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For more than a century, Nintendo has shaped childhoods and increasingly, entire generations across the globe.
The company has created cultural icons like Mario, Zelda and Pokemon, all of which are franchises that have transcended gaming to become globally recognizable entertainment brands.
Nintendo has an incredibly fascinating story, as they've had multiple flops that threaten their entire business model and, for decades, had to weather through the dramatic boom-bust nature that defined the gaming industry.
But over the years, Nintendo has continued to reinvent itself and thoughtfully expanded to new business segments, including movies, theme parks, mobile apps, online subscriptions and merchandise, all while staying true to its mission of creating unique, intuitive and family-friendly entertainment that puts smiles on the faces of everyone they touch.
On today's episode, we'll explore Nintendo's 137-year history, its recent strategic shift that reshaped its entire business model, the competitive dynamics surrounding the Switch 2, and whether this iconic Japanese company can continue compounding value for shareholders in the years ahead.
Enjoy today's episode on Nintendo.
Since 2014 and through more than 190 million downloads, we break down the principles of value investing and sit down with some of the world's best asset managers.
We uncover potential opportunities in the market and explore the intersection between money, happiness and the art of living a good life.
All opinions expressed by hosts and guests are solely their own and they may have investments in the securities discussed.
Now for your host, Clay Fink.
Hey, everybody.
Welcome back to The Investor's Podcast.
I'm your host, Clay Fink.
And on today's episode, we'll be breaking down Nintendo.
To kick off today's episode, I wanted to start by going back through the history of the company.
Because to really understand where this company is today, you have to appreciate the journey that brought them here.
Nintendo is one of the most influential and successful gaming companies in the world.
They've been in the video game industry since the industry's inception and time and time again they've been at the forefront of innovation.
But what's interesting is that Nintendo did not start in video games at all.
Nintendo was founded all the way back in 1889 by Fujiro Yamauchi.
At the time, the company was in the business of selling handmade playing cards, specifically a traditional Japanese card game called Hanafuda.
Yamauchi was a skilled artisan and a lover of cards, and he had early success in the cards business, partially due to their After getting access to sell their cards in shops all throughout Japan.
Nintendo would become one of, if not the largest, card manufacturer in Japan by the 1920s.
Nintendo would remain in the playing cards business in the decades that followed, and in 1959 Nintendo secured a licensing deal with another globally iconic brand, Disney.
Under the deal toys, board games and playing cards would be adorned with Disney characters like Mickey Mouse and Popeye.
In 1962, they decided that they wanted to make a push to expand outside Japan.
So the company went public and began to expand into different markets.
From there, Nintendo attempted to enter several new business segments including, believe it or not, rice cookers and a taxi service.
Most of these new projects would fail miserably and, as a result, by the late 1960s, Nintendo was on the brink of bankruptcy.
Nintendo would then refocus on its bread and butter segments, which really had worked for decades.
This was entertainment.
Around this time.
They could use these new emerging technologies to create new types of games that their customers could play, which led to the release of the Beam Gun series in 1970, which was an instant hit and sold more than 1 million units.
In the years that followed, home game consoles started to pick up steam in the West, so Nintendo partnered with Mitsubishi to help them put together their first home consoles.
They'd go on to sell a few different types of consoles throughout the 1970s, some of which weren't much more than just a game of Pong.
In the 1980s, they launched the Game & Watch, which was a handheld game that sold millions of units over an 11-year time period.
This success gave them the cash necessary to continue investing in new games and continue on their growth trajectory.
In 1981, the original arcade game Donkey Kong was developed by Shigeru Miyamoto and his team, and it was a culmination of game design at the time.
Miyamoto was just an avid gamer himself, and he understood that a game, at its fundamental level, it needed to be easy to learn but difficult to master.
Donkey Kong was an immediate success as it was the number one arcade game that year.
This game was also the debut of the iconic Nintendo character, Mario.
In the 1980s, Nintendo's gaming segment included arcade games, handheld games, and consoles.
But Nintendo was starting to see in the gaming industry's history was the crash of 1983, which was created by a flurry of third-party game developers just flooding the market with low-quality games.
And the crash led to a lack of demand for gaming consoles for around two years.
But Nintendo was still intent on being the leader in the US market gaming console.
They rebranded the console to the Nintendo Entertainment System, otherwise known as the NES.
In the late 1980s they would sell more than 13 million units of the NES and it would be in more than one third of all US households by 1990.
There was one specific addition to the NES that really set it apart from other consoles, and this was the lockout chip.
While other video game consoles had no protections for what games could be inserted into the console, this led to several game developers making just whatever games they wanted that consumers would then purchase and try out on the console.
Nintendo wanted full control of that user experience.
So, on the NES, users could only play licensed games.
Nintendo would also place a gold Nintendo seal of quality on gaming packaging and cartridges, showcasing to consumers that their games were licensed and reviewed by Nintendo for quality and family-friendly content.
And even with this level of gatekeeping, the NES really had no shortage of games in its library, which included The Legend of Zelda, Duck Hunt, Wild Gunman and, Nintendo's crown jewel, Super Mario Bros.
The NES was far ahead of its time in terms of graphics and gameplay, and it was also far cheaper than other consoles that were available at that time.
