Good Investing Talks - Is the Switch 2 lifting Nintendo stock on another level, Ryan O'Connor?

Episode Date: April 21, 2025

Ryan O'Connor of Crossroad Capital joined us to discuss Nintendo's new Switch 2 console and its impact on the stock.

Dear viewers of Good Investing Talks, it's great to have you back. And when this guy is back in the podcast, Ryan O'Connor from Grosswood Capital, it's time to talk about Nintendo because in my eyes, he's the most well-known expert on Nintendo from the investor side. I know, and he's written great reports about Nintendo, and we've also done great videos. And as Nintendo fans may know, the Switch 2 has just been recently released. So, Ryan, what surprised you about the release of the Switch 2, and what is in line with your expectations? Great question. First, pleasure to be back. These are always a ton of fun. So definitely an appropriate time to kind of re-litigate, re-underwrite the situation. And I think there's a lot of fun stuff to talk about. What surprised me, with the direct or just kind of in general with, like, the recent news flow?

What do you have with the switch as a system? So the device was honestly everything I think we could have hoped for. It was, you know, the power has been, you know, everything I hoped it would be. I think that, you know, it's, you know, basically a PS4 Pro. you know, with a lot of kind of more modern, you know, bells and whistles that should, you know, allow it to have really no trouble at all playing kind of the best and brightest current-gen games. I thought that the, you know, the camera, the mic, the new chat feature was, you know, particularly fantastic. You know, I think one of the things that people don't tend to think about is how, you know,

I saw there's a stat out there that something like 107 million active users across the PlayStation and Xbox ecosystems are on kind of prior gen hardware. And I think a lot of the, and this is kind of borne out in the stats, of something incredible like 63%, or I think it's somewhere approximately in that basis of these prior gen, you know, these prior gen, you know, higher powered hardware. where console users spend all their time playing games that are like five or six years old. So, you know, think Fortnite, Call of Duty, you know, EAs, FC. And so, you know, one thing that I've noticed over time is that, you know, like just for an example with Call of Duty, you know, there's a lot of guys I know that, you know, the only time they say talk to their friends from high school is when they all jump online and, you know, play together. And so because of inertia, because of, you know, that's kind of the system their friends are

on. And, you know, that's how they stay in touch, you know, over time, you know, life, you know, can make that hard, that there's a large amount of those kind of 107 million active users that, you know, stay, largely because of kind of that chat feature, which has not been available, you know, on the original Switch and really historically with Nintendo systems. So, you know, I think, you know, bottom line is that creates a lot of stickiness that, you know, now I think, you know, kind of goes away and better than that. And I think it's kind of a nuanced point. But the fact that Nintendo's, you know, the Switch 2's new cat system, you know, allows gamers to kind of play together, you know, whether it be, you know, all playing the same game or all playing different games.

And so I think that extra bit of utility makes it, you know, very, very attractive. And I think it'll be, you know, kind of add a lot of stickiness to the ecosystem over time. And, you know, similarly, you know, I thought that the mouse functionality, I mean, you know, That was probably the biggest surprise, you know, as far as, you know, the total joy factor is because that opens the door not only to converting, you know, the 107 million, you know, prior gen Xbox and PlayStation users, but the, I think it's 1.6 billion PC gamers around the world. And so bringing that mouse functionality into it for, you know, whether it's kind of competitive gameplay with first-person shooters or games like civilization, you know, these massive games with very sticky installed bases, provides, you know, along with the power and the ability to play all their kind of favorite,

graphically intense, you know, games that weren't available on the switch, you know, the original switch, on a Nintendo system, really, I think, kind of opens the door and unlocks a massive opportunity to expand the TAM and grow their active playing user count above, you know, where it is today,

which is, I think, 129 million users for many, many years. And that, you know, taken together, I think, is going to be an enormously powerful thing that isn't really fully appreciated. it. What is for you the most unknown topic or the less discussed topic in the Switch 2 release where you think, oh, I see it is, but not a lot of people talk about this factor that the Switch 2 brings? That's a really good question. So, you know, I have a long-running theory that I don't want to discuss too much about it. But, you know, I think there's been kind of a a mosaic of breadcrumbs over the years when it comes to what Nintendo is planning for their

