Good Investing Talks - Is Nintendo stock poised for winning in the 2020s, Ryan O'Connor and Todd Wenning?

Episode Date: March 30, 2022

They are back! Ryan O'Connor and Todd Wenning have joined us to give an update on Nintendo stock and the future of the company.

This episode of Good Investing Talks is supported by Interactive Brokers. If you're ever looking for a broker, Interactive Brokers is the place to go. I personally use their service because I think they have a great selection of stocks and markets you can access. They have super fair prices and a great tracking system to track your performance. If you want to try out the offer of Interactive Brokers and support my channel, please click on the link below. There you will be directed to Interactive Brokers and can get an idea what they offer for you. I really like their tool

and it's a high recommendation by me. And now, enjoy the video. Hello, subscribers of good investing talks and listeners. It's great to have you back. Today, we are discussing Nintendo again and I have my two superstars of Nintendo here.

Ryan and Todd, it's great to have you here and back on. How you're doing this crazy times? Good, good, gentlemen. It's great to be back on, you know, wish it was better circumstances globally, but, you know, might as well talk Nintendo. It's, you know, put smiles on people's faces. You already have some, yeah. It's great to be here.

Thanks. And I echo Ryan's sentiments that, you know, this is something that is actually fun to talk about. So happy to do it. And Ryan already showed some of his papers he's preparing. I think you're preparing a big report on Nintendo that will soon come. Yes, yes. It is currently being formatted. And with the charts and everything, it's been a little bit of a process.

But, you know, hopefully we will release it when, you know, in conjunction with the video. So it depends on how long you take to turn it around. But hopefully it will come out right after we're done. We will link it for sure here in the show notes. people can find the report and also can read about it and there will be also a transcript on the website but without further ado let's dive in a bit and we already had like a few days ago the 50 years anniversary of the nintendo switch so if we all go back in time and think about the situation nintendo was in in 2017 how would you reconstruct the situation of the company

and also with in mind what they have achieved since 2017. But maybe let's go in the face before Switch. What kind of business was Nintendo then? Sure. Do you want to go first, Todd? Do you want me to feel it? My comments won't be as thorough as Ryan's perhaps. But I think they, Nintendo at that point was trying to search for the next console, right?

They, we was a huge success, 3DS. DS were huge successes, but they were still trying to kind of figure out where they belonged in the console space. You know, PlayStation and Xbox kind of took off in another direction. And we can talk about that later. It's one thing I wanted to touch on was just that they're really not competitors anymore when they're wishing each other luck when the consoles come out. Like that's not what competitors do.

And so they had to find their own way. And I think Switch was just the perfect mix of their handhold expertise and their console expertise. And it just has been extremely successful, obviously, with everything that's come. It has some great software that launched with it. And it's just been, you know, we all know the story since. But that was kind of the setup that I took. And we, you wasn't a huge, didn't really take off because I think it lacked that console strength that the switch has.

And that's where I'll leave it. And I'm sure Ryan has more to say on that. Yeah. You know, I think you were. were coming off a long period where Nintendo had kind of been, kind of a, you know, they were bootstrapping each successive console generation. And with each, you know, successive generation, you know, the size of the installed base at maturity, you know, the exception would be the we, was getting smaller and smaller. And so, um, the size of the installed base at maturity, you know, the exception would be the we,

was getting smaller and smaller. And so that combined with the kind of inherent cyclicality of the console cycle had kind of branded the business as a hit-driven cyclical, which, you know, historically it was. And that, along with the kind of disastrous release of the Wii U, which I think sold, you know, what was the 13.4 million units, kind of kickstarted an era of soul searching and reinvention at Nintendo. And I think they have, you know, kind of reinvented themselves and are still in the process of doing so in a lot of ways. But probably the largest change from, you know, call it the 2017 and, you know, from pre-2017 was, you know, from pre-2017 was,

They kind of adopted, you know, I'm sure we'll get into this. We talked about this a lot last time, but what I like to call the Apple model, which is, you know, a iterative approach to hardware, where they basically continuously release, you know, both incremental and major upgrades. And, you know, the, you know, not only basically the era of cyclical console changeovers is over. And so I think, you know, fundamentally as Nintendo started to transform its, you know, the intrinsic nature of its business with the Switch, you know, you kind of have to, I don't know if there's BCAD, you know, type of thing here. But I think that when you think about Nintendo and its past and its future, you know, the game changed for lack of a better term. And that's what has kind of set and forth in motion where we are today. I think it is a fascinating business and probably the most underappreciated and, you know, widely misunderstood of, you know, all of the great kind of ubiquitous global family-friendly brands out there.

So it's a very interesting setup. then let's try a short exercise and maybe like try to find from both of you free short points what Nintendo has achieved since 2017 since the launch of the switch like your free or free highlights that come to your mind gosh yeah I think the biggest thing to me the most important thing to our thesis at ensemble capital is that digital transformation, you know, the ability to connect directly with consumers for the first time. I mean, they have 250 million plus Nintendo accounts now. And I forget the number on Switch, maybe 90 million. And it's just amazing the connection that they have with customers.

And that's always been the challenge with Nintendo from a stock investment standpoint is the cyclicality. When they launch new consoles, they have to re-win all their customers. And they have no idea how long player A is playing this game and player B is playing that game. Now they know. Now they can create a more sticky relationship with

those customers and it's getting to become more of a recurring revenue type of purchase than ever before. And so it really slows down, it doesn't eliminate the cycle, the cyclical nature of the console. But it does smooth them out quite a bit.

So that to me is the biggest metric, the biggest change, the biggest thing that they've done since they launched the switch that really gives us confidence that this is not your typical investment cycle. I already have a chart prepared for this. You can see it here. It's the what Nintendo knows about the customers, how many people play it, how many active

players they have on the console, maybe without losing the train of fault on the free points that Nintendo has achieved, is this one of your most important metrics you track to track the success of the Switch, this active players, this annual playing, annual playing users that you find it like this? For sure. I mean, I think that's the key. What Nintendo doesn't want, the worst thing it can happen is that the switch gets put in a drawer and left to gather dust for months, maybe a year plus, and then people play it once

in a while, maybe they forget about it. Those people aren't going to be primed to spend money on software until there's a game that they absolutely want to play, and maybe they'll buy it then. And then Nintendo really wants people to subscribe to Switch Online, the expansion pack, which we'll talk about, I'm sure. That's what Nintendo wants is more points, more transaction points. They want you to come in and buy things on a more regular basis. And again, that comes back to smoothing the cycle. So that's all very key to us. Yeah. I mean, not to completely reiterate exactly what Todd just said, but there are two things that I think are kind of interconnected. And, you know, I think, you know, on the hardware side, going to an iterative model where, you know,

basically the OS and the hardware evolve and get incrementally better over time in combination with, you know, the digital transformation of the business. So, you know, between those two things, you create, you know, the hard breaks and the, you know, the few years of declining revenue and operating profits, you know, typically there'd be one or two years of losses or something equivalent to that, I think is, you know, gone. And I think one of the things that makes Nintendo so interesting right now, I mean, when you look at the macro, not only is it, I think, a good and an improving business. I mean, I should say a great business that's getting better.

But at the end of the day, you have internal dynamics that, you know, should basically somewhat guarantee that both revenue and margins continue to increase, regardless of whether or not money remains cheap or, you know, inflation, you know, remains high. And that is a, you know, very unique thing. You know, this isn't a business that's trading at, you know, 20 times, you know, sales. In fact, you know, if, if I, you know, I'm right about the thesis, you know, earnings should continue to go, revenue should continue to go pretty much irrespective of the macro. And I know that's saying a lot right now, but I think that's unique.

And, you know, there's just, I think there's a limit in terms of the multiple compression that, you know, we can likely experience, especially given the contextual backdrop of the space, M&A and the space, what's going on in Japan, you know, between growth. in revenue and margins, you know, expanding operating margins and just the rock solid increasingly high quality nature of the business, I don't see how you realistically permanently lose money here over three, over the next three to five years. And, you know, the multiple is so compressed. I don't see how, you know, even if things get dicey market-wise, the stock goes much lower, at least for long. So in a increasingly uncertain world, I think it is a very unique, very safe,

kind of the kind of the perfect idea to size up in scary markets and, you know, in a way where you can sleep at night. It's an interesting observation I also made the last days. Twintit was quite silent and I'm also like a bit of serving on Nintendo Twitter. And Nintendo Twitter was also with this rumor about the switch pro the fifth anniversary super loud and super active and twitter even like fed me content from the nintendo feed in which is quite quite interesting to see uh how this this community is active how they've gathered the community of players that are really eager to play nintendo and really love their products um which is quite fascinating to see and it's also what it's also what kind of customers does nintendo own or to with it

which kind of customers has Nintendo relation and how sensitive they are to inflation in your eyes? You know, so there's a nuanced answer here. I mean, to say that Nintendo is not, for example, susceptible to decreases in consumer spending is a stretch. At the same time, you know, later on, we'll probably get into, I think, maybe the two to three variables that need to happen for, I think, Nintendo to be a home run.

And, you know, in each of these cases, I think, you know, you have a very high probability slam dunk in terms of the dynamics that are propelling kind of the self-reinforcing feedback loop. You know, I think that's a really interesting question in of itself. But here, let's say. stop and kind of revert this. What was the question again? What kind of what I was? Customers, Nintendo does own in your eyes and how they are positioned in this

shaky kind of times we are in. So, you know, as it relates to the customer, I think that, you know, you need to distinguish one of these key variables that I think will determine what, you know, the ultimate outcome is with Nintendo is. Nintendo Switch Online. And if you look at, you know, the history of, you know, similar online services, whether you're looking at their console peers, you find that, you know, this is a product with inelastic demand and considerable pricing power that, I mean, you know, if you look at PlayStation's, you know, historical attach rate over time, it is remarkably resilient and defensive.