Super Mario Bros' success on the NES led Mario to become a cultural icon in the United States.
I certainly have fond memories growing up playing on the NES and the Nintendo 64, playing games like Super Mario Bros and Super Smash Brothers.
The NES would go on to sell over 60 million units around the world.
So in the 1990s, Nintendo would also go on to release one of my other favorite games as a child Pokemon.
Pokemon was the brainchild of Satoshi Tajiri. being released in February 1996.
The success of Pokemon led to a natural expansion into playing cards and a huge amount of merchandise.
So Pokemon was yet another success for Nintendo, as 80 million units were sold on the Game Boy and Game Boy Color.
When I was a child, you definitely could have considered me a Pokemon addict.
I just loved the Pokemon games.
Throughout the 90s, Nintendo's primary competitor in the gaming console industry, console that targeted older audiences.
Sony was also on the rise, which had just released the PlayStation as well.
Nintendo launched the Nintendo 64 in 1996.
This featured their first 3D video game console, and it included the launch of Super Mario 64, which beautifully showed off the N64's capabilities.
However, the N64 had difficulties competing with the PlayStation, as it was more difficult for game developers to develop games and the games weren't able to store near as much memory, which allowed Sony to gain a lead in the gaming console market.
The intense competition between Nintendo and Sony.
It led to price cuts on the consoles to encourage consumers to get that initial exposure to their ecosystem.
Nintendo and Sony.
They just did their best to get the consoles in the customer's hands with the hope that they would purchase several games down the line to recoup their losses on the sale of the console.
The success of the PlayStation showed Nintendo that they really needed to continue to innovate and differentiate themselves to stay on top of the gaming industry.
So they had the Nintendo GameCube.
That sold around 21 million units, but the PlayStation 2 sold more than 7x that at 158 million units.
However, Nintendo got the upper hand on Sony through their handheld device, as the Nintendo DS sold over 150 million units, nearly twice that of the PlayStation PSP.
Next, Nintendo set their sights on developing the Wii, which they described as a console that mom would like.
They sought to have a console that was unobtrusive and could slip into anyone's home, regardless of whether they were a gamer or not.
There were so many aspects to the Wii that made it unique and Nintendo was very intentional in the types of households they were targeting.
It was this thin and sleek design, making it easy to fit into anyone's household.
It had a much quieter fan than top competitors and the Wiimote was very similar and intuitive to a remote
So older generations would intuitively know how to work it and they would just point it at the system similar to that remote.
The Wii was a huge financial success for Nintendo as revenues more than tripled from 2006 flop with the launch of the Wii U.
The Wii U had several clear issues but to summarize how big of a miss this next-gen console was, they were targeting to sell 100 million Wii Us and they ended up only selling 13 million.
So they were totally dwarfed by other consoles in the Xbox and PS4.
And as a result, Nintendo turned slightly unprofitable in 2012.
The one positive spin from the Wii U was that it sort of forced Nintendo to find that next big win.
And this led them to launch the Nintendo Switch in 2017.
And this allowed for gameplay both at home, on one's television, and for gameplay on the go, such as when you're traveling.
After the failure of the Wii U, the Nintendo Switch would practically serve as the company's saving grace.
Remarkably, the Switch would break Nintendo's records for home console sales and was able to attract interest from third-party developers to help build out their library of games.
Since then, Nintendo has been riding the success of the Switch, as it has released updated versions to help keep the console sales rolling in.
So currently they offer the regular Nintendo Switch, the Nintendo Switch Lite, and the OLED model.
And then they also have the Switch 2, which we'll be one in the world in lockdown.
Nintendo sold over 20 million Switches in that year alone.
The Switch is actually my most recent touchpoint with Nintendo.
So when I was back home for Christmas my younger cousin she got us going on the Switch and it quickly brought me back to my childhood, playing fun, intuitive and competitive games with friends and family.
None of us knew how to play this game that she had set us up with.
So going into that evening, most of us just picked the game up rather quickly, even those who didn't have previous experience with the Switch.
And this really showcases all the subtle nuances that go into the design of Nintendo's games.
So, like I mentioned earlier, many of these games need to be easy to pick up and get going, but difficult to master.
In more recent years, Nintendo has expanded into new segments to give the company a broader appeal and give consumers different touchpoints.
So in 2016, Nintendo first entered the mobile market by developing apps for mobile phones.
Although mobile isn't a significant revenue driver for the company, cumulative downloads for Nintendo's apps have exceeded 900 million, indicating a pretty broad reach.
And although you have the classic Mario games on mobile, the biggest mobile hit was Pokemon Go's launch in 2016.
This drove huge download numbers and player engagement.
Nintendo's stock price initially soared because investors mistakenly believed that Nintendo would directly benefit from that success.
But Nintendo did not develop or publish the game.
It was published under the Pokemon Company, of which Nintendo only has a minority stake in, so the financial impact to Nintendo was rather limited.
They've also followed Disney's lead by entering the amusement park business.
They've partnered with Universal Parks and Resorts to create Super Nintendo World, an immersive theme park based on its iconic games.
They opened one park in Japan in 2021 and subsequent locations in Hollywood in 2023 and Orlando in 2025.
These parks bring Nintendo characters and environments to life in real spaces, blending cutting-edge ride technology with the gaming elements that fans absolutely love.
