a 10% earnings yield. So the first question we ask is, because 10% earnings yield kind of means, all right, we'll make 10% plus returns if this sticks around for the long term. So the first question we ask is, do we think Nintendo's earnings are durable? Now, given what Ryan discussed in the Switch hardware section, we think Nintendo's earnings are much more durable than the market is thinking here. This gives us a margin of safety on the stock at its current enterprise value. And as long as the earnings don't fall or right around the $3 to $4 billion range, if not higher, depending on foreign exchange, we think it'll be very hard to lose money owning Nintendo over the next few years if they continue to pump out

$3 billion plus, $3.5 billion plus in earnings every year. And it is likely that the stock re-rates to an earnings multiple of at least 15 times. We don't need that to happen, but we think it probably will if they show that the earnings are durable, although they keep showing that the earnings are durable and the stock never re-rates. So maybe it'll just become a capital return story. If it re-raised to about 15 times, that would be a 50% bump from here. Now, moving on to the next section, of course, there's a lot more to Nintendo

than just the status quo, as we've talked about throughout this episode. If they continue to move to digital sales, if they have more of the add-on content that they've embraced over the last few years, and they grow the NSO subscription revenue, I think earnings from gaming could rise to... Oh, I said rise by around $5 billion a year.

I meant rise to $5 billion a year. I don't think they're going to get a $5 billion bump from that. So that'd be nice. And I think the stock would trade a little bit higher if that is a durable earning stream. But if they hit on the visual content, theme parks, and the other IP expansion, we think Nintendo can add probably $2.5 billion in annual profits through direct sales and the indirect uplift to its gaming business, which would bring its annual earnings to $7.5 billion. dollars. Don't need to run the math here to show that the stock would be much higher

at 10 times earnings, let alone 15 times earnings under this scenario. Before I kind of go into the long-term view we have with a business like Detendo, Ryan, anything to add for that valuation work? No, I think the important thing here is it's pretty simple. It trades at 10 times earnings, and we think it's going to grow. We think that the gaming revenue is durable and will grow, And there's all these sort of call options. And if I would have said, oh, there's these call options with digital media next year or like movies last year, people would have said, oh, who cares? Now that the Mario movie has been an absolute hit, I think you have to give some – I think you have to bake that into your valuation. That's a 30% plus – like potentially a 30% plus jump to earnings if the estimates are right for a billion dollars plus.

Yeah. Yeah. But Ryan, what are hardware sales going to be next quarter? We don't know. We don't know. It's so uncertain. They don't share stuff like that. This is the thing. You got to be comfortable with them not sharing things with you and being secretive. That's just how it's going to go. It makes you a little nervous, right? But it's just how things are going to go. Yeah. I mean, there's, I could picture we're 15 years into the switch console cycle. We're on the switch five and people are saying, just wait until the cycle turns. Cycle's going to turn baby. Yeah. Okay. Go ahead. I mean, it's always going to get – people could be right that we're not kind of – that it isn't this entire structural shift in the business model. Maybe they are right, but I think, A, they are returning capital to shareholders, which maybe we'll talk about in a second. But also, there's the upside here where – that's what gives it the upside is the fact that people don't believe that the earnings here are durable. So not only are you getting potentially, I think, some margin of safety, but there's

tons of upside if we're right about the business long-term. And one more thing before we go to the management section, because we're running out of time, I want to highlight this quickly, just that slide from their earnings or from their investor presentation that they do once a year. And it shows how they think long-term about their company. So here's just an example. It's kind of weird. I think it's because of the translation from Japanese to English,

but it says the title is IP nurtured by users over many years. She played super Mario bros when she was six. Now she's 42 and teaming up with her kids on Splatoon three. And then they get multiple other examples to basically show they want to be a family friendly. They want to span generations. And I think call me crazy. That reminds me a lot of a little company called Disney,

but let's move to management. about management. What do we think of management? What do we think they're becoming more shareholder friendly? And what do we think of Nintendo's culture? Ryan, any to add here? I know I wrote down a lot of stuff, but why don't you hit some of the stuff you think is important? I don't want to steal everything. Well, I mean, it's a very customer-friendly business. They care a lot about preserving the culture and making sure that Nintendo's around for a long time and managing their reputation with customers. I like the management team. I think they're obviously very creative. They're very customer-friendly. The longevity of executives' time at the company

is proof that they really do care about the business. It's not just like some mercenary CEO that steps in and tries to weasel out some money while he can. These are people that are really tied to the company and it's a huge part of their personality and character, most likely. Difficulty here, I think they can be better communicators with shareholders. They aren't. If they believe that this is a completely different business, that it's no longer cyclical and they think they're going to earn the current earnings for a long time or more, they haven't said that. They've never gone out and just been like, yeah, we think it's entirely different. They've alluded to it and maybe it's kind of the translation, but

they just aren't super clear communicators like you get with a US-based management team. So there's the frustration, but they've also returned a lot of capital to shareholders. And so I think that to me gives evidence that they're becoming increasingly shareholder friendly. And they're also doing a lot of the investor presentations and stuff. They've got the conference call transcripts. So they're putting some effort out there. I don't know if they've been doing that for a long time, but they're putting some effort out there to be a little more shareholder centric. They had a stock split. I don't know if that makes them more shareholder friendly. Yeah, I think that was something. There's a dynamic there with the Japanese market. But yeah, they did do a stock split. So I guess a little cheaper for those individual investors out there. Here's what I would say, though. I love how they manage their brand, especially when you position that versus other entertainment companies. We'll use Disney as an example a lot, but there's a lot of other ones out there. they have big patience in between product releases, and they are resistant to juicing their intellectual property. Some people would say that's not shareholder-friendly, but I would take the longer-term view and say it's very shareholder-friendly if you think about this investment over a decade-plus period, because it assures investors that Nintendo will keep its