live service, you know, operations. And, you know, you could, I'll give you two kind of data points and just leave it there. But, you know, I started playing Mario Kart tour. I never played a mobile video game before. And, you know, for my due diligence, I kind of got into it for a little while and you know watch them kind of transition away from the kind of a lotto gotcha mechanic monetization kind of completely towards gas or you know gaming as a service um subscription in other words and as the game went on uh you know i played played it probably pretty consistently for a year year and a half but not only did the game get in quite you know just light years better but you could see, you know, kind of the model, you know, a subscription model for kind of mobile

light games really come into its own. And then all of a sudden, you know, I pick up my Switch. You know, I knew that they kind of, when they tied in the booster pass into Nintendo Switch online, you know, as part of an incentive for their players to upgrade with Nintendo's, you know, higher price subscriptions here, you know, I noticed they'd started integrating, you know, a lot of the tracks from Mario Kart Tour into the actual Mario Cardi Deluxe game. And so I thought that was super interesting that they were kind of integrating their mobile and console businesses in that unique way as part of like a, I think a pretty smart way to kind of leverage their most engaged player bases in terms of the support.

subscription service with Nintendo Switch online. Anyhow, fast forward to, I don't know, six months ago, I picked up my Switch and, you know, went to go play Mario Kart for the first time in a long time. And I had noticed that they had integrated all of my, you know, skins and all the data from my Mario Kart tour account into my Mario Kart 8 game. So that was intriguing, you know, that they'd be.

basically combine the two into a single thing. You know, the other thing I'd point out was how, you know, Nintendo created a joint venture with DNA who kind of runs the back end of their live services. And, you know, if you really think through the incentives there, you know, the reason I think they would do that is, you know, to give DNA, you know, a part of the upside from, you know, fully leaning into and expanding their gaming as a service, you know, business. And, you know, I think you also have to remember that this is Nintendo.

They'll lean into things the right way, but it will go very, very slow. And they spend, you know, years kind of mastering the dynamics of kind of the back end. And, you know, as far as their game development expertise, live service was something that was relatively new to them. And so it's kind of no surprising they've taken, you know, many years to kind of build up their expertise there, you know, alongside their. partnership with DNA. So third, you know, and I think this is kind of the biggest and most interesting of them is with the Nintendo Switch online playtest that they put out, I don't know, it was maybe two months ago. And my thought was that, you know, they were probably just doing it to test their dedicated servers because they put all this money into kind of, you know,

state-of-the-art networked online infrastructure. And because, you know, that, was one of the things with the OG era and Nintendo historically where they've really lagged. And so as they really leaned into building that kind of state of the art back end, that this was really just about, you know, seeing it how, seeing how it worked. So I think there was 10,000 test players. I, unfortunately, wasn't fast enough on the gun, you know, to get involved in it. But what ended up happening really, really surprised me, which, you know, it wasn't like just, them playing Splatoon or some multiplayer, you know, kind of MMO in the background.

But it was an entirely new game, a new IP, that essentially, you know, based on some of the leaked footage, is a, you know, Roblox and Minecraft clone. And, you know, it was clear they were using some of the game engines they built with for Tears of the Kingdom. But, you know, I don't think I need to tell anyone how big of a game Minecraft is, you know, worldwide, especially in Japan, and Roblox is obviously another big moneymaker, but within the game that the, you know, players were testing, there was clear direct evidence of kind of traditional in-game monetization, the ethical kind. And, you know, that really opens the door for, you know, it's obviously because it's part of NSO that, you know, it would be the perfect way

to kind of draw players in, not only attract kids via the Minecraft angle. I mean, I think they're perfectly suited for this type of game, but to leverage this IP to kind of massively expand their NSO memberships. And I think potentially kind of tie in their top franchises over the next five years into the NSO service via higher price subscription tier. that, you know, could do wonders for the bottom line, to say the least. But, you know, you take that, this new IP, it's kind of perfectly suited for Nintendo's expertise. It's a great kind of kids acquisition funnel.

And, you know, you add Nintendo's expertise plus, you know, the ability to grow subscriptions through NSO and then make incremental money through in-game, various forms of in-game monetization with all their kind of top five, call it best franchises with the most engaged player bases. And, you know, I think that will probably be involved with, you know, a new higher price subscription tier. So you add all that together. I thought it was notable that they,

there were a few things that they left out that surprised me. I mean, we know because of contractual guarantees, call of duties coming to the systems day and date or to the switch too. But I was really surprised on some level that at least going into it that they didn't reveal that game. But then, you know, as the direct went on, it was about an hour. I'm actually glad that they kind of saved that for what I presume will be the summer direct kind of heading into the all important holiday season. So, you know, that's the thing that I think no one sees coming. And then you add in the fact that, you know, one of the big leaks, I think it's called the TetraLeak with Pokemon, was that they are in the process of working on a huge Pokemon MMO that I suspect will in some way be tied to this as well.