And, you know, basically as the business transforms, I think the core earnings engines of the business are becoming increasingly stable, increasingly resilient. And, you know, as software, you know, continues to become, you know, increasingly a larger and larger percentage of the business, I think the one of the primary drivers of Nintendo's earnings power won't be, it'll be basically an SO. And NSO like PlayStation Plus and Microsoft's equivalents have exhibited, I think, remarkable resiliency and, you know, should drive the business forward regardless of whether or not consumers are buying, you know, less games at the margin. Because I think they'll continue to play online. In fact, they might play online more just because, you know, maybe they have less of money at home and they're looking for, you know, the cheap forms of entertainment. So, you know, there's not a much better price-to-fund ratio relative to other forms of entertainment media than I think what Nintendo offers. So I think that, you know, provides us kind of another layer of protection that is unique.

You know, you mentioned earlier the, what audience Nintendo owns. and I recall our previous conversation where you asked for an emoji to represent who Nintendo's core customer was and I had a family emoji and Ryan had a whole bunch of different emojis and I think after Nintendo released that map of who is playing age-wise,

it was pretty clear that Ryan was right the whole time and I was not. I had expected Nintendo's players to be primarily between 7 and 12 and call it 30 to 40. But man, there's a ton of players in sort of the core gamer age group of like 18 to 24. And what's interesting is that time, it declines over time. And then it kind of drops off after 45. But what's interesting is, you know, perhaps it's because I'm 40 and I was, I've always

growing up with Nintendo, you know, that's kind of where the age group starts where we see it as a core part of entertainment. It's a Nintendo generation. It's a Nintendo generation. So as our generation gets older, we'll increasingly use it as well. So that the current distribution that they have on that map will continue to move to the right.

And I think that's incredibly exciting because you're not going to have this age group where people just aren't playing video games at all or they aren't playing Nintendo. They have no emotional connection to the Nintendo IP. But as we get older, our kids get older, we continue to pass it down generation to generation, just increases the generational interest in Nintendo. I think that's such a core part of the IP.

And I think it's not to take this off in a different tangent, but I think that's what you're seeing with some of the deals happening for like Activision, for example. There are core video game brands that you just can't replicate. You can't replicate Call of Do. right? You can't replicate these different, like so you can't replicate Mario. It's talking 30, 40 years of, of enjoyment connected to that brand. And I think that's what you're seeing. That's why people are going out trying to buy some of this, this core IP because it's just so expensive to manufacture it from scratch. And the payoff probabilities are very

low because some games will be a hit, but most games will not, and you're just burning money if you get it wrong. So it's better to have a sure thing. And that's, it's what you're you're seeing entertainment across the board. I mean, the Marvel universe. That's what they're doing. There's going back again, again and again to the well. And people want more because they want to be immersed in that, in that relationship. And so people, we're talking about inflation or whatever it might be, pricing power, Nintendo can continue to take advantage of that if they want to. You know, I think in the console space, there's some limitations to how quickly they can raise prices because it's sort of like in people's heads anchored that you know 5999 is the price

for a for a for a triple a game and it's been that way since we were right it's great you know it's crazy like like what price what pricing I mean we there's no doubt latent pricing power there but I mean if any industry deserves to raise prices I mean maybe we don't go with the the what is it quadruplea now was the I forget which third party dev our publisher you know wanted just start calling quadruble a to raise the price, you know, $10, $15. But I do think that that will likely happen in time, you know, given the increasing cost of games and everything Todd's talking about. But, you know, I think he hits on a really interesting point that I feel like it doesn't get the, you know, the light that it deserves.

But, you know, we're part of the Nintendo generation. And, you know, for the most part, the generations above us, you know, looked at video games as, you know, entirely a kid's thing. And so as that generation, as we get older, I call it, you know, the passing of the baton as the Nintendo generation passes the baton to the next generation. You know, basically one, the older generations that don't play video games are, you know, dropping off and, you know, our kids, you know, are picking it up. So you should see, you know, a compound, you know, basically the number of total players that play video games in the world is, you know, compounding at a very nice clip. And for whatever reason, I don't feel like that's ever much of the discussion. I mean, we'll probably talk about saturation points and things like that later on. But at the end of the day, you know, I think the growth in the video games.

space is just beginning, and that is a very, very unique and interesting thing. I mean, the industry keeps getting better, more resilient, more stable. Nintendo itself is following that same path. When we first talked, they were kind of first, second inning. Now they're kind of midway through, but, you know, they still have quite a bit of catching up to do. And so as you get the, you know, the digital transformation, as that works itself through, and, you know, the industry continues to improve, that creates, I think, a really outstanding, you know, backdrop for thinking about, you know, how this opportunity kind of plays out over the next five or ten years. It's very, very special.

And the other thing I'll just, I'll just add is, you know, right now when we're in our 40s, early 40s, late 30s, there's not a lot of time. Like, we don't have a lot of time. We don't have a lot of time to play. I mean, at least I don't, I wouldn't consider myself a gamer. I like games, but I'm not a core gamer. And so switching or search costs matter, right? Increasingly as you get older, I don't have time to try a bunch of different new games. Like, I want to go play a game that I know there will be a threshold of enjoyment.

So whenever a new Mario game comes out, I know exactly that I have this much fun at least playing this game. But I'm not going to go spend $60-70 on games where I'm, I may or may not enjoy it. I may not have any connection to it. I have a steep learning curve to get good at it. It's too much. And I think what you'll see with that chart you held up just before, Tomlin, with the age group, is that engagement will actually increase as our generation

begins to get more time as we get into early retirement, whatever it is. We have more spare time and we look for more forms of entertainment. it will turn to games that we grew up with and enjoyed. So I think the durability of the Nintendo IPs, there's nothing I'm concerned about there. Totally. Yeah. You know, only thing I might think about adding is,

and I think Todd hit the nail on the head when he was talking about Marvel. One of the things that, you know, there are a lot of things that I think makes Nintendo's, you know, cash flow, I think, extraordinarily stable in a way that isn't properly understood. You know, NSO being a big part, but, you know, this is, you know, becoming more and more of the case with time. And I think part of it has to do with Evergreen IP, you know, with Marvel, Disney acquired a company that had, you know, basically boundless source material where you had kind of built in affinity across generations and cross culturally. I mean, it wasn't, I don't think, as universally beloved as something like Nintendo, but I think the idea of, you know, Todd saying, you know, I don't want to go learn a new game.

I mean, I originally bought the Switch solely to play Zelda. You know, I didn't play video games for probably almost 20 years, but I had beaten all of the Zelda's in the past. And, you know, that was the game that kind of started it all for me. And I went out and purchased the switch solely for that purpose. And, you know, let's just say, it's kind of a stretch to call video games high art. But if there is high art that are video games, this is about as close to it as it gets. So that kind of, I don't know, it brought me back to when I was 10 in a way that was incredibly fun. I know

Todd, as small kids, hopefully I will soon, but this is very much something that not only I think are, is the Nintendo generation should they want to be reintroduced to Nintendo games and go back to them is very much primed

to pass the things on that they know. I mean, you know, in many ways, video games is like, I don't know, cars to our parents' generation and, you know, the free freedom of the open road. There are a lot of parallels, but I think one of the things that makes our generation unique is we were the first to kind of fall in love with video games and passing that on is not a fad. I mean, I think even Munger said something like that or confirmed that at the Dow Jones meeting, which hearing him say video games are here to stay was, I guess not surprising.

I think it's obvious. Well, the one analogy I like to use is just a sports franchise, whether it's like an American football team or Manchester United or whatever it might be. It's a way to connect generations, right? Like my son and I will always be able to share Mario. You know, he had a Mario birthday party, you know? And by the way, I'm not pushing this on him. Like this is not something where I'm like, you have to play Mario.

He's doing it on his own. And then we're saying, hey, you know, we start connecting that way. And so it'll continue, you know, and that's what Nintendo has to make sure it does is continues to delight generation of generation the way that a football team or something like that might do. And that way continues to build that brand and that generational connection, which is a hard thing to do. You know, like, you know, it's hard for grandparents and grandchildren to connect on lots

of things because of their age and their experiences, but they can always go back and talk about with the Cincinnati Reds or whatever sports team you're talking about because they have that shared experience. And those are rare things. So I think it's such a key part of not just intergenerational communications, but global communications, just things that people can relate to and share without having any sort of a background that's similar. We can always talk about Mario or Zelda or whatever it might be. Well, this is actually, I think, another thing that I think is in terms of we want to break the buckets,

you know, Nintendo and the buckets, things that I think are kind of dramatically underappreciated despite consistent execution and, you know, where things are kind of

basically staring you in the face. I think people are dramatically underestimating, you know, Nintendo's progress in terms of better monetizing its underlying IP and particularly in visual content. I mean,

as far as the, entertainment flywheel, I can't think of a more powerful feedback loop, frankly, than these big blockbuster, you know, partnerships with illumination to bridge along those kind of shared experiences that you have. But, you know, it's just another way to introduce, you know, your kids and to get the, you know, get Mario out there. You know, one of the biggest risks. And, you know, I think they're doing an outstanding job is, you know, not connecting with the next generation. You know, I don't think that's reasonably likely whatsoever, but, you know, the impact of movies, too, I think, is going to be quite a bit, you know, the market is clearly discounting nothing in there. I think, you know, they could, I don't know if you guys, I should have actually, like, printed this out, but if you go into, I think it was,

the annual last year was the proxy filing. But in it, they were Chris Melladondry, the CEO of Illumination, which, you know, I should say up front, I've never seen a more majestic, reoccurring box office money machine than illumination. I mean, have you guys looked at their historical finding? I mean, it's bonkers. I mean, the H-movie's cost is between like $67 million and $76 million. And I think their average box office return is something like $640 million. So if marketing and production are one-to-one, I mean, everything they've ever done on average has done $5X.