Amusement parks are yet another example of Nintendo being successful in introducing its IP to a wider audience.
And finally, they've also been expanding into movies.
Nintendo's major entry into big screen movies came with the Super Mario Bros movie in April 2023.
The movie grossed 13 billion worldwide, becoming the highest grossing film based on a video game and one of the top animated films ever.
Though Nintendo does not break out film revenue in its own accounts, it acknowledged that the Mario movie boosts games and merchandise after the release.
Given the success of the Super Mario Bros movie, Nintendo is actively expanding its movie efforts, with planned films including the Super Mario Galaxy movie in 2026 and a live-action The Legend of Zelda film, which is expected in 2027, alongside other projects drawing on its key franchises.
Nintendo's management has emphasized that movies are a part of a long-term strategy to extend and preserve its IP beyond games, reaching new audiences and keeping its brands culturally relevant.
Zooming out.
What's remarkable about Nintendo is how they've needed to produce hit after hit, with these new consoles, new games entering new markets, etc.
And overall they found a way to both survive and thrive over the last 137 years.
And it's no coincidence that Nintendo is this longstanding Japanese company, as Japan is home to many of the world's oldest companies that are still in operation today.
There are thousands of companies in Japan that are well over 100 years old.
Japanese companies are known for their focus on longevity rather than optimizing short-term earnings.
They tend to avoid existential risks by maintaining a strong balance sheet, not getting overly leveraged and moving cautiously into new categories.
Since Nintendo was founded in 1889, they just fit right into this Japanese model by ensuring survival and longevity over appeasing short-term-oriented shareholders.
Nintendo's balance sheet is rock solid, as they have more than enough cash to cover all their debts, and this has given them the optionality to continue to experiment and find new ways to monetize their incredibly valuable IP.
To further illustrate how long-term Nintendo behaves, consider that Mario debuted in 1981.
And more than four decades later, Mario remains a cornerstone of Nintendo's monetization strategy.
That does not happen by accident.
That's the result of deliberate stewardship of intellectual property across generations.
Now, this long-term strategy isn't necessarily viewed as a is too cautious in the way they operate, then they might be leaving quite a bit of money on the table, or they may be even doing their customers a disservice by not offering products that there is clear demand for.
So that's the big question with Nintendo from an investor's perspective.
Is this a company that is shareholder friendly and looks to maximize long-term value for its shareholders?
So, around 2018, Nintendo made a strategic shift in their business model by focusing more on generating recurring revenue through a subscription model.
Rather than continuing to start from scratch.
They need to have yet another hit console and new set of games in order to survive.
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I think back to my childhood.
One of my all-time favorite games was Super Smash Brothers on the Nintendo 64.
It's like I enjoyed it just as much as when I played it when I was a kid with my brothers or my friends.
But Nintendo was only able to monetize the sale of the console and then the one-time sale of the games.
I was getting tremendous value from those games for years.
But Nintendo only caps amounts of value to many of their customers, but they're only capturing a small portion of that value.
So by implementing more of a recurring revenue model, they can position themselves to increase each customer's lifetime value to the company.
Over the years, I'm sure Nintendo has looked at how Apple's business operates and in what ways they could replicate Apple's success.
Apple implemented a business model that's no annual cycle, rather than reinventing its products all at once.
Each new device typically keeps the same core design, but improves key components like processing power, battery life, cameras and displays.
Over time these steady enhancements.
They compound into major performance gains, while reducing manufacturing risk and smooth in as hardware, software and services evolve together in a controlled, coordinated way.
Investors also tend to favor this model because it creates more predictable demand, steadier cash flows and lowers the risk of major product missteps.
Now, how is Nintendo implementing this playbook?
Prior to the release of the Switch, Nintendo's earnings essentially always relied on the success of their in once a customer entered Nintendo's ecosystem,
So in the past, once a customer purchased, let's say, the Wii, they might have had that customer for five years, and then they would just hope that that customer would then purchase the next generation console.
But now, with the creation of the Switch, the hope is that once a customer purchases the Switch 1 or the Switch 2, they're now in Nintendo's ecosystem for a much longer period of time.
Nintendo has been able to add more value to its customers by developing a software-based ecosystem that features a library of games.
Users would not only be able to access the current generation of games, but it would also be backwards compatible, meaning that you'd be able to play many of the games that were available on past consoles, offering more selection.
Furthermore, if a new games that are being released today.
The simple way to think about this is that smartphone apps that are developed today might work best on the newest iPhone, say the iPhone 17, but those apps also work on previous generations of the iPhone.
So the release of the Switch represented that shift in their business model, where each new console had a Xbox.
They followed the subscription model years ago.
The Xbox 360 was the first console to put online play behind a paywall through a service called the Xbox Live Gold back in 2005.
In PlayStation, they followed suit with the PS Plus in 2013 with the launch of the PS4.
Nintendo launched the Switch in March of 2017, and then the Switch 2 in June of 2025.
The Switch was just a big hit.
It sold 155 million units worldwide, making it their best-selling console ever.
As of year, in 2025, Switch 2 sales have come in at 17 million units, which is selling at an even faster pace than the Switch 1.
In the first four days of the Switch 2's launch, sales exceeded 35 million units, making it the best-selling release for any video game platform in history.
