Mario, Donkey Kong, Zelda, Super Smash Brothers, Kirby, Pokemon — the list of Nintendo’s iconic franchises is remarkable, rivaled only by Disney’s portfolio of beloved brands.

What Disney’s brands are to movies and television, Nintendo is to gaming. The above franchises, among others, have been as enduring and culturally impactful as any Disney character, particularly for avid gamers.

Impressively, Nintendo has found ways to continuously invigorate these franchises. With Pokemon, for example, the viral launch of the app-based game Pokemon Go helped expose a new generation to the 1990s-era franchise, bringing the game to an innovative and new mobile format.

Before going any further on Nintendo: If you haven’t listened to this week’s podcast yet, then please allow me to introduce my new co-host, Daniel Mahncke. Daniel is a talented investor, and he’ll be joining me in this journey of breaking down different companies every week, valuing them, and then deciding whether they should be added to our Intrinsic Value Portfolio.

He will bring rich new insights into our analysis, making each of these newsletters and podcasts even higher quality(!)

With that, I’ll let Daniel take it away and outline his pitch for Nintendo below.

— Shawn

Nintendo: Leaving Cyclicality Behind

I (Daniel) must admit—my days as a gamer are long behind me, and I think the same goes for Shawn. But Nintendo still holds a special place in my heart. As a kid, I spent hundreds of hours playing Pokémon on my Nintendo DS and just slightly less guiding a Lego Darth Vader through the Death Star on my Nintendo Wii.

And I know I’m not the only one with these memories. Nintendo has built one of the largest player bases in the world—selling 146 million units of its most recent console, the Switch, and boasting nearly 130 million active players—a testament to its enduring appeal.

But despite this lasting appeal, Nintendo’s financial growth couldn't follow the same straight upward path. Its business model has long been tied to console cycles—with revenues and profits surging in the early years of a new console as margins expand and growth accelerates, especially compared to the late-stage weakness of the previous cycle. But inevitably, every cycle peaks, leading to falling revenues, profits, and margins.

The Nintendo Switch Cycle illustrates how this dynamic works. One year after its launch in March of 2017, revenues more than doubled, rising from $4.4 billion to almost $10 billion. Operating margins nearly tripled, climbing from 6% to 16.8%.

Until the peak in 2021, Nintendo enjoyed a four-year upward cycle with average revenue growth of 17%. At its high point, revenues hit $15.9 billion, operating income reached $5.8 billion, and operating margins soared to 36.4%.

Now, you might argue that there hasn’t been a significant downturn until FY2025. And you’d be right. While the Switch cycle followed the typical growth pattern, it hasn’t experienced the usual steep decline.

So why has this cycle been different, and what does that mean for the future of Nintendo’s business?

Nintendo’s Journey to Recurring Revenues

Nintendo’s competition — Sony’s PlayStation and Microsoft’s Xbox — began transforming their business models years ago. The Xbox 360 was the first console to put online play behind a paywall through a service called Xbox Live Gold. PlayStation followed suit with PS Plus when the PlayStation 4 launched.

This marked a major shift in the industry. Recurring subscription revenues helped offset the cyclical nature of the console business. Additionally, most consoles historically sold at a loss. PlayStation and Xbox were rumored to lose between $100 and $200 on each console sold. While the PS5 has been sold at break-even prices since late 2021, subscription revenues helped to make up for console losses quicker than before the business model switch.

Nintendo never sold their consoles at a loss. That may explain why Nintendo didn’t immediately jump on the subscription bandwagon. While Sony and Microsoft were launching the PS4 and Xbox One, Nintendo released the Wii U—the biggest failure in the company’s history. The Wii U sold just 13 million units—a far cry from its predecessor, the Wii (which sold over 100 million), and its successor, the Switch (now at 146 million).

The failure of the Wii U proved that Nintendo’s business model needed a shift as well. And the Switch delivered. You could say it was Nintendo’s Xbox Live Gold moment—the turning point where Nintendo began to rethink its revenue strategy and embrace a more modern, sustainable model.

The New Business Model - Nintendo’s Flywheel

Nintendo’s new business model is built around an ecosystem that retains its player base across console generations—significantly increasing a player’s lifetime value. At the same time, Nintendo is shifting toward higher software sales and more third-party game support with the launch of the Switch 2.

Historically, Nintendo has been the king of physical sales. But in recent years, software sales have gained ground, now making up closer to 50% of total sales—a notable shift toward a more balanced revenue mix.