So as Nintendo being their partner, at least in the animation space, I just know it's a thing to behold. It's beautiful, you know, in terms of the economics of these movies. But, you know, if the average illumination movie does, you know, $640 million, what do you think, you know, Mario's going to do with Chris Pratt and all of that stuff? So, you know, people, you know, kind of, they get focused on one thing with Nintendo and they don't follow along or really pay attention to the evolution and the ultimate impact here. And this is what I was getting to in the proxy when they talk about appointing Melodonti to the board. There's a little footnote in there that basically says, gives you an idea of what at least the front end in terms of box office is going to be.

And I think it's 2% of 2020's full year revenue. So that's 280 million up front. So, you know, if you use that as a general proxy for what Nintendo will earn, you know, on the front end, and then, you know, as they build up a library, they will retain the full global distribution rights to all their IP, all these movies, visual content, TV. So that will build, too, into, you know, kind of a dual, double-engined, reoccurring revenue center. And, you know, I see no reason why they are. I mean, I think, you know, with the announcement of the investment that they made, I think it's 440 million USD.

last November, they don't break down specifically what's going to be spent, you know, where and how. But, you know, when you look at the production cost of an illumination movie, you know, they don't, we don't know the split, you know, we do know that Nintendo has taken production risk here. This isn't simply a royalty off the top of sales. So, but, you know, it's clear, no matter, you know, you could run the math a bunch of different ways, but, you know, basically between what they've already expensed, with Super Mario and what they have dedicated to investing in visual content in the future, you know, you're looking at four or five movies. And so what that tells me, and I don't want to over embellish it, but, you know, they clearly have an NCU or excuse me, MCU-like vision here, where that, you know,

with the amount of money they're pouring into it, I see no reason why they can't get to at least one movie per year, say within the next five years. So not only are you going to have these big franchises, you know, constantly releasing and, you know, becoming a part of the cultural conversation, but, you know, the market is basically discounting, you know, these earnings engines to zero. And I think they can start doing somewhere, you know, within, say, my forecast rate over the next three to five years, I see no reason why they can't do something in the odds of half a billion to a billion plus. just from movies, you know, and TV. So I don't know. I think I might have gone off on a little side point there. But, you know, it relates to the larger question of shared values and, you know,

making sure that Mario doesn't go the way of, say, Mickey Mouse. Not to speak bad of Mickey, but, you know, he is less relevant now than he was, you know, 40, 50 years ago. they also have a lot of like i saved them for you they also have a lot of marketing power and like they could partner with other brands to do marketing with the harrybo special editions with super mario which might be also something to put the brand in place before the movie comes and get connections to customers you're you're in omaha or both kansas city can't see about three hours no we have no we have to know at the oh yeah yeah yeah then we have a plan I saved them for them.

Wonderful. Wonderful. I'd rather, I need Harbo over peanut bread all any day of the week. So they have this marketing capability that's quite strong and other brands are willing to partner with them. Even like pay Nintendo to get a Nintendo brand in front of people. Yeah, I mean, it's nuts. I mean, you hit on the other part. You know, you kind of break into, you know, what I was saying.

about movies and, you know, TV, visual content, you know, similar deal with theme parks. We just talked about, you know, merchandise licensing and, you know, they're doing it in the way that Nintendo does everything, which is painfully slow, steady, methodical. But, you know, inch by inch, it's getting bigger and stronger. And, you know, people act like, you know, there's a few articles that have talked about, you know,

You know, Nintendo wanting to be the next Disney. I don't think Nintendo wants to be the next Disney at all. I think Nintendo is taking pieces of their playbook to improve their competitive position and grow their business. But, you know, I don't see Nintendo building a huge, massive merchandise licensing infrastructure like, say, Disney does or has, you know, to run that giant machine. But I think what, maybe you guys could correct me, but I think the last reported number I saw was, he did something like $56 billion in merchandise licensing? Nintendo is never going to have the infrastructure, you know, it's never going to get close to that. But can, you know, merchandise licensing get to, you know, say one to $5 billion a year at maturity?

I think I don't think that's a stretch. I don't think that's aggressive in time. It might happen more slowly than you'd expect. but I think it is definitely, I think there's real potential there. And the same goes with theme parks. This is another element of the business that's getting discounted to zero. And yet I think we have, you know, extremely high visibility into, you know, there's going to be four parks open, you know, say by the end of 2007.

And, you know, we already have a second park opening in Super Nintendo World in Japan. the Donkey Kong exhibit, and they've announced that they're planning new areas within the other three parks as well. So, you know, I, you know, again, we don't have the specifics of, you know, the Comcast contract, but I've, you know, been able to go back and look at, you know, the royalty rate on theme park ticket sales for Harry Potter at the beginning. and you know there's a couple other ways you can triangulate it but between those four parks if you're trying to figure out the economics you know somewhere between call it if each park has two lands eight nine percent in terms of a royalty on ticket sales given the power of the IP to drive attendance and i think there's 40 million 39 40 million on average that you know people that attend each of those parks every year so um it's

quite easy between those four parks to get to three, four hundred million in recurring revenue. And, you know, it's not talked about a lot, but, you know, there's also universal base which I think has 20 million visitors a year. And, you know, that would be a great way to use Pokemon because I think Pokemon's bigger in China. But eventually, you know, if you just assume those, you know, five parks are it, you know, we have a very clear line of sight to another half a billion dollar, basically pure margin royalty stream. That's worth a very high multiple, certainly more than 20 times that is completely ignored,

but also, I think, critical to, you know, reinforcing these shared cultural, you know, weaponized nostalgia, for lack of a better term. And it's, you know, finally starting to, you know, reveal itself of the financials or it will, you know, all of these things, I think, will become more meaningful in a material way within, you know, call it the next two years. And, you know, none of that is getting any credit, which is interesting. It's also quite interesting. If you look at the Lego annual report, they all. also said something on the Mario sets they sold and it was one of the fastest selling sets they ever released. So it's also an indication about the power of the brand and the merchandise they have. That's good. They're just very, very careful. I think I read,

maybe you guys have read this too or maybe it's just a recollection that I'm getting confused with. But I think I read something with the Lego set. that they spent five months going back and forth, arguing over Mario's hair, which, you know, is dedication to protecting your IP, to say the least. But again, they're slow, but, you know, I think they're making the right choices and very methodically building a very powerful, you know, kind of supporting pillars to their core business. Yeah, no, I think that's something that they get critical.

emphasized for, I mean, they are extremely protective of their IP. Like to a ridiculous extent sometimes where, you know, people will, you know, develop things on their own and Nintendo shuts it down and you hear people complaining about it. Like, why didn't you let us do this? We love the IP so much. And Nintendo is just defending it like an artist, right? Artists don't want people taking their stuff and messing with it and putting it back out there and making money. So that's misunderstood about the Nintendo cultures.

They do see this very much as a work of art. And so there is some concern that they push too far. And I think that's one of the reasons that they had trouble maybe expanding into mobile, for example. Like they want to control every day. They want it to be exactly the way they want. Maybe not the graphics, but they want to make the monetization exactly the way they want it to be. And it may not fit with what's popularly accepted. accepted as a way to monetize mobile.

Like, for example, they don't want, they don't want people spending $20,000 on Mario Kart go, right? They want, they want people to pay a flat fee or maybe a small fee and play the game and enjoy it. They don't want to. Todd, Todd's being polite. They don't want to rip kids' eyes out with, you know, Vegas-like casino monetization tactics.

I mean, you know, and this is one of the things that, you know, it's like there's quite a few people on the cell side that, you know, I've, I've, never really understood in principle, I mean, I guess I do at a high level, a Nintendo thesis that's built around the mobile segment. To me, it's kind of always quite obviously been about the console business and, you know, mobile is a free option that, you know, I think, you know, believe it or not, will still kind of land deep in the money with time. But, you know, it's hardly necessary to, you know, to the kind of core investment thesis. But, you know, I just am continuously shocked when, you know,

here we are with the brand that, you know, core IP is basically cartoon characters. And, you know, where you have basically a 40-year history, you know, call it a deep reservoir of trust with families, you know, and, you know, through generations. And the idea, the fact that people don't see the risk in, you know, approaching your customers this way, I mean, you know, it's not that I have an issue with, say, gotcha monetization mechanics. I think when they're marketed the right way, adult, you know, they can be fine and, you know, that's great. But, you know, when it comes to Nintendo and you think in, you know, you have a hundred year business plan. And you are concerned about the permanence of your art. And you also take that, you know, customer relationship with a kind of deadly seriousness.

You know, I don't know why, you know, I can understand why people would want more. What I don't understand is why people don't seem to recognize or grant management's point of view, which is I don't care how much money we're leaving on the table. We're not going to put our, you know, we're not going to put the company in a position. of, you know, headlines where we're, you know, a six-year-old or a 10-year-old or a 14-year-old kid, you know, we're basically using casino-like tactics to pick their pocket. I mean, it's just, it doesn't make sense to me.

And I actually think that not only, it took me a minute to come around. Not only does how they've dealt with mobile, I think, teach us a lot about what long-term really means. But, you know, I think that being patient and waiting for the pitch to come to them is the right move. And, you know, I think, you know, there's various tea leaves here, but, you know, you have the recent announcement with J.B. with Niantech. So, you know, you're going to have multiple games there. You have, you know, Nintendo was basically the business, the company that invented the, you know, exercise video game genre. And, you know, Peloton hasn't been doing too hot lately, but when you think about things like ring fit and, you know, at one of the, I think there's a 14 million installed base there, you know, connected fitness, you know, through connected devices, i.e. peripherals is kind of what Nintendo does. You know, they've done this JV with Niantec, the first of this future partnership was basically, I think, a giveaway game. But, you know, a Pickman Bloom is basically a walking game.