The UK sold out their stores in less than two minutes, France sold out in less than an hour and the website in Japan was repeatedly breaking due to so much traffic.
Wall Street's initial consensus on the success of the Switch 2 was that they'd sell around 18 million units in the first year, and it's looking like they're going to far surpass that.
This also illustrates the pricing power that Nintendo has, considering that the Switch 2 launched at a meaningfully higher price point than the original Switch 1.
So initial sales for the Switch 2 have been strong, which I don't think should be a surprise, since it's been eight years since the original Switch.
The Switch 2 includes several upgrades, including a significantly more powerful processor and GPU, up to 4K resolution when docked, a larger screen and a major increase in storage capacity.
It also has built-in game chat and an integrated microphone with noise cancellation for customers to upgrade from the Switch 1 to the 2, assuming that they're just big fans of Nintendo.
Turning back to the Apple analogy, part of what would make the Switch a long-term success is encouraging third-party developers to develop games that could then be sold within Switch's ecosystem.
Nintendo has taken several steps to encourage developers to do just that.
They've created a developer platform which provides support for developers throughout the process of creating Switch games.
They've lowered the technical barriers by supporting popular engines that are used by most developers.
And they've improved relationships with third-party publishers and collaborated more directly with companies like Microsoft EA, Capcom and Sega.
Overall, they've made it much more attractive for developers to develop games for the Switch, and it seems to have worked out beautifully.
The Nintendo Switch now has a library of over 13000 games in their ecosystem, and the vast majority of these games are coming from third party developers.
To help put this into perspective, the Wii U offered just 600 third party titles.
It's also important to mention that, since Nintendo has such a vast base of users, this gives developers even more of an incentive to develop for their ecosystem rather than one of their competitors.
The more users they have, the greater the profit potential for developers, which leads to a wider moat for Nintendo.
But I think that Nintendo still wants to keep their first-party games at the center of the user, creating these unique, intuitive and family-friendly entertainment that just puts smiles on the faces of everyone they touch.
So what do the economics look like for the Switch?
The Switch 2 console, which includes two controllers, it sells for $450 in stores.
In the Switch 1, it sells for $340.
Other consoles sold by Sony and Microsoft are sold at a loss with the hopes of recouping their money through the high margin video games.
But Nintendo is unique in that they actually sell their hardware at a profit with something like a 10 to 20 gross margin.
There are three tiers of games that you can purchase within the Switch's ecosystem.
You have indie, which is short for independent AA, which you can think of as a mid-tier level, and then AAA.
Indie games are around $10 to $30, and they can be produced by a single developer or a small team.
It's more of your basic games.
Double A games are $30 to $50, and they tend to be put together by mid-sized studios.
These can be solid games, but they're not quite blockbuster level.
And then you have the AAA games.
These tend to run around $60 to $70.
Teams that have huge budgets are putting these AAA games together.
Some examples include The Legend of Zelda, Diablo III, and Skyrim.
Third-party developers collect revenue on games sold within Nintendo's ecosystem and end up paying Nintendo a 30 fee in return.
In case that sounds familiar, that is exactly the fee that Apple charges its third-party developers for iOS purchases.
Now, you might be wondering, what if users only buy a couple of games and they don't need any more?
Doesn't that mean that you just have the same problem as before, where users would buy the consoles, buy the games, but then no further value would be captured?
Well, this is where Nintendo Switch Online comes into play.
Nintendo Switch Online, or NSO, is their paid subscription service for the Switch and Switch 2.
NSO includes online multiplayer for supported games, cloud-safe backups, access to a library of classic games from previous hardware consoles and online features like voice chat integration.
Individuals can pay $20 for a year, and families can pay $35 for a year.
For Nintendo Super fans.
They also have a higher tier, which includes additional features such as retro libraries.
This runs at $50 per year for individuals and $80 per year for families.
And I think it's increasingly important that Nintendo has invested significantly in their online infrastructure to allow for users to play online with their friends or other users.
It's also pretty attractively priced, as PlayStation charges 80 a year for PlayStation Plus, for the essentials plan, and then 160 per year for the premium plan.
And then Xbox's Game Pass Ultimate, it runs at $360 per year.
So it may be that Nintendo is just beginning to tap into further monetizing their user base through the growth of Nintendo Switch Online.
To paint some more numbers around Nintendo's size and their scale.
They've been successful in growing their number of annual playing users within the Switch ecosystem.
This metric grew from 16 million all the way back in 2018 to 129 million today.
The surprising finding at least what I thought on this metric is that it's basically been flat in recent quarters, despite the launch of the Switch 2.
This suggests to me that a lot of consumers who bought the Switch 2 were simply upgrading from the Switch 1, and it also showcases that Nintendo is going to need to come up with more creative ways to attract new users into their ecosystem.
Of the 129 million active users, around 34 million were NSO users.
That was as of September 24, and it looks like Nintendo quit reporting this figure altogether.
If that is representative of where the number of subscribers are at today, then I think there's still room to a more capital light recurring revenue business.
And it is making an impact on the financials.
So prior to the launch of the switch, operating margins were around 6%.
And then prior to the launch of the switch too, you saw margins rise all the way to 30%.