But so, you know, if you take a Mario Card MMO, my hunch is that the direct next week will kind of showcase that, you know, it's certain they've been holding certain things back with what they've been allowing players. to play at these various in-person events going on with as far as the new Mario Kart world game. But I suspect that you'll have Mario Kart, Pokemon, and I could go through a few others that I think you're coming. But if you have five MMOs that are all available free to play as part of your Nintendo subscription service with, you know, non-casino-like monetization, in-game monetization between the impact to memberships and, you know, the incremental dollars that are basically pure margin from in-game purchases, I think the upside, you know,

like over and above what we've kind of underwritten and embedded our models is going to be enormous. And that's, you know, that's the thing I love about Nintendo, you know, it's dirt cheap on kind of the core-based business and there's all of these free options that are, you know, enormous in themselves. And I think you can kind of see coming if you're paying attention to, you know, all the details and clues that they've been dropping for, you know, in this case, a number of years. I hope you can follow me with this comparison when I watch the Direct as a Switch 1 user, let's call it Switch 1 or the Basic Switch. It felt like changing from a low-speed train to a high-speed train, Nintendo announced. Can you follow this comparison?

Yes, I follow it perfectly. It is leveraging. Let me ask, and which high speed, where do you see the high speeds elements in the Switch 2 Nintendo is pulling off? Well, I think it's going to be everywhere. I think, you know, the increased power, you know, is going to, I mean, you know, there are a couple reasons why I think essentially all third-party AAA games will come to the Switch 2, accelerating, you know, the growth of, I think, you know, what is the cheapest ticket to the best ecosystem with the best library of games, you know, ever. I think you could probably make that argument just based on the existing Switch 1 library. But, you know, the step change increase in third-party

games that will be available kind of in true fidelity, you know, once DLS is, you know, included and it's kind of upscale in dock mode, is set to really kind of blow people away. I think GTA-6 is coming to the Switch 2 as just one example. It's kind of like the Mario Kart, non-Nintendo games for the Xbox and the PlayStation. So you're going to see an acceleration in third-party games because of, you know, the device itself embedded power. But I also think that structurally, given, you know, the cost of game development for a lot of these, you know, third-party developers, you know, you know, like the industry is becoming kind of uneconomic. And, you know, I think once again, Nintendo called this, I think, all the way back in 2004, you know, referring to kind of the rat race

of changing photo, you know, or chasing photorealistic graphics when, you know, in the end, I think the only thing that really matters with video games is, you know, the gameplay and, you know, simply are they fun. And so to kind of break that down a little bit, you know, these, these big, tent pole triple A games, you know, can cost upwards of three, four hundred million dollars now. And it's because, you know, not only do they need an, you know, an army of engineers and programmers to build the base game, but it's kind of like a game plus a motion capture movie added to it. So when I say motion capture movie, think like actors, a Planet of the Apes would be a good example. or Avatar, where there's human actors, you know, wearing those suits and, you know, there's scripts. And, you know, the point is, is that the games have gotten just kind of so outrageously expensive to make that, you know, the existing installed base of, you know, whether it's Microsoft in particular and Sony, you know, it's just not big enough to make an adequate return on capital without kind of going multi-plan.

And you've seen kind of multi, you know, Microsoft Lean definitively that way and less so with Sony. They still have exclusives. But they've opened up their IP to PC and, you know, they're kind of moving that way. And I think it's because, you know, they're being forced to. You know, you need a much, you need to spread those costs across a much larger install base of users to really have the upside, you know, to make, taking all that risk. worth it. So obviously this plays, you know, very powerfully into Nintendo's mode because, you know, the Switch 2 will be the first console and, you know, really history that will basically allow, you know, high-end gamers, casual gamers to buy a system, you know, and by the way,

the cheapest system, you know, where they can play all the best games outside of, you know, maybe a dozen on PlayStation, but basically all the games that they could play if they owned an Xbox or a PlayStation plus Nintendo games. And I think that's the only way you can differentiate a platform in gaming. And so, you know, they need to bring their games to the Switch to, one, because they need to survive and the risks associated with game development are too large now to keep them exclusive to these smaller active user bases of Nintendo's peers, but also because they can. And that hasn't really been, you know, Nintendo hasn't had a system that could play kind of current-gen games and true fidelity day and date, you know, for 25 years.