And, you know, there's a really excellent, of all the Metaverse AR mixed reality type of applications out there today. I mean, one is ironic that Nintendo is the only one that actually has a game on store shelves that people love with, you know, Mario Kart Home Circuit. But, you know, it's interesting to me that, you know, they have kind of taken a step back, really reevaluated where they wanted to go with mobile. You know, in the interim between, I think, I'm not sure exactly what we did our first one, but, you know, they've entered, you know, they've started to use mobile gas gaming as a service, live service, as their kind of primary monetization mechanism because, you know, at least with subscriptions, consumers know what they're getting. It's not like a six-year-old, you know, spending money and, you know, getting work, you know, it's coming up tails each time. But I think that of all of the applications, the ones that is the most interesting from a commercially perspective, is AR, you know, Metaverse, mixed reality when it comes to working out, you know, exercise-based gas is what I would call it. And, you know, we will see, but I wouldn't be surprised if all of Nintendo's Niantic partnerships are basically exercise-based connected ecosystem. for lack of a better term.

And that's the way in which they go, where, you know, the nature of the services subscription, you pull the monitor, you know, the gotcha stuff out, you know, primarily. And, you know, I'm sure, you know, with Nintendo's expertise and in hardware, I mean, really no one's done it better from an innovation standpoint. I mean, it's a perfect way to continue to sell peripherals and to, you know, kind of meet their larger mission, getting people out into the world into community

versus Zuckerberg's dystopian vision of us all sitting in rooms plugged into the matrix. So, you know, I think it's a, you know, I think the death of mobile is greatly exaggerated. That's the beautiful thing about when you have IP is powerful as Nintendo does.

And your brand is ubiquitous like theirs is because you have unlimited it back. I mean, that's the other thing. There is no rush, you know, like Nintendo. All they have to do is sit on their thumbs, kind of like investors, and wait for an absolute no-brainer to come across their plate. And, you know, maybe they strike out three times in a row. I mean, Pickman Bloom, I mean, I'm almost certain it wasn't intended to monetize at any

level on purpose. But, you know, how many companies can just, you know, with and with and with, but eventually they're going to connect. And if you can compile, you know, seven to eight of those games over a five to ten year period, that becomes a pretty lucrative, very high margin, very good business. So, you know, I think mobile is probably the least interesting part

of the larger story now, but I don't think it's not interesting. It's also like if you think about the terms customer acquisition costs and lifetime value, it's also like a good customer acquisition cost not to do certain forms of businesses because then are parents willing to pay a premium for Nintendo devices,

not being sure that they don't get spent with advertising that is disgusting, not that the kids just like buy for hundreds of euros stuff they don't want to have on the computer or don't see zombies for the six-year-old that Nintendo has this, offers this quality, and they can really trust them for a lifetime.

The lifetime value is in Greece, right? That's what it's all about. There's a great Nick's sleep quote where they, he talks about, you know, through his experience, you know, the one kind of common trait that, you know, unites the best companies, you know, with the best management teams. He calls it the ability to avoid locker room talk, essentially, to, you know, not care, you know, what the Zetkeist did, you know, just. stay focused on the mission. And, you know, I think the quote ends, you know, we've learned in the long run, that's all that matters. And I think it was in reference to Costco.

But, you know, this is, you know, I think, though, it's ironic, but I think one of the things that I find most attractive about Nintendo is one of the things that I think most people hate, which is their refusal under any circumstances to sacrifice their principles for short-term BS. you know, I think it's a special thing, and I don't think you find companies that are as clear about their mission and as dedicated to maintaining its integrity over the long run and, you know, but also, you know, pushing it forward and doing smart and creative things. Yeah, I think that's, it's a tricky balance for Nintendo because on the one hand, having that long-term 100-year plan makes a lot of sense from like a principal standpoint, but, you know, When you think about how fast the entertainment business is developing, they also have to be able to be nimble enough to respond to it. And one of the things that we, one thing that we really liked was that, I forget which report it was, but they talked about how, you know, we're an entertainment business.

Like, we understand that. And historically, we haven't taken as many risks, but we plan on taking more risks going forward. I mean, that to us was a really good comment. And Nintendo management is constantly cryptic. So it's always hard to be like, yep, that's what they're talking about. But to us, it seemed that they are intent and that they understand what they have to do to remain relevant. Because going back to, I think we talked about this in the first video, but no one a Nintendo wants to be the last generation of leading Nintendo, right? Like, that's a core part of this.

So they have this hundred year plan. But in order to do that, they have to stay relevant. So they can't not invest and they can't just ride their historical success. they have to continue to invest. That's part of the theme parks, it's part of the movies. Everything kind of loops in. It's about diving deeper into the content, becoming more relevant. And that requires them to make changes, take risks, develop new products that they may

not have done in the past. And we are more confident than we ever were before about their ability to do that. Yeah, 100%. I mean, I think that's the, the process. perfect counterbalancing point. And I just add that, you know, while I think they're getting better at it and smarter and, you know, finally focused on the right things broadly, I think no one can look back at Nintendo's history and not see a company that takes big calculated risks.

You know, like this isn't a company that sits on their, you know, you know, ask for lack of a better term. I mean, they're ambitious and they're ambitious as hell and they're fearless. you know, when they lean into something, which is, you know, I think what was so interesting, I mean, outside of everything they're doing for the core console business, you know, putting that much money to work immediately with movies, you know, putting Melisandri on the board, all of these things. You know, here's an example. In fact, I think this was interesting. You know, Nintendo subtly changed their historical reason for their overcapitalized balance sheet.

historically it was always about maintaining reserves to basically protect it was a hedge against failure in the console cycle well now it is I can't remember the exact words but you know the emphasis in the last I think

November was when I remember reading what I would but they put the emphasis on movies they basically said you know we're gonna really lean in hard you know, when it comes to visual content, for this reason, you know, we have to maintain, we have to maintain our ability to continually take shots on goal. Luckily, they'll be generating so much cash, you know, it's going to be difficult. I mean, they'll have a lot of money to reinvest, but, you know, movies is something where

they can really lean in, get a huge return, where it is, you know, genuinely and commonsensically synergistic with the core business. you know, in a way that will certainly drive console and software sales. But, you know, also, and most importantly, saving relevant. So, you know, it's not at the end of the day something where, you know, they are, you know, they're not oblivious to building and growing the business. It's just I think people want them to focus on what they want them to focus on versus, you know, what they are focusing on.

And I agree with Nintendo. I'd much rather have them focus on building, you know, life, you know, movies that, you know, make you cry and, you know, and building affinity and deepening their relationship with, you know, their fan base this way than, you know, squeezing out, you know, an extra 20 bucks a month, you know, buying more rubies to buy some in-game item in a mobile game. So reason of people could disagree, but I think that no one, that has actually objectively analyzed, you know,

who Nintendo is as a company, as a culture, can say that they don't, you know, they don't take smart calculated risk, that they are, you know, kind of insular and stuck in the past. I mean, I just don't think it kind of holds up to scrutiny on any level. So I'm personally excited to see them start making big bets again. And, you know, in November we saw them kind of take the bazooka out with roughly 2.7 billion in online network infrastructure, expanding their game development

frameworks. I have to chart here. Basically, various ways, you know, I think internally they're building out their own, you know, live service expertise, expanding their, you know, software output and the types of software that they create organically internally. You know, 2.7 billion is a big, big bet. you know, more than enough to fix their technical debt and online infrastructure to build out a, you know, server base that is as state of the art as can be to fix online gameplay in a variety of ways. I mean, basically the every weakness that they had up through November is now basically concretely being fixed and with more than enough money to do it right.

And on top of that, they're expanding, making another big bet in movies and TV and putting that cash to work, which, you know, if I had a dime for every person that's told me, you know, the cash is just going to build up and they're never going to reinvest it and they won't return it or, you know, I mean, they, I think we can finally say this question has been settled. I mean, they've been built, bought back a billion dollars with the stock last year. I think when it comes to capital management and reinvesting for growth, the old narrative doesn't really hold up anymore. That's exciting to see. Go ahead, please. I was just going to say, if you looked at the most recent direct, all the Nintendo games, that their first party games, they emphasized the multiplayer, they emphasized the live games. And that's something that they couldn't do when they started Switch.

I mean, they just didn't have the infrastructure, really, to do that in a meaningful way that was dependable. But I've played a number of times multiplayer with friends across the country and have never experienced some of the technical problems that other people have said. Not to say we haven't dropped off at times, but, I mean, that happens with all of my technology. And so, you know, I've never felt like it was subpar in any way. And I'm sure, I'm not an Xbox player or a PlayStation, and maybe that service is better. But again, like I said, when we first started this conversation, like, they're playing different games. What Nintendo is doing and what Xbox and PlayStation are doing are separate, separate things. So I don't think you can compare that to it.

I agree. I agree. And, you know, to Todd's point, why they are, you know, their online, you know, infrastructure, you know, prior to, even prior to November before they took out the bazooka. I think it a big way to make a big statement. You know, a lot of the issues, you know, for example, online play with respect to mobile, a lot of the old, you know, first, call it first gen switch games, their online gameplay was basically runoff an 18-year-old server system. Next, I think, is called. And, you know, they have basically, you know, I think Monster Hunter Rise was the first game released where, you know, that was totally built from the bottom up, you know, with the new system.

But, you know, since then, you know, and you've seen this with Nintendo Switch Online, you know, Nintendo has gone back and patched and fixed every, you know, so I think eventually, you know, I think we're basically already at the point where for the, you know, types of games that are, you know, Nintendo's bread and butter, at least on a first party level. I mean, it's ludicrous that we need to talk about, you know, split second. I mean, Mario Kart does not require, you're not playing Call of Duty. I mean, I can understand that. But I think that's one of the things that's so exciting about these recent investments is, you know, clearly, I think a lot of this investment isn't necessarily for their first party games. I think it is to lay the foundation for third party games because in many ways, you know,

you know, bringing free-to-play games and AAA multi-platform games from the likes of EA and, you know, all of the kind of big developers that haven't put their stuff on Switch, you know, with the upcoming release of more powerful hardware later this year and these investments, you're setting the stage to bring all of that to the platform in a way that, you know, faithfully recreates that kind of elite level of online gameplay, for lack of a better term. So I think in the end, it's about bringing the third parties to the yard now

and getting all that stuff fixed and just another way to kind of drive engagement and ensure that no one's switch is sitting in the back gathering dust. If we look at these cast utilization with this chart, That's quite interesting. Where do you see the return they will get on these investments? What kind of return should this investment have?

