What are the tips for reading Nintendo's financial report?

A popular series explaining financial statements.

This time we focus on Nintendo (7974). The company began manufacturing and selling hanafuda and playing cards in Kyoto during the Meiji period, and is now a consumer-friendly company that develops and sells gaming consoles and mobile games.

The game console "Nintendo Switch", which was released in 2017 and was a huge hit, celebrated its 8th year in March of this year. Although the number of units sold has decreased since the fiscal year ending March 2021, it has maintained a steady size and the number of annual players has reached 122 million people.

Let's check the key points for deciphering the financial statements.

1. A single segment company with only gaming business.

In analyzing a company's financial statements, it is necessary to focus on the business that generates the highest revenue.

In the case of Nintendo, it is a single segment consisting only of gaming-related businesses, with almost all of its sales coming from gaming consoles and software sales. Therefore, it can be said that it is a business that is significantly dependent on whether or not a game is a hit.

Point 1 - Dependence on gaming consoles and software, but a solid financial foundation.

In terms of Nintendo's sales breakdown by category, over 90% of its sales come from gaming console sales (including software), while "mobile and IP-related income, etc." accounts for about 5%.

Let's take a look at the sales volume trend of Nintendo Switch, its main console, from Nintendo's performance and financial information page. Although it has maintained sales of over 10 million units, it can be seen that the sales volume has gradually decreased since the fiscal year ending March 2022.

Let's also consider the characteristics of the gaming business. It is a tough business that is not a necessity of life but a part of entertainment, and is significantly influenced by changes in people's preferences. It is also a difficult business to read, as sales fluctuations are significant due to rapid changes in device technology, the success or failure of hits, and changes in gaming enthusiasts' preferences. The life cycle of gaming consoles is relatively short, and there is a risk of having excessive inventory due to the strong seasonality of heavy sales during Christmas and New Year holidays. On the other hand, if there is a big hit, performance will jump significantly. During the COVID-19 pandemic, the game "Animal Crossing: New Horizons" became a record-breaking hit due to the stay-at-home demand.

You can see from the following graph that performance has fluctuated greatly depending on the presence or absence of hit products.

In the gaming business, there is a large risk of significant performance fluctuations, and it takes several years to develop a game, with large development and advertising costs required. Therefore, many gaming companies hold a significant amount of cash and manage their businesses to avoid taking on a lot of debt. Nintendo also holds a lot of cash, and its self-capital ratio, which is the ratio of its own assets and not debt, reached 82.6% (fiscal year ending March 2024). In addition, of its total assets, about 80% are current assets, ensuring a high level of business continuity and a solid financial foundation. The financial statements for the fiscal year ending March 2024 show that the company has nearly 150 trillion yen in "cash and deposits."

Point 2 - High overseas sales ratio, with a large impact from foreign exchange rates.

Nintendo's overseas sales ratio is around 80%. As shown in the graph below, sales in the Americas and Europe are very high. Therefore, it is strongly affected by foreign exchange rates against the dollar and the euro.

When making performance predictions, the assumed exchange rate is often based on a strong yen assumption compared to the current exchange rate, and exchange rate gains are expected at the end of the period. The exchange rate the company is expecting should also be confirmed in order to anticipate how much exchange rate gains will occur and to what extent the performance forecast will be above or below expectations.

2. What is the successor to Nintendo Switch?

The Nintendo Switch, which is in its eighth year, is a historical hit machine with cumulative shipments of over 140 million units. As a game console, it is the third largest after Sony Group's "PlayStation 2" and Nintendo's "Nintendo DS." The successor to the Switch is highly anticipated, and Nintendo has announced its intention to release information on the successor by March 2025.

According to an article in the Nihon Keizai Shimbun in February, the successor will be a game console that combines the features of both a stationary and portable type, like the Switch. The screen is expected to be larger than the Switch (standard model is 6.2 inches) and capable of supporting games with even higher image quality.

Suppliers are also being watched. Nintendo has a "fab-less" production system in which it outsources the production of its major products, such as game consoles and peripheral equipment, to external production partners, without owning its own factories. As a result, it has the characteristic of having a low proportion of tangible fixed assets. The risk is that problems with external procurement sources may hinder product manufacturing. When the Switch was released in March 2017, initial shipments could not keep up with demand, resulting in a shortage and widespread reselling. Major suppliers include Hosiden, Minebea Mitsumi, Megachips, Marubun, Rohm, and US Nvidia. If they release a game console compatible with highly precise image games, Nvidia's AI graphics technology "DLSS (Deep Learning Super Sampling)" would be necessary, and whether it is built-in or not is also a focus of attention.

3. Who are the competitors in the industry?

According to the Nihon Keizai Shimbun, the global game market is expected to expand to $211.3 billion (about 32 trillion yen) by 2025. Competitors and peers of Nintendo include US Microsoft, Sony Group, Tencent Holdings, Nexon, Bandai Namco, Konami, Square Enix, Capcom, DNA, and Koei Tecmo Holdings.

Point 1: Comparison with Sony Group

The main domestic competitor is the Sony Group. Compared to Sony, which has multiple businesses such as music, finance, and movies, Nintendo relies solely on its game business. Nintendo targets a wide range of users such as children and family, while Sony has attracted many young and core gamers as fans. However, Nintendo can be said to have many IP (intellectual property) of its own games, such as Mario and Pokemon, with high name recognition.

Point 2: Expansion of population touching game characters

In addition to games, Nintendo is expanding into theme parks, movies, and official shops to increase the population that touches game character IPs. They have been particularly focusing on this area in recent years. Specifically, Super Nintendo World, which opened in Osaka City's Universal Studios Japan (USJ) in 2021, and the Mario movie released in April 2023, "The Super Mario Bros. Movie," were both popular. A new Super Mario movie is scheduled for release in April 2026. The live-action film adaptation of the popular game "The Legend of Zelda" is also planned, and these initiatives are being accelerated.

This information is provided for information and investor education purposes and does not recommend individual stocks or investment methods.