You know, you've got to go all the way back to the GameCube. So that's one way it's everything's accelerating or the train is. You know, I also think it's a good analogy because, you know, this console changeover will be the first time in history that Nintendo's active user base hasn't kind of reset to zero, you know, day one. And so, you know, they're really building on everything, you know, they have, you know, done before. You know, I think this is really the Apple model at work where, you know, they, you know, have an iterative device, you know, hardware, you can. system where, you know, every few years, you know, you'll have new form factors and, you know, incrementally better specs, which will, you know, keep demand steady. And, you know, they, you know, Nintendo should want original Switch owners to continue to play for many, many years. And they can

just keep on building what has come on what has come before it instead of having to kind of play console roulette every generation and, you know, start again from scratch. And so I think that's another great way to think about it. But, you know, there's so many things. I mean, you know, one thing that I also think doesn't get fully appreciated by people is, you know, with, you know, a semi-surprise was that they didn't make Mario Kart World Cross-Gen. The new Pokemon game will be as will the new Metroid Prime 4. But when you think about the incentives to upgrade, the carrots that they're putting out there, I think that they're just amazingly powerful.

So, you know, one incentive to upgrade is obviously the ability to play these, you know, AAA games that weren't available on the Switch 1. But I think an equally important element of this, you know, kind of the latent demand here, which, you know, I think is very pricing, elastic given the, you know, existing, you know, the replacement demand from existing kind of upgradeers is that, you know, when you buy a Switch 2, basically day one, you know, a big chunk of your library from your Switch 1 games will be automatically upgraded. And what I mean by that is because of AI and Navidia's DLSS, you're going to have, you know, a part of your Switch 1 library

that will automatically have better graphics and run at much higher frame rates. And then, you know, this was another surprise. I figured that Nintendo would just allow the kind of upgrades to happen for their entire Switch 1 library. But I think from a shareholder perspective, you'd kind of hope that in certain cases, they would charge for it.

And so, you know, I think they did it really elegantly by, it's like 12 to 15 games that are upgraded automatically for free. You know, then you have games like Breath of the Wild and Tears of the Kingdom, which have some incremental functionality that they've added, you know, a little bit more polish. And that's going to be either free with a subscription to Nintendo Switch Online or $10 for new users to kind of upgrade the original game from the Switch 1. And then you have the $20 charge for like the new Kirby game or the new Mario Kart where, or excuse me, not the new Mario Card, but the new Kirby game is an example where they've actually built new levels and, you know, they put a lot of work into it. It's kind of like the original game, looking better, running better, but also having new levels and additional content. And for that type of thing, they're going to charge $20.

So, you know, besides it, you know, the impact to the financials being material and how wonderful that is, it really makes. the desire as a switch one owner to upgrade to a switch two incredibly large because you're getting something for free that makes a big difference in, you know, the, call it the entertainment value of games you've already bought, you know, on top of access to new, all the new AAA games day and date and that kind of thing. So I think that, you know, you're going to see just enormous, very price and elastic embedded demand for switch twos from the active, you know, the current active playing user base. And I also think, as we touched on earlier, that, you know, 100 million plus at the minimum

of people still playing on prior gen consoles not named Nintendo that are due to upgrade, you know, have, you know, this wonderful new opportunity to not give up anything that. you know, has kept them on their prior, you know, the other consoles and kind of adopt the Nintendo system for the first time. So, you know, you add all that up together and it's a pretty beautiful thing as far as, you know, Nintendo's future over the next three or four years. To quote the former famous New Yorker, is the price too damn high or how do you see Nintendo's pricing strategy? I think it is what they've always done, I think the whining and complaining is absolutely absurd. While I understand on a human