Monstrous. I don't see it as a, I think they're putting in place the infrastructure that is required to kind of press and leverage their position to, you know, people say that Nintendo's not a platform business. My ass it's not a platform business. I mean, on a gross revenue basis, you know, I think in the November report, they, they talk, you know, for the first time ever, third party games, you know, they account for them on their financial statements, sales from third parties as, you know, net revenue, which is basically a pure 30% margin from the e-shop. But on a gross basis, which is the apples to apples comparison you have to make, now more games are sold, you know, from third-party development.

You know, these aren't indie titles either. These are, you know, major package software because by definition, you know, indie titles and various forms of add-on content cells aren't included, you know, in the software metric. So this is genuinely becoming a platform where more people are playing. games that aren't named, you know, that were created by firms that aren't named Nintendo. And I think that they, a lot of what they're doing, both on the hardware side, is to, you know, keep that, you know, the network effect accelerating.

And I think the momentum is incredibly strong. And for a bunch of reasons, I think it's a near certainty that you're going to see, not just a flood of new games, but, you know, from third parties and the major ones, but also subscription services. I mean, in my letter, you know, I go through all these different clues, but, you know, one of them is a job opening for EA where I'll tell you know, it's regard to Madden, but specifically their EA play live services, you know, subscription. And, you know, I don't think I've ever seen Nintendo mentioned on, you know,

anything EA ever. I mean, I think it's been 10 years since Matt, Adden was on another Nintendo system, but, you know, their executives have come out on multiple occasions and said, there's just no way the hardware is not powerful enough, we can't do it. And then, you know, strangely enough, surprise, surprise, at least if you believe the original timeline of when the pro, I think it would be called like hopefully the Super Switch, the Super Nintendo Switch. But all of a sudden, you started having, you know, executives like, you know,

EAs start talking about how they're going to bring all their games and how they prefer to bring their live service games, who, you know, in the past had been said, you know, straight up, we can't do it. And you can look at something like FIFA and understand why, you know, FIFA 2018 is the same as FIFA 2022 with just rosters and names changed. I mean, so you can see that even with this. game that's five years old, they were up against the limits of it, you know, anyhow, the point is, is, you know, just with EA, if you could sign up for a subscription service and get access

to, I think they don't have battlefields or call it duty, it's battlefield, but all the sports annuities like Madden on a Nintendo system, you know, five percent of the installed base of the switch, you know, would easily do that. And that's, you know, take 30% right off the top from that subscription service. And just there, you have something meaningful. And then, you know, if they're going to let EA play onto the switch platform, it logically follows that, you know, something like Game Pass, you know, would be suitable there too. I just think there's a lot of clues that all point in one very specific direction, which is Nintendo does care about third parties and everything they've been doing in these last few years is geared towards that.

And I think that's really, really exciting. And it's yet another element to this story that I think is not priced in at all. And we think of what happens to NSO, for example, if Microsoft does a tie up with them with GamePass, you know, just like allowing EA play. And I don't know why EA would be hiring for the switch for a live subscription service if, you know, third-party subscription services weren't going to be allowed on the platform. You know, if you believe that, or if you believe that that's happening, it makes total sense that GamePass would come.

And if all of a sudden Microsoft can start, you know, offering NSO to their installed base, It gets, the numbers get, you know, pretty insane. And this actually goes back to a video that came out about a year ago. I think it's called the Stack Event, but it's one of Microsoft's internal development conferences where they speak to developers about what they're doing. And if in the background, you know, there was like two weeks before this, there was a Phil Spencer live stream and in the background, Oh, he dropped.

So we lost Ryan for a second. I hope he's coming back soon, but you have something to add. Hey, Tillman here. I'm sure you're curious about the answer to this question. But this answer is exclusive to the members of my community Good Investing Plus. Good Investing Plus is a place where we help each other to get better as investor day by day. If you are an ambitious, long-term-oriented investor, that likes to share, please apply for Good Investing Plus.

Just go to good minusinvesting.net slash plus. You can also find this link into show notes. I'm waiting for your application. And without further ado, let's go back to the conversation. And also if you think about the customer relation they have and like this, this customers, they quiet quite early. It's quite fascinating if you look at the last presentation from November. how does customers are willing to like upgrade the existing systems like you have those five years of lifetime span and with the switch pro or super switch or whatever comes out you will have another unlock of this buying cycle so you have already like a customer base of like let's say 20 to 30 million if you offer them a great product great update to solve some bottlenecks they are already in touch with you and love your product they're willing to upgrade yes and we saw some of

that this past quarter with the OLED launch, if you look at the overall units were down year every year. But if you look at just the people who bought the regular switch or the original switch, and you combined the OLED and original switch sales, it was actually up. It was light that really pulled things down. And so what I think is happening is that your people upgraded.

So if they had a light out of necessity during 2020, during COVID, when there weren't original switches available or if they wanted to buy a second one for their house, maybe now they're upgrading to OLED. And by the way, OLED's great. I was skeptical. And when I got mine delivered, I said, this is just a tremendous upgrade. In terms of just the design of it, it's a much better functioning switch than the original. The screen is bigger. It's brighter. The colors are more. It's just a fantastic experience. And I was really impressed with the ability to transfer all of my games and status on the cloud. You know, it was pretty seamless.

It's not perfect. It's not Apple yet, but it's pretty close in terms of when you upgrade to a new iteration of Switch, it's all going to connect together and your games will be there with a couple of clicks. You know, like I said, it's not as seamless as Apple where you just sign in and everything's there, but it's pretty close. And it wasn't a struggle for me at all, especially since I, Most of my stuff was, you know, downloaded software versus physical software. But even then, you know, your saved data was all there and what didn't lose anything in the process.

So it was very impressive. And I think, you know, for us, you know, there's been a lot of talk, obviously, Nintendo circles about Switch Pro, what it will look like. I don't know that it's going to be this super jump. And Ryan might disagree with me when he comes back. But I think it's really this more successive iteration. of Switch, you know, where it gets a little better, a little better. It's sort of like iPhone generations where, you know, there's the SE model, there's the core model, and then there's the Max model, right?

And what happens is when people upgrade, what happens first is the lowest end of that model upgrades, right? And I think that's happened happening with Switch with people who had light upgrading to OLED. It's just a far better experience. And we think that's going to happen again. And Nintendo has to continue to improve its, it's hardware. And Ryan touched on that with the third-party developers.

They need to make sure that they can plug their games. They can port their games to Switch without losing a lot of customer satisfaction. So Nintendo has to iterate, but as long as they continue to hold the Switch OS, that reduces the risk of customers being to be re-won or re-brought into the ecosystem. It makes it so much easier for Nintendo just to continue to generate recurring revenue. If you think about the ecosystem, you also have to think about the developer ecosystem, Nintendo is building over time. And it's also the other side of the trade. And I've talked to developers.

They said they started to convert their games to Nintendo. They do it once. And then they have the routine and they're able to do it quicker and quicker. That's quite interesting. We see Ryan is back. I'm back. Sorry about that, I guess. I was just making the point on the developers' ecosystem that Nintendo there also has some.

installations in the development departments of certain developers. I talked to the developer of Nintendo. So they now can easily switch their games also to the switch ecosystem. And with the Switch Pro, maybe which might be the end for our interview, because we're running out of time at this point, what bottlenecks do you expect the Switch Pro to solve and what innovations do you expect Switch Pro or Super Switch? to, yeah, solve? A lot.

I think, you know, in terms of bottlenecks, I think the two biggest and most obvious is, you know, the ability to play current-gen hardware. And without or playing current-gen software that, you know, requires more powerful hardware. So, you know, in terms of, you know, how they're going to go about it, You know, there's a lot of things that I think are key to bringing it all together.

First of all, you need to be able to, you know, eliminate this, you know, not all of the security, as Todd was saying, but, you know, you need forward and backward compatibility in terms of game software. And I think one of the, you know, I kind of joke around with my COO, you know, the switch is like Diamondsler forever. or it is forever. And that doesn't mean people get caught up in semantics and, you know, confusion or, you know, whether it's a pro, whether it's a revision, whether it's a next gen. You know, the point is, is that, you know, the software, you know, both first party and third is evergreen, you know, across, you know, minor,

so minor incremental, i.e. revisions improvements, like we've seen, thus far and what I think will be the first major iterative upgrade since the switch has been launched, which is what the pro will be. And, you know, if you get into the details of what I think the chip set or the new system of the chip that will be, you know, in the next, call it, generation of switch family devices, it is going to be, I think, the Oren. The chip is the T-239, a variant of the two, three, four. But the point is, is that that changes a lot of things. You know, for example, on forward and backward compatibility. There are a variety of secular dynamics here that are making technologically, you know, at least technically obsolete hardware

a non-issue because, you know, most of the processing is offloaded onto servers. I mean, for example, I can play on my original switch the new Guardians of the Galaxy game because it's done in the cloud. And you would never know. I mean, basically, there's a variety of trends that all abstract away the hardware layer. And you even see this with the, I don't know if you saw this stuff, but when they did the beta for Switch Sports, you know, there was a copyright. night. You know, there's a picture of it I have in our report, but that shows that Nintendo is now using FSR, which is Fidelity FX super resolution. And so, you know, one of the things about the pro is that it's going to have, you know, DLS 2.0. And because of the immense, you know, kind of

upgrade, you know, I think the pro of the chip set is going to be roughly four to eight times more powerful. And then one upscaled through DLSS will be essentially equivalent to current gen hardware. I mean, the chip itself is as powerful as a PS4 Pro, but through AI, you know, and upscaling technologies with DLS, you know, basically you won't really be able to tell a difference between PS5 games and third-party games played on the Switch Pro. But one of the things that was interesting, and specifically as it relates to older hardware, was to see this FSR being implemented into Nintendo's existing first-party games. But what is FSR? FSR is like DSL 2.0 light, in that it basically extends the life of older hardware. It's like getting an upgrade without paying

for it. Does a lot of the same upscaling issues and frame rates, but it's hardware agnostic, unlike DLSS, which requires a much more powerful chipset that has like tensor cores and things like that. But you're seeing Nintendo, you know, the other interesting thing about this was Switch Sports was done in the graphics library of AGL, which is the same graphics library for Breath of the Wild, Mario Odyssey, all these games. So what that means is that basically they can just flip a switch and all of a sudden all these older games are running at, you know, a perfect 60 frame rate, you know, per second, you know, all of the things that people complain about, you know, when it comes to the older hardware relative to the new, even the old hardware should be able to run these games relatively, you know, perfectly. Games that did not work very well like, I don't know, The Witcher, you know, these big games. you know, will, you know, basically get the benefit as if they had more powerful hardware and better software by Nintendo simply flipping on this FSR switch.