Regarding third-party games, the Wii U offered only 600 third-party titles—a consequence of many studios abandoning the platform due to its poor sales performance. In contrast, the Switch has amassed a library of over 11,000 third-party games. However, these are mostly smaller indie titles—so-called Single-A or Double-A games—rather than major franchises like Call of Duty (COD) or Grand Theft Auto (GTA).

The Switch 2 is set to close the performance gap with competing consoles. Powered by a new Nvidia chip, it will match the PS4 Pro’s capabilities—making it possible to run high-end, blockbuster games previously limited to PlayStation and Xbox. If it delivers, Nintendo could significantly expand its audience.

These blockbuster games offer greater upsell potential through DLC (Downloadable Content) and in-game purchases, such as character skins. Nintendo benefits from these sales, taking a 30% cut of each transaction without incurring any costs.

While increasing software sales and introducing higher-quality third-party games will naturally improve margins, another key objective is to drive subscriptions to Nintendo Switch Online (NSO). A larger subscriber base would further boost margins and reduce cyclicality.

Currently, Nintendo Switch Online has “only” 34 million subscribers. I say “only” because Nintendo has 130 million active players—meaning there’s significant room for growth. For comparison, PlayStation reported 47.4 million PS Plus subscribers in 2023 on a comparable-sized player base.

Nintendo should be able to reach similar, if not higher, subscription numbers. No other company—except perhaps Disney—commands an IP portfolio as strong as Nintendo’s, which includes Mario, Pokémon, Zelda, Animal Crossing, and many more.

Nintendo has begun leveraging this IP more effectively, taking a page from Disney’s flywheel model. The 2023 Super Mario Bros. Movie drew 170 million viewers and generated $1.36 billion. Soon after, Super Mario Bros. Wonder became the fastest-selling Mario game, with 4.3 million units sold in two weeks.

Mario-themed attractions at Universal Studios in Japan and the US have also been major hits, showing Nintendo’s growing ability to capitalize on its IP.

Now, what does this mean for Nintendo’s valuation?

Valuing Nintendo

Nintendo is in the midst of a transition—making it difficult to value. I’ll walk you through my assumptions so you can see if they make sense to you. If you want to explore different assumptions, you can download my valuation model at the end to adjust it yourself.

Given the uncertainty, I’ve chosen conservative assumptions, including ongoing cyclicality. I'm forecasting an eight-year period, consistent with the Switch 1 cycle.

The Switch 1 benefited from the tailwind of a weak predecessor. Many players never upgraded from the Wii, likely driving stronger demand than today. That’s why I don’t expect a similar 120% revenue increase after the Switch 2 launch. Instead, I’m projecting a 60% increase over the remainder of 2025 (assuming a launch in H2 2025) and 2026.

From 2027 to 2029, I forecast an average annual growth rate of 15%—slightly lower than the Switch 1 cycle—since the technological leap is smaller and cross-gen gameplay could reduce upgrade urgency. The last three years mark the Switch 2 downcycle, during which I expect annual revenue declines of 10%.

This is the most bearish assumption of my valuation. If you want to adjust for a more optimistic, and perhaps realistic, outlook, you could modify the assumptions here—for instance, by projecting flat revenues or even further growth.

Unlike revenue, I expect margins to improve beyond 2029 due to higher software and in-game sales.

I still remain conservative, though, assuming an average annual increase of just 2% over the eight-year period, resulting in operating margins of 43% in 2032. This is well below most bullish estimates. If the thesis I’ve outlined here—and in more detail on our podcast episode—plays out, margins could grow beyond 50%.

However, it’s still unclear how well blockbuster games will run on the Switch 2 or how effectively Nintendo will drive NSO subscriptions using its IP. I’d rather be cautious with a company trading at a P/E of 40—though this reflects the Switch 1 cycle ending, which lowers earnings, and excitement for the Switch 2, which drives demand for Nintendo stock. The normalized P/E is closer to 30.

Based on these assumptions, my model values Nintendo at $77 per share. When we recorded the podcast, this was almost exactly where the stock traded. However, Nintendo has corrected by about 10% in the last two weeks, now standing at $69 (based on the Japanese listing converted to USD).

This price decrease makes Nintendo already a more compelling opportunity. But beyond that, the long-term opportunity is better than it appears at first glance.