So this is a result of a higher mix of their business coming from software sales which, of course, have lower input costs and higher margins.
Software overall is just a much, much better model for Nintendo.
As consumers become accustomed to purchasing most of their games online, that has profound implications on Nintendo's business.
They don't need to ship a physical product to retailers like Best Buy and Walmart.
They don't need to give those retailers a cut.
Consumers don't need to drive to the store to get a game.
And for third-party developers.
They also get a better end of the deal, as there's less friction involved in making the purchase, and they're also cutting the retailer out of the equation as well.
I was reading a Morningstar report this morning on Nintendo's business and Morningstar estimates that 80 of Nintendo's gross margins come from software sales.
And around 75% to 80% of their software sales come from selling their own first-party games.
So the rest of their software sales come from those third-party titles.
So Nintendo's growth is somewhat contingent on them being successful, with the release of new first-party games going forward.
They have a very good track record of doing that time and time again.
What's also important is that more than half of Nintendo's first party titles come from their long established and classic franchises.
Think Mario, Zelda.
And this helps the company continue to generate this strong and consistent earnings and returns over time.
I'd like to talk a little bit more about the Switch 2.
Nintendo re-engineered the hardware and its accessories from the ground up.
The Switch 2 features a larger display screen, upgraded controllers and it includes significantly more powerful processing and graphics capabilities.
Nintendo wants to encourage the existing Switch users to upgrade, to provide enough additional benefits to try and incentivize them to do so.
And this would prove to be a challenge, given that the Switch 2 is priced a decent amount higher than the original Switch.
They also did a few more things to help encourage users to upgrade.
So first, they strategically bundled the system with the highly anticipated Mario Kart World.
So if you go to their website, you'll see the option to purchase the Switch 2 for 450 or purchase the bundle, which includes Mario Kart World as well, for 500.
Nintendo has also, as I outlined earlier, they've taken these major steps to secure a suite of extensive third-party games.
So the Switch 2 includes a custom-made NVIDIA chip that showcases graphical improvements and increased memory and bandwidth.
This new chip also allows more third-party AAA games, which puts the system's capabilities more in line with the PlayStation and Xbox.
Most third-party AAA games weren't due to its limited hardware capabilities, but now that's no longer an issue.
They added Game Chat, which is a built-in voice and video communication feature and the first console that has allowed players to talk, share screens and even video chat while gaming.
This is important because gaming for a lot of people is a social activity.
They might hop online just to spend time with their friends in the comfort of their own homes.
This helps make many of their games more engaging, leads to longer play sessions, and it pairs well with the more complex multiplayer games, so players can better communicate with each other.
It also opens up a whole new segment of the types of games that developers may want to create, which previously just weren't interesting due to the lack of the voice chat feature.
What's also interesting about game chat is that players can be playing different games, still be in communication with each other.
So perhaps you're playing on the Switch with three of your friends.
You and one friend might decide to go and play a round of Mario Kart World.
Perhaps your other two friends would rather play The Legend of Zelda.
So, in the midst of all, that all four of you can remain in constant communication with each other, if you'd like.
They also introduced mouse functionality, allowing Joy-Cons to function like a mouse and even supporting standard USB mouse inputs.
That may sound like a small addition, but it significantly expands the types of games that work well on the platform, particularly first-person shooters, strategy games and simulation titles that benefit from precise cursor control.
By removing that control limitation, Nintendo makes the Switch 2 even more attractive to third-party developers and more competitive with PC and other console ecosystems, which really increases the Switch's significant increase in the value proposition now that users get.
They get the best of the best Nintendo games, backward compatibility for games from previous generations and many of the best third-party games, including those of which that are AAA.
Adding the AAA gaming capabilities I think was huge for Nintendo.
For years.
They opted out of this AAA arms race and they left it to Sony and Microsoft to invest just crazy amounts of money in developing games like Call of Duty and Grand Theft Auto.
The most popular AAA games.
They can cost hundreds of millions of dollars per year to develop and have carried significant financial risk because the developers don't know exactly how successful the games will be.
The cost of developing these games has also risen just a lot, that both Sony and Microsoft have opted to go this multi-platform route to help recoup that upfront investment, meaning that they're allowing users on other consoles to start playing their first-party games because the users on their consoles aren't enough to have them recoup that investment.
Thanks to Nvidia's custom chip, the Switch 2 now has the capability to run these modern AAA games, which opens them up to a whole new segment of gamers.
Historically, Nintendo has catered to families, casual gamers and younger demographics, and now they're able to also capture hardcore gamers.
And this is also a win for Sony and Microsoft as well, because it opens up their games to the largest gaming ecosystem that exists, with the Switch.
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That's the iconic first-party IP innovative gameplay, portability and a focus on providing games that are fun, instead of having this incredible raw horsepower.
Another added bonus is that not only does Nintendo take a cut on the sale of each Nintendo game, they also get the 30 cut on any upsells.
These upsells are pretty prevalent in AAA games through downloadable content and in-game purchases.
Similar to Apple's model, Nintendo takes a cut of these transactions without incurring any costs.
As I highlighted earlier, Nintendo's expansion into movies has given them a great opportunity to both as a tool for marketing to selling their gaming consoles and games.
Nintendo's first successful film was the Super Mario Bros movie, which was released in 2023, and that was in partnership with Illumination and Universal Pictures.