level, no one likes to pay, you know, more for anything. You know, like for example, the, you know, the people whining about Mario Kart World being $80. Well, if you just go back to $2,017 and you look at what, you know, that is in $2,025, I think it's $78. So, you know, in real terms, Nintendo has kept its software prices the same, going back three or four generations. That and, like, as a kid that, you know, I can remember begging my dad, it was probably 1989, to buy me a copy of Double Dragon on the original Nintendo, the NES, and it was $60. You know, so like in real terms, I think, or, you know, in current day, you know, money that's something like $160, So, you know, the real cost of games, which have gotten dramatically better, much longer experiences, you know, the replayability of them has expanded massively. You know, you're getting a ton of value. You're getting a hell of a lot more for, you know, less than it used to be and the same as it's been, you know, the last 20 plus years. So I think the you know, kind of, you know, complaining about the price increases, quote unquote, again,

in real terms, that's not the case. And, you know, it's the same with the system as, you know, with the games, the kind of walk I just walk through you with Mario Car World is pretty predictable. And I would just note that too, because, you know, this has happened certainly since I've started following Nintendo, you know, for example, you know, when they announced the pricing for the original switch in 2017, I think the broad expectation was that it'd be 250 or 280, and it came out at 300. And, you know, the stock sold off 6% the next day as people, you know, kind of did the same old song and dance. And, you know, it's, I think it's quadrupled from that point, you know,

over the last eight years. So, you know, I kind of find it annoying and ill-informed, but I think it will have absolutely zero impact on consumer demand for both the system and the games. And, you know, that, you know, the price increases in general have actually compounded less than, you know, inflation. You know, if you look at pricing over the years and how much it's gone up on an annual basis. It's actually beneath inflation. So no matter what, I think that both the system and the games are going to sell like hotcakes, you know, regardless of the macro, regardless of, you know, what you see, you know, the concerns you may have about the general economy, which I think makes Nintendo set up today very special, especially given, you know,

all of the, you know, tariff-related, you know, aspects that people have been concerned about. But yeah, I mean, I think all roads lead to snowballing profits, irrespective of external factors. And, you know, that's exciting. I don't think it'll have any real impact on the business or whether adoption, you know, takes off like I expect or whether, you know, consumers think they're getting their money's worth. And I'll leave you with this, you know, like when it comes to all forms of entertainment media, internally we have what we you know a kind of a crossroads metric that we call the price to fun ratio which is kind of simply the average hourly cost of various forms of entertainment media

kind of ranked and so with you know Mario Kart for example I think it is extraordinarily reasonable to presume that you know the average Mario Kart fan will probably get 200 plus hours you know of gameplay out of that game so at $80 i mean you're talking about 40 cents an hour you know uh in terms of the you know kind of the real cost to the consumer now compare that to movies or you know uh you know take your pick you know the average movie whether you're buying it digitally is what $12 an hour um something like that uh depending on where ticket prices are or you know uh but i know on all the digital platforms like amazon prime and the Like, you know, typically movies, new movies are, you know, $20.

So call it $10 an hour. But no matter how you slice it, I think, you know, pound for pound, you know, Nintendo provides some of the best entertainment at the cheapest cost, you know, in the world. And, you know, when you compare that to the cost of cable TV or movies or, you know, other forms of modern entertainment media, you know, I think it's got a lot of incremental share to take given just the value received. You know, it's an incredible bargain, and I think that will be the case for a long, long time. Are there still people out there that say Nintendo is a cyclical business? Not if they have a brain. You know,

So, you know, it's funny, I almost fell out of my chair when the analyst at Goldman, you know, upgraded the stock and actually, you know, laid out the thesis we've been kind of putting out there since, you know, when we first released it publicly in 2019. So I'd say this. You've seen a lot of the sell side and kind of, you know, you know, and the buy side to kind of come around in full. as, you know, kind of the obviousness of what we laid out has kind of been proven out year over year, over year, you know, for the last six years. So, you know, I think there's at this point a fair amount of kind of buy into, you know, the new reality, you know, structural reality of Nintendo's business. But on the other hand, there's still a lot of kind of awakening, I think, to go. And, you know, once we see this console change over, you know, and as it, you know, is proven out to be a success, I think intellectually speaking, you know, it becomes, you know,

basically impossible to deny. And so that, you know, whoever is still on the, you know, obsolete paradigm side of the boat, you know, should kind of run over to the other side, you know, I'd say within the next year, as, you know, Nintendo. Windows, you know, revenue and profits continue to build off of, you know, kind of the steady upward trend that, you know, you've seen, you know, since the Switch-O-G Switch era began. Hey, Timon here. It's great that you've made it that far into the video, and I think it shows a certain passion for investing you're having. If you want to dive deeper and go further down the rapid hole, you're invited to apply to my community Good Investing Plus. It's a place that's very helpful to people who are ambitious about investing.