First, while uncertainties remain, I believe the thesis outlined today has a much higher chance of succeeding than failing. Beyond that, my model suggests the market still isn’t pricing in Nintendo’s business transformation—it’s focused solely on a successful Switch 2 launch. That could give long-term investors a chance to buy after the initial hype fades and benefit from Nintendo’s broader business improvements.

Portfolio Decision

I’m inclined to add Nintendo to our Intrinsic Value Portfolio, but the value investor in me is still cautious. Further short-term headwinds are possible after the Switch 2 release since investors already expect success, which limits the upside. Even if the release should be a success. The market also hasn’t priced in Nintendo’s business transformation, which could lead to selling pressure from those betting on a quick win—a pattern seen with past launches.

If that happens, it could create an opportunity to buy at a lower price with greater certainty once the Switch 2’s success becomes clearer.

At a price in the low $60s, I’d be comfortable starting a position in Nintendo. Waiting for the release carries the risk of missing some upside—but that’s a risk I’m willing to take. And who knows—maybe the market will give us a shot at this phenomenal business sooner than expected.

If you’d like to explore different scenarios, you can download my Nintendo valuation model here.

For the full story on Nintendo—including its history, competitive advantages, and how its IP could drive future returns—check out Shawn and I’s full podcast on the company.

Let me know what you think of my conclusions in the poll at the bottom of this newsletter. Shawn will be back next week with another potential addition to The Intrinsic Value Portfolio.

Weekly Update: The Intrinsic Value Portfolio

Notes

• Portfolio Changes: We still have a lot of cash to allocate! Not quite the $300 billion in Treasuries that Buffett is sitting on, but being 80%+ in cash during a market correction isn’t a bad spot to be in. Ulta, Alphabet, and Airbnb have all fallen to even more attractive prices in recent weeks, though we are starting to get a bit concentrated in Ulta and Alphabet.
  

  • I (Shawn) used this week’s weakness in ABNB, due to concerns about declines in air travel and vacation plans hurting the company through the rest of 2025, to increase our position from 4% to 5%, snapping up shares at a price of approximately $122 per share.
    

• Update on Ulta’s Q4 2024 earnings: The stock popped more than 12% on Friday after falling dramatically ahead of the report — from as high as $450 per share to as low as ~$310, as risk appetites in U.S. markets have generally faded recently. With Ulta’s dependence on the Beauty industry, which is largely a discretionary retail business, shareholders have been especially nervous about the company’s prospects in light of recession and tariff fears during what was already expected to be a challenging year in 2025.
  

  • Ulta’s business held up pretty well last quarter, and management assuaged investor concerns further by suggesting that competitive pressures were normalizing and reiterating the company’s plans to expand internationally (Mexico this year and the Middle East at some later point, likely Dubai.)
    

  • Ulta’s fair value is likely still well north of $400 per share still, though there’s certainly no shortage of uncertainties facing Ulta’s business at the moment and the economy broadly.
    

  • I (Shawn) had mixed feelings about the earnings call and will be closely paying attention to their results over the next few years to see if they’re able to reverse losses in market share, which happened for the first time ever last year. You can read my previous analysis of Ulta here.

Quote of the Day

"Patience is one of the most valuable attributes in investing.”

— Martin Zweig

What Else We’re Into

📺 WATCH: An interview with Joe Tsai, the Co-founder & Chair of Alibaba

🎧 LISTEN: How Nvidia is dominating the chip market with Tae Kim

📖 READ: There’s a new Memo by Howard Marks: Gimme Credit

Your Thoughts

Here’s what readers had to say last week on Airbnb:

• “I bought Airbnb and sold it for a profit and then re-bought it later and was able to add more shares this time. I think the value I have to add here is as an Airbnb host. I have been listing a property on Airbnb and VRBO for 7-8 years now.
  
  Lately, I have been getting more bookings on VRBO (which I have listed for a higher price to offset their ridiculous fees). I also listed a house at one point in Missoula, MT, but the city makes it nearly impossible to get a permit.
  
  Customer service interactions I have had with Airbnb have been mixed. So to sum it up, 1.) Nothing would keep me from listing on all the sites as I don't care what service is being used as long as someone is renting my home 2.) Customer service seems to lean more towards the renter and not the person providing the product and the home.
  
  3.) They’ll be fighting a lot of jurisdictions in the future to keep vacation rentals viable. I am still a holder of the stock as it is a small percentage of my portfolio, and I see it eventually becoming a share cannibal.”

See you next time!

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