But, you know, you have the rise of third-party game development engines like, you know, Epic's Unreal. All of these things, you know, the transition to the server side makes, you know, the technical specs of the hardware you're playing increasingly less relevant. You know, another thing with forward and backward compatibility that I hear people talk about where they say that the architecture is different. You know, they need to have a Tegra chip set, and, you know, now that will create a break between, you know, software in terms of what is playable. That's nonsense. You know, Davidia's core, you know, the, you know, with Apple, you have the iOS, with the SwitchOS,

it's basically, it was created from the bottom up with Nintendo and NVIDIA. It's called NVN. And everything NVIDIA does, even in principle, is meant to be forward and backward compatible. I mean, there's a bunch of management quotes that I could pull out here. But, you know, there will be no forward and backward compatibility issues. There might be a few games like you saw in the 3DS that are not backward compatible, you know, as a way to, you know, know, some fragmentation, I think, is good as you go from minor to major upgrades. But at the end of the day, the OS is, you know, already there.

In fact, one of the, the Navidia hack that was reported the other day, I'm sure you guys saw it, in that code that, that, you know, basically the leak, you see NBN2 and references to DLSS and all this stuff, which basically, you know, is the 17th hard confirmation that the pro does in fact exist. And more, I think, interestingly, more importantly, is there will be no, you know, it's not like the pros will need to have an orange chip set and a Tegra chip set to run the old games flawlessly. The orange chip, you know, the orange system on a chip was built literally from the bottom up to seamlessly blend with all of the other, you know, the, this is kind of maybe too much nuanced conversation to go into detail, but I don't think hardware or software will be an issue when it comes to

maintaining just like an iterative hardware model makes, you know, hardware obsolete because at the end of the day, it's not about the hardware. It's about the software because the hardware is just going to get incrementally better over time and, you know, small revisions and then bigger leaps, you know, kind of like we've seen with generations in the past. It's, you know, I can't even remember where I was going with this originally, but the pro, I don't think you're going to have any big fragmentation in the game base, you know, all old switches. will be able to play new Switch games that come out or release a Nintendo

first-party IP that's released in the future. And all old games will be able to run flawlessly on the new hardware. Now Todd had to leave us and now I'm still alone with Ryan. Bye-bye to Todd who sadly had to go at this point of time,

not dropped out like Ryan before. It's a tricky thing to record in these times but then you also have to feel in comparison to Nintendo Switch online if you sometimes drop, it's no problem. And you continue the game a while later. Can you maybe elaborate a bit more on what you've found about the forward and backward compatibility? Because it's very interesting. Let me kind of sum up the forward and backward compatibility issue or, you know,

I call it the intergenerational hardware thing. long and short of it is, you know, even, you know, despite our, I should say, as the technological gap between older hardware and the newest switch widens, older switches will run new games both natively and online via the cloud, while new or more powerful switches like the pro will run older games natively and through emulation. Emulation is, you know, think of Zelda, all the classic, you know, vintage retro games. But, you know, you're already seeing this kind of the hardware layer extracted away. Today, you have Guardians of the Galaxy running on the Switch. You have Ubisoft's Assassin's Creed. You have Capcons Resident Evil. All of these, you know, technologically substantial games already run on the cloud on the switch today.

So, you know, that's kind of, I think, a preview of what's to come. As far as ideas that, you know, the hardware won't be compatible and, you know, that developers will have to go back and kind of patch and change their existing games to work on older hardware or newer hardware, none of that's true. The SwitchOS was built, you know, hand in hand with the video. And I don't, you know, one of the things that kind of shocks me is because Dividea is very clear about this throughout, you know, their conference calls or whatnot. But, you know, the SwitchOS is basically called NVN. That's the API. And it was custom developed with the video, you know, specifically for scalability as well as compatibility, compatibility across form factors and generations. You know, a few investors, I think, really seem to understand it.

At the end of the day, you know, maybe I'll send some company materials when we finish this up where, you know, they've concerned that Jetsons from Maxwell to Pascal to all of these different hardware architectures are all fully compatible with the Switch OS, just like all of Apple's are. So the point is, is that I don't think there'll be any fundamental bottleneck there. But, you know, I do think that this actually, and we haven't had a time, you know, any real chance to discuss this today, but one of the elements that is different now versus when I first bought the investment was building in some level of planned obsolescence. It's a big part of the Apple model. I think it's a big part of what Nintendo is doing now. You know, this is, you know, there's flawless compatibility between, you know, call it generations over your two to three years, minor upgrades.

But, you know, you can't play, if you have an iPhone 6, you know, and you try and run, you know, apps today, it's going to break it. So there's some level of kind of planned obsolescence that is kind of at the heart of this. But at the end of the day, I think the pro will. definitively show Wall Street, you know, or let me say it a different way, if the pro is released, you know, if we are indeed correct about more powerful hardware coming in the back half of this year or early next, if that happens. And, you know, you have a, what is essentially a next gen console or changeover. And, you know, it is, you know, you see flawless forward and

backward compatibility between this kind of break, this console break, there's no argument left with respect to whether the company is cyclical or not. It is literally insane to argue that, you know, the old standard console cycle will still be foundation, you know, like you just can't make that argument after this point. And that doesn't mean Wall Street will price it in immediately. Um, but, you know, there is no plausible basis, I think, if you're intellectually honest at that point for, uh, acting like there's any historic, you know, the historical cyclicality that was the Achilles Hill of the industry. Um, you know, I think you, this is that this is the point where that is definitively done and put away forever. Um, you know, we've seen it with Sony. Uh, we're about to see it with Nintendo. And I think, that is the point where people are going to really start to kind of wake up in mass and reprice the stock. Maybe let's talk a bit about the cherry or the cherries on the cake or if you say the Nintendo language,

the Kirby on the car, Nintendo Switch online, which is also like changing and getting better and where do you see the direction there? So, you know, at the end of the day, we could talk about, you know, all the different options, all of the different elements and angles of what I think is, you know, one of the more fascinating ideas I've ever come across in my career. But in the end of the day, it's really, really simple. I think there are two drivers or earnings engines that will determine the outcome here. I mean, you know, if these two things are correct, you know, it is essentially a certainty that this will be a home run. And one of these two variables is Nintendo Switch Online. So why is that? You know, one of the things that they did recently that I think is a genuine game changer was coming out and bundling the DLC of their two biggest games with, you know, the largest. and most active player bases into their next, you know, next, you know, their higher price tier

of Nintendo Switch Online. So historically, NSO came with, you know, data storage for the cloud, NES and S-NES games, you know, kind of a bare bones feature for a service that even now is still nascent. But then earlier last year, you know, mid-last year they came out with, the N64 expansion pack, and they have bundled the decision to bundle both Animal Crossing DLC and Mario Kart DLC into the higher priced $50 tier versus the 20, I think is a game changer on several levels. So let's kind of think through the math here in like a super basic level. So I think the installed base for Mario Kart 8 Deluxe is got to be, I think it's through

the rearview, 44 million, it's probably over 45 million right now. But if you assume, let's call it 20% of that installed base, purchase this DLC. So if you already have online, upgrading is a no-brainer. And keep in mind, this is, we're trying to think of the most active, most engaged players out of those 44 million. You know, basically I think that's what, like seven, 0.9 of the, like, I call out a guy, I never do math in my head for obvious reasons, but, you know, assuming 15 to 20% of people that, you know, play Mario Kart will, you know, upgrade to NSO online is a huge deal, you know, right there you're looking at between that and Animal Crossing. And so they released the, the announcement with the N64 expansion. POMPEC that the Animal Crossing DLC would be bundled in for free. If you assume 10 to, let's call 15 to 20% of that player base buys the DLC, you know, and you know, you don't have to differentiate between online,

whether they have the $20. But the point is this, is that somewhere between 10 and 15 million people very easily, you know, probably upgraded increment, you know, at the margin, somewhere between 10 and 15 million new subscribers. came into being for NSO at twice the average ARPU. So through the past, up through November, the last time they reported, we had 32 million subscribers for NSO. That was approximately, I think, a 34% attach rate.

If you add the likely uplift to memberships at the higher ARPU from bundling these marquee DLCI, IPs. And again, you know, the games that are the most, you know, the players that are the most engaged, you know, playing the game that are the largest games in Nintendo's library. It is a reasonable assumption that something on the order of 15 to 20 percent do that. If you do that, if you assume both of those, I think it's like 16 and a half million, 16 and a half million times 50. I mean, the readers can do the math. But, you know, at the bottom line is, you know, basically every dollar of revenue from these you know uh subscriptions to this higher price tier is pure margin so uh i think i have the let me see if i can 825 million it should be let's see i think i actually this is part of the letter uh so again an idea to look into the letter. So, where are you?

It's a long letter, for sure. About 90 pages, which is slightly obnoxious. Epic. But I think it should definitively answer and go through all of the remaining bare arguments in kind of systematic detail. It's your super Mario thesis. Yeah. At this point, I might as well, you know, it's like a book, but it is definitely worth it.