It's helpful to investment talent as well as Experian fund managers. So if you're interested, please click on the link below. And now, without further ado, enjoy the conversation. What are early sales indicators you're tracking? And what kind of sign do they give of how much boom the switch two will make? Yeah, a lot, you know, I think it's telling. So, you know, I'll give you one example from Europe. But so the UK, and I believe France as well, you know, they did their pre-orders, you know, across all of Nintendo's retail partners. And, you know, a couple things that are important to keep in mind.

One of which is, you know, Nintendo is famously candid about, you know, their plans to basically churn out as much, you know, switch to inventory as they possibly can, you know, for a number of reasons, but, you know, one of which was to combat all the scalpers and to try and get a new switch to as many people's hands as they possibly could. So, you know, these retail partners, to begin with, we're sitting on kind of record allocations of a system relative to any launch day with any prior console and history. And so, you know, from the get-go, they, they, you know, open up pre-orders and, you know, they basically sell out completely across all retailers and minutes. And then, you know, they got a restock.

And then, you know, as far as I understand, they sold out in minutes, I think the longest, you know, period where, you know, they didn't sell out of the restocks again with something like 30 minutes. So, you know, they have record launch inventory, they open it up, it sells out in minutes, then Nintendo gives them more, and then it sells out in minutes again. You know, if you look at Japan, the anticipation and demand has been so high that the My Nintendo store in Japan has literally been malfunctioning to the point where Nintendo has had to send out emails to everyone and apologize for, you know, kind of the website being down. kind of even more amusing, the microSD supply in Japan is basically sold out across the country.

You know, again, in anticipation of the new system coming out. So, you know, and all of this is happening. This is the second point, you know, in the midst of, you know, a global stock market, you know, implosion. And, you know, it's been affected not at all. In fact, you know, it's been, you know, every bit as strong as I would have expected it to be. I mean, if you just kind of do the math on, you know, the embedded replacement demand from the 129 million active users, that suggests before we even get into, you know, market share gains from, you know, Sony and Xbox and PC players coming over to the Switch 2, you know, year one demand today of, you know, north of 30 million. million units. So I think that, you know, even with Nintendo, you know, kind of, you know, for various data

points suggest they've been in active production, you know, building out inventory since, you know, late last year. That, you know, I mean, you know, I think Wall Street has consensus for year one in terms of sales at something like 17 or 18 million, which is, I think, kind of ludicrous because I think they did more than that in their six year, or the switch one did. But just based off of day one buyers, people that have been waiting to buy their new switch and have been pushing it off, you know, until the switch two comes out, you know, they could do almost double that. So I think 30 million plus, I think they'll sell everything that they can produce. It's just a function of

how much can they produce. So, you know, I think every leading indicator, and channel check that we have been very closely watching has borne out exactly like what we would have expected it to given everything we know kind of heading into this so we have at the moment over 100 close to 150 million switches out there what is your estimate on how this ratio will look like with switch one to switch two and like five years Right. So I think, you know, I assume, I don't have my model in front of me, but, you know, if you assume 10% churn, you know, which I think is very reasonable. I think, you know, I think there'll be, I think Nintendo, maybe this is the way to answer. I think Nintendo will continue to support Switch 1 with cross-gen and, you know, in some cases, exclusive games. for the next two years at an absolute minimum. But I think the active playing user base, which is $129 million last reported,

you know, should have a fair amount of room to continue to grow, even with, I think, unrealistically high churn rates. And, you know, I think in a lot of families, for example, you know, they might have a, they might buy the switch too, but they'll, you know, the kids will each have their own switch one. and that's how they'll remain active and engaged. But I think it'll be, you know, much like iPhones, where, you know, it eventually switch ones are going to go away, but, you know, they should be utilized, you know,

at a pretty decent rate for, you know, the next several years and, you know, the uptake in the switch two from, you know, existing switch ecosystem consumers and, you know, new consumers. casuals and high-end that come into the system will more than make up for it. I mean, long story short, I think it should grow consistently for quite some time, which active switch users, not switch one users. And how much do you estimate how many active playing users will we have in this in five years? Um, I'd have to, I'd have to pull up my model. I think about it in terms of the top and bottom line, uh, typically. But, um, uh, let's put it this way. Uh, if we underwrite, you know, I think very conservative assumptions and we assume they stay flat. Uh, I think the stock, you know, even with a bunch of, of nonsensical, uh, in terms of the conservatism, uh, in terms of, you know, what, what the business. should earn. I think the stock should easily double if active users never grow.