brand relevant in the eyes of consumers, and they won't anger them. I mean, think of Marvel, think of Star Wars, think of everything with price hikes, think of Disney at their theme parks, or just a flood of content that is low quality. Now, you also hear a lot of complaints about the lack of returning capital to shareholders and the conservative balance sheet. Yeah, they have over $10 billion in cash in the balance sheet and no debt. It's probably suboptimal. But on the flip side, it makes them very anti-fragile if the global economy goes into a tailspin or they have a few rough years. I think that is, maybe they could be a bit more aggressive, but they also do return cash to shareholders. Just to give a reference, since 2014, they paid

out between $5 billion and $6 billion in dividends, depending how you use the exchange rate and repurchase $1.8 billion in shares. Dividends also increase in proportion with income generation. So if Nintendo is able to grow or maintain its current earnings, its annual dividend will be strong as well. Anything else before we wrap things up with risks? No. I wouldn't expect a huge change in the culture. They're never going to pay out 70% or 80% of their earnings. They're going to be more conservative and probably still continue to hold that cash. Maybe a little less conservative than they were 20 years ago, but still that's part of what you're buying. I think that's part of why you get the discount. Yep. All right. Last topic, and we should maybe make

this somewhat quick. What are the risks? How would we know to sell our stake? Yeah. So there's one that's obvious. It's the glaring flashing sign that every investor thinks about and sees. And I think there's one that's more of a long-term one for me, but everyone's worried. I'm worried about the next hardware device being a flop. I'm confident that the chances that they succeed are much higher because of all the things we addressed during this episode and because of the change in philosophy from the management team and all the things they've talked about with the Switch, Switch Online, Nintendo account, backwards compatibility, add-on content, new iterative models, and not trying to get crazy with it. But I still think there is always a small

chance, especially with Nintendo, that they will get very weird with this new hardware and try to sell another funky device to consumers. If they don't sell enough hardware devices, the high incremental margins on game sales won't flow through to the bottom line and earnings will sputter for multiple years because to develop a new, you know, the next one after that, the next hardware device, it takes multiple years to develop. So you're going to be stuck for a while. Second one, though, is I'm worried about what happens to the company when Miyamoto, who was again the walt disney of nintendo if he retires or passes on he is he is 70 years old so he's you know nearing the end of his run here um you know that leadership transition is going to be

important once he and i think it presents some uncertainty uh speaking of that though in the newsletter i will link to a new yorker interview he did where he told he was very confident about the transition uh more confident than he was in the 2010 to 2015 period so i think that's a highlight but again he knows that he's been the creative engine here and once he leaves he needs to set up the company to succeed with these brands into the future but he's probably done a pretty darn good job with how successful and how popular the the characters are yeah i think i think mario and Zelda, those franchises hold, whether he's around or not, it's

a matter of who's developing the next, kind of, the new IP. I mean, those brands are going to withstand the test of the time, whether Miyamoto's here or not, which is credit to his work. You know, I mean, if they released a new Mario Kart and

it wasn't Miyamoto behind it, you don't think people would still buy it? Well, I guess maybe Star Wars will show us. You can release, you can have commercially successful bad products for 10 years and maybe people will still buy it, but are people still going to be buying Star Wars stuff 10 years from now? I'd say probably, but who knows if they keep releasing bad stuff, eventually people stop buying. Yeah. Biggest risk for me is just that we're wrong, that

it is still a cyclical business and that they try to release a new piece of hardware that just doesn't work and that maybe people engagement is lower than we think. All the signs I'm seeing don't point to that, but it's still a risk that's out there. It's probably the number one thing that we're watching. If we saw unit sales really drop in a quarter where they shouldn't have, that tells us that the sell-in or the sell-through to the customers is low and that the people that have been around for a while just aren't using it as much. Because the annual playing users, it's helpful, but it's not totally indicative of engagement. Yeah. And maybe one quarter, I don't know, but they, they don't really care.

They could, they, they aren't given their culture. They honestly would sacrifice a year. They wouldn't care given their balance sheet of declining unit sales. So I don't know if that's, I mean, if it's during a year where they have Zelda and they have a new Mario card or something, it's just not getting the sales. It should be. That's that's our tell. yeah uh i mean new hardware sales i don't know if it's down as long as earnings are fine i wouldn't

necessarily say it's a big deal especially with aging hardware before the new one comes in because their worst sales are going to be right before they launch but no one knows but no one knows when it's coming yeah you said that shouldn't affect it as much it's not like people are holding off for the next console people don't know whether there'll be one yeah well yeah some people i guess it might affect them but the like i'm talking about that where you're are you talking hardware sales or software sales buffer sales oh okay i was confused i thought you meant hardware sales yeah yeah i'm just getting i'm in agreement yeah the game that the games are not yeah yeah of course i agree with you there all right that's gonna do it remember uh i would say we have high

conviction on the stock right now, but do not listen to us. Do your own research. We try to talk about the risk here. There is big risk here with Nintendo. The stock could be down 50% or something within a year or two. And I would definitely read our disclosures, read all the stuff on the Arch Capital website. But if you're more interested, check out the newsletter and check out the website. The link will be in the show notes. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you all for listening or watching. You can do so on Spotify, Apple, YouTube, or wherever you get your podcasts.

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