Anyhow, the point is this. I could pull up a calculator, 16 million new NSO subscribers at the margin, you know, is upwards, let's just simple math, it's a billion dollars. So it was doing $600 million before, and just like that, not only will, does bundling these DLCs, again, of the biggest franchises Nintendo has with the most engaged player bases for free, drive a step change increase in the attach rate, the incremental profitability that, you know, falls to the bottom line, you know, and if you put a, you know, let's call it a 20 times multiple on that, is that. in of itself is worth about the entire enterprise value today, and that is just reaching parity on an ARPU perspective with the absolute low end of Microsoft and Sony. So, you know, it's that we're assuming a $60 ARPU, which is as low as it gets, essentially. 50, actually. Now, the more interesting thing is I think what Nintendo's demonstrated actions tell us about the future. You know, we know

Breath of the Wild, too, is about to be released. You know, it's been five years since a Mario game has been, you know, Mario Odyssey was released. So you know that's in the pipe somewhere. We just had a Gen 9 Pokemon game, you know, released on top of Legends Archaeus that's going to hit this year. You know, I could go on and on. Kirby. Yeah, yeah, Kirby, you know, switch sports is going to drop, which was, you know, granted it was included in the Wii package, but, you know, We Fit and Wii Sports and their sequels are like four of the top, you know, 10 bestselling games of all time. I mean, Nintendo is literally carpet bombing, you know, their users with the greatest software lineup, you know, in the history of what they've done. And, you know, I am certain to a relative degree that what we've seen them do with Animal Crossing and Mario Clark here is going to be what they're going to do for.

Imagine the GameCube tier, you know, the GameCube expansion pass. And along with that GameCube expansion pass, you get free DLC for, you know, Breath of the Wild 2, the next Pokemon game and the next Mario game or, you know, say the next Mario Kart, but plus the GameCube games, plus another vintage, you know, vintage system, you know, like they did with a Genesis. But, you know, the point is, is by bundling the DLC, you not only get a massive increase in memberships at much higher ARPUs with relative certainty, but because the engagement, you know, will grow along with that.

And in video games, there's kind of a linear direct relationship between engagement and profit per user. You know, it's not that hard to see the future, look at the established, game plan that they've been executing again so far. And imagine, you know, let's just call it the, you know, we'll stick with the N64 or the game-kewed expansion pass. Just there, if they bundle those three or four DLCs over the next two years, I can get to roughly 52 million. I think Sony is right now at 48, but, you know, I wouldn't be surprised if they are

at parity with Sony now. just from Mario Kart and Animal Crossing. But this is the bottom line. Do you think that it will be hard for Nintendo as they layer in all these new vintage consoles and retro kind of classic games, all these new life service games like Tetris 99 and Pac-Man 99, these marquee DLCIPs that are going to sell 30 million a pop,

easy, each one of them, You know, where are they going to price it? My guess is right around, you know, 100. So right beneath where Stoney and Microsoft are for their kind of absolute low-end online services. When you're talking about, I'm not talking about Xbox Live or PlayStation Plus. I'm talking about, you know, they, I think what the next iteration here will be, will be the expansion of something more like GamePass. if you think that they can get to 52 million users memberships and you think that the ARPU

from each, you know, as they kind of build on top of each other, will be, you know, call it 100. Right there, you know, you have the entire value, you slap it 20 times multiple on that, you have the entire value of the business today. I think that is basically a certainty. I love to debate it with people, but if you, you know, believe that the stocks are home run. And this gets to the next part, which is, you know, arguably the most important, which is the ongoing transition to digital that Todd had mentioned at the beginning. And, you know, people forget that, you know, everyone's already done this before. If you look at all of the software developers, the amount of their mix, you know, split between physical and digital. So Ubisoft. take to Activision, roughly, let's just call it 80% of all their software cells are already digital. Sony's is, I think, 85% digital relative to physical cartridges.

You know, I could, we could kind of joke around and I'd say, you know, when was the last time you bought a CV? Yeah, what was the last time you bought a DVD to watch a movie? You know, we could, you know, what was the last thing you bought a computer with a disc drive in it? You know, there are so many analogs in entertainment media specifically. In fact, I saw an article the other day where Best Buy is now starting to shrink and remove the video game section from, you know, the square footage and stores. The point is, five years from today, you know, in the long run, physical media is dead. And this is absolutely true in video games.

If you believe that five years from today, Nintendo can catch up to where basically everyone, whether they're console peers or their publishing peers, you know, basically catch up to where they are already today, the impact to profits is, you know, just it's kind of, it's nuts. If you, for example, let's not even assume, any further growth in the active installed base. And we simply take management's estimates for this year, 2021, fiscal 2022 for Nintendo.

I think they've guided for 220 million units, okay? I have the math broken down, you know, in the letter that will be released with this that anyone's, you know, more than happy to go through. But if you assume that the digital. physical mix was the same as it was for all of their first party publisher peers or their console peers. And you take that pretext profit, you know, like the, I go through the difference to the first party and third party and kind of walk through the economics of what the margins are on physical package disks. And, you know, kind of as their did, you know,

distribution and production costs basically dissipate to zero, you know, basically that results in a incremental $23 per game that drops directly to Nintendo's bottom line. You do all the math, and what you get is at 20 times just based on the physical to digital musical shift for the software they're going to sell this year, I think it's $74 billion at 20 times. So, you know, right there, just from this one lever, you get a kind of crazy outcome, you know, and I say crazy because of the predictability factor here. I mean, there are a lot of high quality businesses. The thing that makes me excited about ideas is not only where, you know, are they a great business and I think they have a widening moat and a lot of the things that, you know,

all intelligent investors, I think, emphasize. For me, predictability, you know, an estimating of businesses' medium-term earnings power, handicapping those outcomes is very, very important. And so, you know, with this, you know, it's rare that you get something that is, I think, a certainty over the next three to five years that has the ability to, you know, call it, you know, double the stock on its own. And then you add NSW. So, you know, which simply by catching up to what everyone else has done, you know, you get another double from where it's priced today. Yes, yes. And so then you get the movie.

I mean, you just lay, I mean, if you break each earnings engine and isolate it. And these are things, you know, whether Nintendo is going to get tickets, you know, royalties on theme park tickets is not endowed. You know, I mean, 40 million people go to theme parks every year. You can't see it in the financial statements, but, you know, I don't think there's really any uncertainty to the fact that this is going to be a very valuable business to Nintendo. I don't, and I've at least never heard in the public domain, whether on Twitter, I've never heard anyone attempt to argue that as Nintendo continues to continuously add value, you know, it's spending $2.7 billion fixing its technical debt and online infrastructure, you know, expanding its software output. You know, it's decision to bundle these DLCs. I mean, the idea that Nintendo can't get to, call it, 50 million NSO subs at a average ARPU that approximates its peers, this is not a high bar. I think it's a certainty, especially with the DLC strategy.

You know, it's a slam dunk. The transition to digital is a slam dunk. You know, figuring out you might, you quibble over whether the royalty on ticket sales for theme parks is 5% or 10%. percent, there's no real discussion about whether there's a royalty. So again, this is a very predictable outcome. It is very easy to handicap. You don't have to be a genius. You can do the math on a, you know, the back of an envelope. You don't even need to build a model. It is very simple. And I think, you know, truly common sense. And I think that's the thing that that kind of astounds me about the current price is, you know, this is not, these are not kind of wild-ass guess bets.

These are almost kind of, I think, like insultingly low bars for a company that has a pedigree like intended to reach. And if you, you know, grant these premises, you know, you have to grant that, you know, the stock is kind of grossly, disgustingly mispriced. And I think that is exactly where we're at, you know. I think Nintendo's is going to be huge, or the movies and TV, you know, segment will be huge. I think, uh, merchandise sales. I think it'll be slow and methodical. I think that's going to be a big business. Theme parks is going to be a big business. Uh, you know, when I, you know, talk about the, uh, the 74 billion figure that I arrive at in the letter, you know, that's based off of this year's software number, you know,

and five years from today, it is an absolute certainty, um, that the, you know, that the, you know, the active user base is going to be considerably higher than it is today. You know, you can play with the numbers all around, but the numbers are huge, and they are not, I think, disputable at this point. I mean, you know, the future is always uncertain, but, you know, Nintendo continuing to follow its plan with NSO, given, you know, here we are three years in, we've seen them, you know, execute against it so far. They're just going to keep doing what they've been doing.

And that's going to be a transformational game changer for the business as they keep growing the attach rate. And one thing I should note with all this stuff, none of the things that I think are embedded in these two to three variables are things we haven't seen before. If you want to think about this basic sanity test for saturation, you can look at it a couple ways. Historically, on the hardware side, Nintendo has never had a family of affordable devices that have sold less than 200 million units, ever. You could flip it around and do it a different way. The Wii generation, just this singular generation between the Wii and the DS, I think they sold 300,000. 30 million hardware units. I think the more fair, like the truly apples to apples is the bunch would be to take

what they've sold the last three generations, so the Wii, the Wii, you know, and I think it's $443 million. So, you know, here we are today, given the installed base, you know, is that $100 million? If I'm right about the iterative hardware model, there's an amazing amount of headroom to run on the hardware side. Software side, make this real quick. In 2009, I think they sold 400 million units of software. I'll rest my case there. You know, the tie ratio that you want to put in there, put it at two, put it at 1.9. It doesn't matter. You know, like you, the underlying assumptions of this is right now I'm kind of referring to the two models in the letter. But,

You know, hardware, we're not even close to saturation. Software, we're not even close to saturation. Nintendo Switch Online. Daniel Amad has some great charge of data points here, but historically, PlayStation Plus memberships have grown, you know, in a linear fashion with the installed base, the size of Sony's ecosystem. And these, you know, the amount of members has been basically impervious to external

factors, you know, recessions, and, you know, I mean, I guess we've had basically a 13-year bull market, so that could be tested in the future, but all of the evidence, I mean, we could just leave it here. Xbox Live has 100 million users as of a year ago, so not even close to saturation. What's the others? Then I kind of already ran it about the digital, but you know, when you get into the reasonableness and you're intellectually honest about the underlying assumptions that underpin the core drivers of the business going forward, I just don't see how you can look at a business today that has the best IP portfolio in the history of video games that are the most devoted, brilliant art. I mean, the Switch games for, you know, since 2005, I mean, they are all of them,

for the most part works of art they've never been hitting it doing it better on the software side I mean I could go on and on there's also this this potential to raise prices if you think about Disney Plus I just have the subscription for three years now and every year they raise the price

with 10 euros a year and Nintendo is just doing the same it's also a playbook they copied and even coming back to to the best buyer argument you made on the degrees of video game space we also have the economy which is really a mark Saturn in Germany

they also decrease the space that is available for video games so Nintendo still could like even like even if they stick with the cartridges they have even could say okay we're selling you the cartridge is still but with a premium price so they even could rise prices

there so there's many so many yeah yeah there's there's the amount of monetization levers that they have at their disposal is nuts. You know, I mean, like the, there is no lack of, I think, ideas that at Nintendo that make this, you know, make their growth plans work. And, you know, I'll say one more thing about the, you know, the end of physical media, certainly entertainment physical media. There's actually, in the letter we have, we linked to an Ars Technica article from, I think, a week or two ago.