And how do you see the game selection and the game offer changing in the next five years? Are we also going high speed there? So that's a great question. I think if you look at Nintendo's history, with, you know, specifically their portable system where they've been doing kind of iterative upgrades for, many, many years, you know, with the 2DS and the 3DS, you know, you could go back through all their families of portables and kind of see this dynamic. But, you know, historically when they've launched a new upgrade like the Switch 2, they have, you know, released, you know, kind of three or four exclusives to that new, you know, iteration. And then the rest of the game,

have been, you know, what would generally be called cross-gen. So I suspect it'll be something like that. You know, you see this with the new Pokemon AZ and Metroid Prime 4, where you're going to have, you know, additions released for both. And you also see this has been the general way for, you know, the PlayStation and the Xbox where, you know, a new AAA game will have a game released for both, you know, in this case, the PS5 and the Xbox. Xbox series consoles, and then they'll also release a copy for the PS4 and I think it's the Xbox One.

So, you know, that and you're going to want to be able to monetize this massive installed base of users as a publisher, whether it's Nintendo or a third party. And so, you know, there's all the incentive in the world for that to continue to happen. So when you think about what the kind of normalized tie ratio will be going forward, I think on the total active base, switch one and switch two, you should actually see, I think the average over the last eight years is 2.5. And then you look at credit card data, you know, there's a variety of ways you can triangulate this. but, you know, PlayStation and Xbox users spend on average as something like 30% more than, you know,

Nintendo fans have historically. So I think you should see the tie ratio kind of expand on a steady state basis from two and a half, you know, averaged over the last eight years to something closer to three. And, you know, that has a tremendous impact as it flows through the financials and then, you know, the price increases on Switch. two games and all of that kind of thing. But I think Nintendo will continue to support the Switch 1 for a number of years until the Switch 2 base starts to get, you know, let's call it 100 million plus, which, you know, I think could be sooner than a lot of people expect, but, you know, called over the next four or five years, it should get there.

And then, you know, like, you know, with the iPhone, you know, if you tried to, you know, start up, say you kept your iPhone six, and you tried to, you know, start it and, you know, update it with the current software. I mean, the phone would brick and it wouldn't run. This is, you know, kind of that planned obsolescence dynamic where, you know, over years as devices are iterably improved and upgraded, you know, the older models continue to work just fine for, you know, several years. But eventually as both the software and hardware improves, you know, the older stuff stops working. So it'll be very much Apple-like, I think, in that way. Does the Switch 2 also solve a bottleneck for third-party games?

100%. You know, people were concerned about power. And one thing people don't really take any consideration is game optimization is the very last part of the development process. And so, like, I'll give an example, when the Switch 1 revealed, Mario's Odyssey, the first, you know, trailer, if you will, direct, you know, the gameplay they were showing was brought, it was like 780P. And, you know, when it was eventually released, it was at, you know, I think 980 and looked, you know, materially better. And so that's just a way to say that when you're looking at what we saw on the April 2nd directs, you know,

on your screen, you should kind of expect that all of these games are going to look a lot better than, you know, what you're kind of seeing today. So, and that kind of ties into the next point, which is, you know, if the footage for I think it's cyberpunk, this was a game that was so required, you know, so graphically intensive that they didn't even release it on the PS4. and it was basically running terribly on the PS5. You know, the footage that they had shown, and there was similar,

you could say similar things about Street Fighter 6 and some of the other stuff that they put out there. But, you know, for CyberBunk in particular, you know, this was a game so big and massive that, you know, they didn't even attempt to release it on the PS4, yet here it's coming to the Switch 2. It looks as good, you know, for all intensive purposes in every way as, you know, the PS5 version.

