Coming from a BusinessInsider interview with Joshua Kennedy of Sonian Capital Management...
BI: What is the market missing on Nintendo?
Joshua Kennedy, Sonian Capital Management: There is a confluence of factors that has led to Nintendo getting mispriced in the past, and I think it is a pattern we’re seeing again today.
The first factor is the cyclicality of their hardware business; sales are very strong when they have a hit console or handheld. Software sales are procyclical, so it is a real peak-and-valley sales pattern.
The second factor is the company is extremely circumspect about sharing its plans for new products, so it leaves investors, competitors, and fans to speculate about what’s coming next for Nintendo, particularly when sales are at a trough because the old cycle has ended.
As a value investor, Nintendo is an attractive example of a protected downside, because of the balance sheet and the intangible assets, plus an earnings engine that potentially can drive the stock much higher. It might not work, they might screw it up, and lots of things can happen. But the combination of risk and reward is positively skewed almost regardless of how low a probability you place on Nintendo’s continued vibrancy in the video game space.
BI: Is there any possibility that Nintendo acquire or be acquired?
Joshua Kennedy, Sonian Capital Management: Nintendo will not be acquired, I think that much is certain.
In terms of deals they could do that would help them in smartphones, they took an obvious first step with their partnership with DeNA, which is a mobile gaming specialist in Japan. That partnership included a share swap, so Nintendo owns 10% of DeNA. We don’t necessarily know the details of DeNA’s role, but if they are jointly successful in mobile games, Nintendo could begin to account for a significant portion of DeNA’s profit stream. In Japan, this type of progressively deepening relationship can be a predecessor to M&A.
Although Nintendo has the capital to easily swallow some listed Japanese game makers like Capcom or Square Enix, both of which are further along in adapting their game franchises to mobile than Nintendo, I don’t see that happening either. Nintendo is pretty independent and prefers to develop its own IP.