The film was a hit because it combined this nostalgic appeal for the longtime fans with family-friendly humor, strong animation and global distribution through their partnerships.
And this allowed the movie to resonate across generations and just be a blockbuster hit.
So this past weekend, I actually went back and watched the movie and thought it was just wonderful.
You have Mario and Luigi.
They're going about their normal lives before they get sucked into this magical warp pipe and separated from each other.
Mario landed in the Mushroom Kingdom ruled by Princess Peach.
And then Luigi.
He ended up in the Dark Lands.
Nostalgic to say the least, considering my childhood memories playing Mario games.
And it proved to me that Nintendo could in fact successfully take these iconic characters to the big screen without necessarily losing their appeal.
So the success of the film helped give Nintendo that confidence to continue to release more movies going forward.
In April 2026, they'll be releasing a sequel to the Super Mario Bros movie.
And in 2027, we'll see the Legend of Zelda.
Movies help introduce Nintendo's franchises to a global mainstream audience, many of whom may not own Nintendo consoles.
And this expands the brand beyond its traditional demographics.
Down the line.
Nintendo is targeting to release around one movie per year, and it helps just accelerate their flywheel.
The more people who see their movies, the more consoles they should expect to sell over time.
To wrap up the discussion on the business itself, I'd like to highlight some of the sources of Nintendo's moat and competitive advantage.
The most obvious source of their moat is the intellectual property.
Nintendo owns some of the most valuable entertainment franchises in history including, but not limited to Mario, Pokemon and Zelda.
These franchises transcend generations of and are essentially embedded into cultures globally.
While anyone can create playing cards, build a console, develop games or put together a movie, what cannot be replicated is the emotional attachment that people have with Nintendo and the franchises they own.
This makes Nintendo fall into a similar category but judging Disney's stock performance over recent years, that might not make too many of our listeners that excited to compare the two.
If we consider the intellectual property through the lens of Hamilton Helmer's Seven Powers, this primarily falls under the category of branding.
Even though other types of video games exist, many people choose to purchase Nintendo's consoles and games.
The brand they've built allows them to charge these premium prices for their consoles and games, and this leads to high returns on invested capital over time.
The second source of their moat is counter-positioning.
Nintendo benefits from counter positioning by deliberately avoiding the graphics and performance arms race that Sony and Microsoft compete in.
Instead, it focuses on differentiated hardware and unique gameplay experiences.
Their competitors are structurally locked into serving these hardcore gamers and relying on high powered consoles.
So if they tried to copy Nintendo's strategy, they would risk alienating their core audience and undermining their existing strategy.
With Sony, Microsoft and Nintendo owning a lion's share of the US video game market, Nintendo has uniquely positioned itself to continue to thrive in an ever-changing environment.
Another aspect of their mode to consider is switching costs.
As users purchase games and play games with their friends within the Nintendo ecosystem, leaving the platform becomes less and less attractive.
And parents who purchase multiple first-party titles and accessories for their households are also more likely to stay within that ecosystem for the next console cycle.
While switching costs aren't as high as some software supports recurring engagement and sales.
I don't know how things were for you as a listener growing up, but I would tend to get one console per generation of releases.
So if I ended up getting a Wii, I didn't also get an Xbox or a PlayStation.
I would typically have to wait a few years, until Christmas time, to ask to play another console after I had already made use of the previous console that I received as a gift.
Nintendo also benefits from network effects and scale advantages.
A large installed base of Switch users attracts third-party developers, which in turn brings more content to the platform and reinforces its appeal.
And as hardware sales grow, Nintendo can spread development and distribution costs across a wider audience, improving margins on first-party titles.
While these forces are not as dominant as its IP and brand power, they still strengthen the overall durability of the ecosystem.
And since AI is just all the rage today and it's just top of mind for so many investors, who are thinking more and more about the potential for disruption coming from AI, I thought it would be interesting to touch on how AI might impact Nintendo's business going forward.
It seems like AI will improve the development efficiency and thus expand their margins over time.
AI tools can help with things like game development, game testing, leading to shortened development cycles, allowing Nintendo's team to focus more on the user experience, which is where the company tends to really differentiate itself.
AI could also strengthen Nintendo's ecosystem by improving online safety and personalization.
As Nintendo expands social features like game chat and online multiplayer, AI-powered moderation, anti-cheat systems and smarter content recommendations could make the platform safer and more engaging.
Lastly, AI at the hardware level could enhance performance and further broaden their addressable market.
On-device AI upscaling, smarter battery optimization and improved graphics processing can allow Nintendo to deliver stronger performance without investing these absorbent amounts like Sony and Microsoft.
So AI empowers Nintendo to continue to innovate without necessarily sacrificing its profitability levels.
One risk to monitor, however, is industry-wide content oversupply.
So, as AI lowers the barriers to game development and floods digital storefronts with more titles, this would increase competition for player attention and make the discovery of games even more critical.
Over time.
AI likely won't change Nintendo's core advantage, which is the IP, but it can make the business more efficient, more scalable and more defensible in an increasingly competitive gaming landscape.
Speaking of oversupply and competition, one interesting tidbit I came across was from one of the co-founders of Xbox, Seamus Blackley.