And in that article, they basically show the, I mean, you know, basically the amount of game developers, indie, you know, multi-platform, you name it, that are actually even going to the trouble of creating physical package games is basically at an all-time love. and dropping through the floor at the exact same time that the total number of parties released is exploding and they kind of they go into the charts the details but again when was the last time you bought a DVD when was the last time you bought a CD you know when was the last time you bought a computer with a disc drive this is not something that is not predictable it is by its intrinsic nature very predictable. As this transition plays out, the value creation, Bonanza, and Nintendo is, it's ridiculous relative to the current price. It's worth more. The incremental pre-tax profit is worth more than what you can buy the entire enterprise value for today. You know, one of the things we haven't

talked about, and I'll just, I know we're running out of time, and I got a long day. I know you got important things to do, but the other element here is corporate reform, you know, not only internally as far as, you know, capital allocation in general and, you know, specifically, I think the most impressive and important element of kind of recent revelations was then pulling the bazook out and putting roughly $4 billion of work towards, you know, future growth that I think will generate, you know, very, very high returns. But, you know, not only is it, have they, I think they've proven themselves that the, this idea that they are just your classic Japan Inc. management team that are content to simply mine the store as cash piles up and that they don't care about shareholders. I think it's nonsense.

I think they've just, you know, not, this isn't them just speaking, you know, making verbal gestures that they're going to be. re-investing for growth. They just put $4 billion of their cash pile of work. That speaks for itself. On top of that, they put roughly a billion dollars, you know, towards a buyback. I think that speaks for itself. They have, in November, they released basically two pages where they outline where the, you know, where this $4 billion is going in the various ESG and, you know, related elements, you know, there's a big technical capital flow element to the thesis. not only from the internal stuff that they're doing, but we've gone back and forth and talked about the corporate reform that is happening in Japan. Most people don't know this, but on April 22nd, a series of government-led corporate reforms all basically take effect.

And they have, for the first time in history, targeted all the right things and they are real teeth and consequences to these changes. You know, for example, companies will start to have to explain to the government why they have cross-holdings. Basically, these various reforms in total are, I think, game-changing. There's no other way to put it. I think, you know, the court system is on board, you know, given Japan's demographic crisis, and there's no other way to put it, the only way that they can, you know, there's only one way forward. that is increasing the, you know, if they want their economy to grow, they have to unlock value and increase the efficiency of their capital markets. There's a reason you see Buffett buying

the commodity houses. There's a reason why KKR and Carlisle are jumping in with both hands over feet. I read a great discussion from, I think it was a Columbia talk three or four months ago that had the brilliant woman that runs Soros. I had not heard of her before. I hate that I can't remember her name. I loved everything she had to say, but she talks about this. But, you know, as all of these old line, you know, everything that is in people's minds eye that represents Japan, Inc., a lot of, basically all of that stuff is going away.

and you have half the topics trading beneath book value. You know, there's a bunch of articles that I list that provide further context and go to the details. But I think you could see private equity have just feast, you know, over the next 10 years, like it was the 50s and 60s here in the U.S. So, you know, Japan as a nation is doing all the right things. You know, Nintendo as the natural brand ambassador, you know, call it the Japanese national champion. is the perfect poster boy of all these corporate reforms. You know, the relative valuation between, you know, Japan, you know, what's called its earnings yield, relative to other development is at an all-time high.

Cumulatively, I think, not only will capital start to flow back to Japan as they, you know, reforms when it comes to capital management, corporate governments, you know, All these companies have to have, I think 60% of the listed companies will have to have majority independent directors. I mean, these are things that have very real tea. And you add that into Nintendo and the change in the business model, the dividend that they pay out. And the fact that, you know, they're going to start, you know, even if you just look at last year, I think their operating margin was 37% and you don't, you know, extrapolate any growth, you know, aside nothing to the embedded margin and, you know, expansion and growth from the transition to the general. I mean, I could just go on down the line.

If you just take from last year and you roll that forward, I think that they should generate something like 20, 25 billion in excess cash after dividends. So when you get into and you really understand what's going on on a corporate reform level as a whole, then you have a question of, is Nintendo just going to keep letting these billions of dollars, you know, pile up? You know, it's got to go somewhere. And that was one of the other really interesting things about the November presentation was, I don't ever recall management explicitly stating that, you know, buybacks are, you know, always on the table. dividends have been paying, you know, pretty consistently.

But when you understand the cultural dynamic, you know, the backdrop of the, of the nation and Nintendo's, you know, I get loyalty and place within that, not only does all of the very shareholder friendly things that they've done over the last year start to make a lot of sense and all of the ways that they're seeking to unlock value by uplisting to the prime market in Japan. And you sent me that wonderful thing on Italy, right? Where they basically did something similar. You know, not only is Nintendo all of a sudden. The star segment of the Italian stock market was upperforming in many dimensions. You know, like Japan as a whole is doing it works. And then Nintendo itself is starting to do. you know, smart and creative things with their capital. And, you know, if you, there's a sensitivity

here table in the letter, but, you know, you can assume various price points of where they buy it back, but, you know, Nintendo could easily buy back 20 to 30% of the market cap. And in fact, I think they kind of have to. Otherwise, you know, the cash piles up and then they're Japan Inc. And, you know, there's just, there's no way given the movement, you know, at the board level, everything that they're doing, you know, the whole point of these reforms is for that Japan Inc. represent, you know, mindset to go away, you know, for, you know, like just allowing private equity to come in and start, you know, buying these companies up, you know, the unwinding of the crossholdings. Like, all of these things are deeply consequential. And if you. don't assume Nintendo does anything but simply buyback stock, you know, with the cash flow it generates an excess of the dividend it pays out. So basically, you know, in an amount that is in line with its annual earnings power, you know, the results are impressive to what that does to per share value. And, you know, I think no one sees that coming. I think it's time like,

you know, all of the old arguments about Nintendo and cap allocation are. are, I think, no longer, if you apply analytical scrutiny to them, are no longer defensible. And I think that's really, really exciting. So, you know, you can't talk about the, you know, capital allocation, and you're never going to get the cash back and it's trapped cash. None of that stuff makes sense anymore. And I think that's exciting. So, you know, I could keep going, but I, again, I never.

People still have to read your letter. So I think we should just make another advertisement for your letter and say it will be soon out here. It's available through the link below and people should read it because we've covered a lot of great points on Nintendo. Thank you very much for coming on. And also thanks to Todd who already had to leave. It was a fun conversation. Besides, we had some technical hiccups. But yeah.

Anything else? Anything else that we didn't touch it on high level that we've discussed in the past? If you want to add something for the end? You know, not, not, I mean, there's a lot of things come to mind, but I think we've covered it pretty well. I'll just say I'm very excited for the next year. I think we'll find out a lot of the kind of questions that have hung over in the air and been, I think, reasonably up. for debate for a long time. I think, you know, there's going to be a variety of catalysts that settle those questions. And one way or another, we're going to find out whether Nintendo's the

platform business that, you know, I think we both think it is and whether it's not. So I think at a minimum, it should be a very good, it won't be this agonizing back and forth between a 20-year-old, 30-year-old narrative that just won't die and you know what i think is we'll call it new nintendo and i think that is very very exciting it is it's a very interesting point on it's fascinating on which really is nintendo still trades and how much the market ignores it but maybe there's on the topic looking back after five years uh what a few feces came true i'm happy to follow up again one year or so yeah well i'll leave at this i think the scenario is much like again analogous to apple in 2011 i mean you had uh if we had a dime for every time you know

it was just a hardware company and and low cost you know samson phones are going to eat away its margins it's it was you know quite possibly the worst hot take uh you know of all time And, you know, you had guys like Michael Dell saying they shouldn't be in business. Bloomberg, or not Bloomberg, Harry Blodgett saying that the iPhone is dead in the water. You know, here we are 10 years later. And Apple's the biggest company in the world in terms of market cap. And I think this situation with Nintendo today is a lot like then, you know, the market doesn't appreciate the software and ecosystem aspects of the business. And I think when we, you know, look forward, you know, in time, you know, there's going to be a widespread general recognition of not only the quality of Nintendo's IP and their skills to create software, but, you know, a much higher multiple on dramatically higher earnings that reflects, you know, what the business is at its at its heart.

And just like Apple, there's periods of multiple compression and expansion, but hopefully we won't still be fighting this five, seven years down the line like Apple did. But I think that, you know, eventually the truth will win out and earnings will grow. And, you know, that's all we need to do quite well. It will be a quite interesting story to follow. And we will see. Yep. I'm really right. That's the thing we have to wait for. Thank you very much for coming on and thanks for the audience to staying that long.

As in every video, also here is the disclaimer. You can find a link to the disclaimer below in the show notes. The disclaimer says, always do your own work. What we're doing here is no recommendation and no advice. So please always do your own work. Thank you very much.