It is running at, you know, a frame rate that is, you know, every bit as comparable. It's just a really super impressive thing. And, you know, when you consider the fact that, you know, we've heard since the direct that the version they showed on the commercial was, you know, it had started basically from scratch this port seven weeks prior. to when that footage was taken. So I really think, you know, it's going to blow people's minds. You know, people are out there talking about how, oh, it's PS4 like, I think on the facts,

that's absurd. And I can give you 10 different reasons why. But, you know, all indications are, you know, these games are running just as well, current gen, you know, PS5, Xbox series games, just as well, if not better. you know, in dock mode and will continue to relative to, you know, you know, kind of the PS4. I mean, it's closer towards a series X, or excuse me, a series S in terms of its capabilities, you know, but I actually think, you know,

very quickly it'll be evident that it's actually, you know, basically neck and neck with current gen consoles. And when you consider that, you know, this is on a home and portable, you know, console and one that has, you know, these dramatically reduced power estimates, it is quite defeat. I think it's incredible. It's going to blow people away. And as these devs learn to master the hardware as is true in every kind of generation, they're going to keep making their games better and better. Now, you know, maybe five years down the road when the PS6 comes out and in the light, there may be, you know, less approximate parity or you might be able to notice, you know,

more of a difference. But for various reasons, I actually think, you know, they'll be fine. I mean, you know, we know for a fact that the switch two was originally scheduled to be released in 2022. And so kind of a different way of saying that I think you'll have, you know, continuous upgrades every two to three years where you know the new system you know called the switch three the switch four you know you know the switch two light you know like we've seen with the og switch era will make it you know they'll easily be able to keep up with current gen offerings on other

consoles and i think that's really exciting for the end of our interview is there anything you would have put to like to put a spotlight on that we haven't discussed i mean i could talk about nintendo all day i know you know i think yeah yeah i think we maybe i just say that um uh you know nintendo and and fears with respect to you know the impact uh that tariffs whether you know uh it's you know everything's dead you know focused on china um you know since we've had the reprieve with Vietnam, you know, in Cambodia, that's where the vast majority of Nintendo's production comes from. So I'd say if you run the math and you assume, you know, the prior math, what it was relevant, that, you know, they take the entire hit, you know, from the 46% tariff

in Vietnam, which most of their production is in, you know, they are still profitable. you know, on a consolidated basis on hardware. I mean, Nintendo has never sold their hardware to loss, you know, kind of much like Apple. But even if you fully load, you know, the worst case tariff that is now kind of irrelevant, they're still going to more than break even, you know, consolidated across, you know, the entire, call it install base on their hardware sales, you know, through, you know, the U.S. and the rest of the world. And of course, you know, that's important because, as everyone knows, I mean, Sony and Microsoft sold their consoles at a loss for most of history.

And they were absolutely fine with it because, you know, all the money is made on the software side. And, you know, so, you know, even in the absolute most draconian worst case, that's no longer relevant, you know, it is essentially a non-issue when it comes to Nintendo. That and, you know, there's, they had actually moved most of their production out of China. China this time, you know, I think in part in being proactive. I think they learned their lesson in the pandemic. And so, you know, fearing the tariff issue, they, you know, kind of had basically already moved most of their production capacity to Vietnam and Cambodia, some in Japan too. And obviously, I don't think anyone could have first seen the 46% tariff on Japan or on Vietnam. But now that that's gone, you know, the point is, is that they are very savvy in this

way. They are flexible and nimble. They have already kind of navigated this by moving away from China ahead of time, you know, and, you know, it wouldn't be difficult. I mean, you know, we're talking about assembling switches. They could move to Mexico. You know, they have a ton of flexibility to kind of restructure and flexibly adapt their supply chain, given how they kind of got flat-footed with the pandemic, and I think they learned the most important lesson. So for those reasons and a lot of what we've discussed earlier, I think, you know, all roads lead to higher revenue and profits and much higher stock price, irrespective of kind of macro issues and all the hysteria with the tariff issue. So maybe I would just, you know, touch on that. That

In the end, they can flexibly adapt in a way that won't really change the end game for their business and for shareholders at the end of the day. Then thank you very much, Ryan, for this great insights on the Switch 2 and the changes for Nintendo. And thank you very much to the audience for listening to here. Bye-bye. Thanks, buddy. It's been a pleasure. I really hoped you enjoyed this conversation. If you did, please leave a like and a comment and for sure subscribe to my channel.

Traditionally, I want to close this conversation with the disclaimer. So here you can find the disclaimer. It says, please do your own work. This is no recommendation. What we are doing here is just a qualified talk that helps you, but it's no recommendation. Please always do your own work. Thank you and hope to see you in the next episode. Bye-bye.