Blackley shared that Microsoft is very focused on the future of AI and they're just not interested in many of their business segments that aren't in AI.
He stated, Xbox, like a lot of businesses that aren't the core AI business, is being sunsetted.
They don't say that, but that's what's happening."
So Xbox?
They currently have 40 million plus active users, which might be a huge plus for Nintendo if they discontinue the release of new Xboxes.
So we'll see how this plays out.
I think PlayStation would likely benefit from this more than Nintendo, but undoubtedly it would help Nintendo as well.
Turning to the valuation, Nintendo's stock price got a big boost after the early success of the Switch 2.
And as of the time of recording, the stock is down over 35% from the highs it set in August 2025.
Investors have the option of buying the shares on the Tokyo Stock Exchange, ticker 7974.
And there's also an ADR that trades under the ticker NTDOY.
The market cap of the business is around 101 trillion Japanese yen, which seems like a ridiculously high number.
It's really equivalent to 65 billion US dollars or so.
In the trailing 12 months, the company had record revenue coming in, 13.5 billion.
Net income over that period was two and a half billion.
This gives the stock a PE ratio of around 26%.
Nintendo is not a company whose evaluation should be judged on current revenue, current profits, because there's just so much more to be seen as it relates to the launch and the success of the Switch 2.
So despite the stock selling off, the company seems to just continue to be firing on all cylinders.
The.
There were concerns in 2025 related to tariffs impacting Nintendo's business, but revenue and earnings post-tariffs continue to suppress expectations.
And investors anticipated a weak holiday demand for the Switch 2 which, it looks like, really did not end up materializing.
In early February, Nintendo announced its Q3 results that ended December 31st, 2025.
Revenue over the nine month period was up nearly 100% year over year and net profit was up 51%.
So it's pretty remarkable that the stock has sold off as much as it has, despite the switch to, still managing to so far make it the best selling console ever at least, is on track to be.
And the market does also seem a bit concerned about the rising costs of memory chips used for the Switch hardware.
Memory prices have been rising globally due to supply constraints and increased demand from data centers and AI infrastructure, and this puts pressure on the cost structure of Nintendo.
If those component costs remain elevated, Nintendo either has to absorb that or consider raising prices.
And investors are trying to gauge how that might impact profitability going forward.
Investors are also uncertain about the pipeline that Nintendo has for first-party games beyond that initial launch window.
So Nintendo is fairly secretive about its release schedule, and this creates limited visibility into what major titles might drive engagement and software sales over the next 12 to 24 months.
And in a hardware-driven business, that lack of clarity can make the market nervous, even when the long-term fundamentals remain intact.
Furthermore, I think there is some element of the market assuming that Nintendo will continue to be a boom-bust story that has historically characterized much of the video game industry.
Video game engagement has traditionally been cyclical, with player activity and software sales surging around when the consoles are launched and then tapering off in the years that follow.
Investors have seen that pattern play out repeatedly across the industry.
So, even with the strong early success of the Switch 2, there's still a lingering concern that growth can normalize once the initial upgrade cycle fades.
So when we look at the valuation, the first thing that comes to my mind is how does Nintendo's financials develop over the next five years, now that we are roughly one year into the launch of the Switch 2?
If we look back at how things played out for the Switch 1, the launch of the Switch 1 was a clear step change for Nintendo's business.
So, from fiscal year 2017 to 2018, Revenues increased by 115 and they continued to increase through fiscal year 2021, before declining in 2022 and 23.
Additionally, Nintendo experienced significant margin expansion after the launch of the Switch 1, as operating margins went from around 6 to more than 35 in 2021.
But, with that said, it shouldn't be a surprise that the stock price performance from the launch of the Switch 1 to the Switch 2's launch was just phenomenal.
It increased by more than 4x in around eight years.
The launch of the Switch 2 has put downward pressure on margins, since the sale of hardware just isn't as profitable for them, which is what happens with the launch of each new console.
So I would expect Nintendo to experience expanding margins over the next few years, as more of their revenues come from these digital games and their subscriptions.
And to put some numbers around this digital shift, Nintendo's digital sales have grown from just 325 billion yen in fiscal year 2017 to 443 billion yen in fiscal year 2024.
That's more than a 13-fold increase in just seven years.
Given the stock's decline of around 35 in recent months.
If any time was a good opportunity to buy shares in Nintendo, I sure think now could potentially be that time.
The market's concerned about margin pressures, increased hardware costs and Nintendo's pipeline of first-party games, but I see reasons to be optimistic about Nintendo's future over the next say, three to five years.
So Nintendo is gearing up for the release of the Super Mario Galaxy movie on April 1st 2026, in part to celebrate Mario's 40th anniversary.
The first Mario movie was seen by over 170 million people across theaters worldwide.
So this should not only be a profit generator on its own, but it should also help accelerate demand for Switch 2 in the gaming side of things.
Ryan O'Connor from Crossroads Capital, he wrote about Nintendo in a recent letter to shareholders.
He writes, keep in mind, these films aren't a cost center.
They're a profit center.
The first Mario movie generated roughly 559 million in net profit on a 100 million production budget, which means the 250 million plus consumer impressions it generated to the core gaming franchise can scalable, self-funding marketing machine.
One that pays Nintendo to advertise its own games, and it's about to start compounding annually with every new NCU release.
End quote.
And more importantly, Nintendo is riding the success of the Switch 2 and solid software sales They're sitting on the richest first-party software pipeline in its history over the next two to four years of the Switch 2 lifecycle, which includes titles like 3D Mario, The Legend of Zelda, Super Smash Bros., Animal Crossing, and the next-gen Pokemon.
Nintendo wants to ensure that the Switch 2 has that sustained momentum across the five to seven year life cycle by backloading its biggest franchises rather than front loading them and seeing a drag on the financials towards the end of the cycle.
And, as I've mentioned, Nintendo has positioned the Switch 2 to be one of, if not the most successful console they've ever released.
With the PlayStation 6 reportedly expected to launch in late 2027 or early 2028, Nintendo likely has a clear runway to continue building momentum and expanding its installed base before the next major competitive hardware cycle begins.
As a result, margins are likely to increase on a growing revenue base.
Because of the inherent nature of this business and it just being fundamentally different than your typical quality company that tends to just grow earnings year after year.
In my view, Nintendo is just a more difficult company to accurately value.
But as Buffett says, it's better to be roughly right instead of precisely wrong.
So if Nintendo bulls are correct about the thesis and how it could play out over the next few years, then shares may be attractively priced today.
So doing some quick math here on the numbers, At roughly a 16 revenue growth rate through fiscal year 2029, that's over the next three years, we get 228 billion in revenue.
This business is certainly difficult to forecast, but I wouldn't be surprised if the actual numbers do come in higher.
Margin expansion, that's what I expect in the near future.
I penciled in operating margins to increase from roughly 15% today to 30% in 2029.
At this margin level, this would give Nintendo roughly $6.8 billion in operating income.
If I apply an earnings multiple of 16 and discount that back to today at a 10 discount rate, that gives me an estimated intrinsic value of 82 billion.
Today, Nintendo trades at around 65 billion in market cap, which would imply a 20 discount to this estimated intrinsic value and an expected return of around 19 over that three-year timeframe.
Now again, this is just back of the napkin type math and there's a lot of nuance to Nintendo's business.
It sort of feels like a business that just has this wide range of different outcomes that could play out in such a short period of time.
So to invest in a business like this, I would need to get more comfortable with understanding the full picture from the perspective of both the bulls and the bears.
It's also worth noting that Nintendo maintains a substantial net cash in short-term investments, with zero long-term debt.
That's around 22% of the market cap, so this is a substantial cash position.
This level of cash adds long-term durability and strategic optionality to the business, allowing management to invest through console cycles, fund new IP and experiences, and continue thinking in decades rather than quarters.
However, this cash pile can also be seen as a liability to some investors.
There's only so much value to cash sitting on the balance sheet, because cash that is sitting idle is cash that could otherwise be used to reinvest into the business or distribute back to shareholders.
The company currently pays around a 2 dividend and at the moment they are not buying back any shares but they do do a bit of share repurchases.
You look back to 2022, 2023 and I would expect, as cash continues to pour in and it becomes clear that they have far more cash than they would ever need, they would then decide to likely pull the share buyback lever again and likely increase the dividend as well.
Robert Leonard.
So it seems clear to me that management is shareholder friendly and focused on delivering returns.
But like many Japanese companies, they are also pretty focused on the long-term durability and ensuring that they're going to be able to monetize that IP for decades to come.
This can also be seen in the way they approached their movie segment.
All the way back in 1993, Nintendo debuted the Super Mario Bros movie which, for all intents and purposes, was a total flop and disappointment.
The experience reinforced how easily beloved characters could be deluded when creative control is loosened.
As a result, Nintendo became highly reluctant to license its core IP for movies for decades afterward.
It wasn't until the company could maintain meaningful creative oversight and partner with the right studios that it felt confident bringing Mario back to the big screen.
And I think it's very reassuring for shareholders to see how big of a success the Mario movie was back in 2023.
When studying Nintendo and considering where the business will go from here, I do think its core business, because each console cycle could dramatically reset the company's trajectory, depending on whether the next platform was a hit or a flop.
That made the business inherently higher risk, as they relied on continuing to successfully launch the next piece of hardware.
But today, the picture looks much different.
Nintendo has created a much stronger customer lock-in with the Switch ecosystem.
They have a rapidly growing base of digital game sales that expand margins and a recurring revenue subscription model through NSO that monetizes engagement beyond one-time purchases.
In addition to the massive installed user base, that attracts third-party developers and strengthens the overall ecosystem.
Putting it all together, Nintendo is far less dependent on the binary success of each new console cycle than it was in the past.
However cyclicality, I think, will always remain an inherent part of Nintendo's model, at least for the time being, as each new console launch brings higher upfront hardware costs and marketing spend.
That can temporarily pressure margins before the install base scales and higher margin software and digital revenues once again take the lead.
To wrap it up, Nintendo is just an iconic company that is sitting on some of the most valuable IP in the world.
And yet after backing out their huge cash position, this IP today is valued at around $50 billion.
If they're able to navigate this transition to a recurring revenue model effectively, then I could see shares compounding at a high rate from today's prices.
That wraps up today's episode.
Thanks a lot for tuning in, and I hope to see you again.
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