Brett Shafer (3:39)

Okay, let's talk about why the stock got cut in half. Maybe you can also talk about the Switch 2 launch at the same time. I know it's related to that, but we hit a peak in the summer of about 20, $25 a share. That would have been, I think in the July or August period. Not really important the exact month. What happened here? I know people talk about memory, they talk about a weak software lineup. What exactly do you think? Someone who follows the company closely. Why, at least in the US adr, has the stock totally collapsed?

Leandro (4:10)

I'd say there are a couple of reasons. First one, I think it's current margins, which is related in some sort of way with the software narrative. Right? So Nintendo did not have a very strong software line lineup for the Switch 2 launch. So then you had a higher proportion of hardware sales. And then margins probably disappointed. And also that the market doesn't know what the margin on the Switch 2 is. We already know because management told us that it's lower than for the Switch one, but evidently current margins are down. This is also kind of natural when you are doing a platform transition because you're going to sell a lot of hardware, which is low margin, and then you will eventually monetize the install base through software sales. I'd say that is one. The second reason would be future margins. Right? Because, and I know we will talk about this more in detail, but memory chip costs have gone up, right, because there's a shortage related to AI. And now the market is worried that memory chip costs going up. It's going to increase the bill of materials for the Switch too, and pressure hardware margins. Right. I'd say a third one is competition and not in terms of real competition. But I think there's been some noise around the PS5 numbers around black Friday Cyber Monday. A lot of people saying that it outsold the Switch 2, but evidently it outsold it with significant discounts. And I also think that maybe people were expecting more of the Switch 2 launch, which is pretty crazy because it's one of the best, if not the best launch in console history, but people maybe had higher expectations. And then I would also say that even though Nintendo was not super expensive at 24, 25, it wasn't super cheap to start with. Right. So evidently that leaves some room for the stock to correct. But I'd say that those are the four main reasons that I would attribute the decline in the stock price. And probably the most significant of those would be the one related to the memory chip costs.

Ryan Henderson (6:33)

So on the memory chips, has management given any sort of visibility into whether or not this cost headwind is going to persist? And if it does, what kind of levers can they pull to potentially pass those through?

Leandro (6:52)

So they have provided some color around this. I would look at this from two angles, right? Because it can create two potential problems. Right. First one is that hardware margins go down, but you are able to get access to those memory chips. I'd say that's the preferred scenario. And then the worst scenario is not only are costs going up, but availability is low. So then you cannot even manufacture the Switch even if at a loss. Right. That would be much worse. And I'd say management during the last Q and A session sort of said that this was not a possibility because even if they are not fixed price, they had long term agreements with suppliers, so they were going to get access to the chips probably at a higher cost. They also said that with the inventory in hand and not inventory, both of finished product and of raw materials, they were able to survive this year without an impact on margins and potentially sometime throughout next year. Right. So if the shortage lasts longer than fiscal year 2026, then I mean it can potentially impact the hardware margins. But I mean management has anticipated to an extent the shortage. Right. So I'm not worried about the chip shortage for several reasons. The first one is that a lot of people said at the beginning that hey, memory producers want to milk customers. They are not going to expand capacity.

Brett Shafer (8:32)

We.

Leandro (8:32)

Well, we're already seeing that that's not true. They are going to expand capacity, Right? Memory has always been cyclical, so I'm not worried about it. In fact, memory was cyclical when Nintendo launched the Switch 1 back in 2017, if I'm not mistaken, 2017, 2018. And the problem back then was NAND chips. And the other problem or who was creating the shortage back then was Apple. Right. Apple was launching several hardware systems and they were demanding a lot of nand and Nintendo evidently had no leverage because the Wii U had been a disaster so they didn't have volume. Now they have a lot more leverage to negotiate with memory producers. Then the second point why I'm not worried about this is because Nintendo learned from what had happened with the Switch one and they already knew that they were going to have successful launch so they built a lot of inventory. And then the last part or point that I would say here is that over the long term it's going to be software that drives the profits. Right? So yes, I mean if memory chip costs go up then hardware margins are going to be lower today. But if I were Nintendo I wouldn't, I wouldn't raise prices much because I want a larger install base because I'm going to sell a lot of software and software is not as impacted by memory costs as hardware. And then in year, let's say 5, 6 of the cycle, most of my profits are going to be generated from my software platform. That's why it doesn't worry me too much over the long term.

Brett Shafer (10:19)

Yeah, I mean I tried to run some basic numbers myself and I think even if you said memory chip prices would impact like a 5050 increase in USD on the bill of goods, you could probably make up for that by selling one or two games to each customer plus the Nintendo Switch online, plus other stuff where you could have an impact of like in an extreme scenario at least. Again no expert on supply chain analysis but maybe a billion dollars in impact for a year or two if you sell like 20 million hardware units. But again the software profits they can generate would be and we'll talk about this later, maybe in the 5 to 7 billion dollars range. And let me for the listeners give context on your inventory using our friends at Fiscal AI use our link in the show notes get 15% off any paid plan. In March 2018 Nintendo, and this is in US dollars had $1.3 billion in inventory. This is right after the Switch 1 launch. But on December 2025 they had $2.65 billion which is significantly higher. Is that kind of what you're looking at as okay, they really invested up front in inventory and now they're prepared for maybe a year without going to get. Without being impacted by memory chip spot prices.

Leandro (11:37)

Yeah, I mean and they management has been open about this. I mean they, they stocked in advance of a successful launch. Right. I think there were rumors that Nintendo was, was asking suppliers for potentially a supply of 25 million switched to for the first year. Right. And they're about to sell. Well, the guidance is for 19 million. So evidently that leaves space to sell in, in year two, even from existing inventory. Right. I have, I think I have slightly different numbers to you because I, I wrote an article, maybe I can send it to you. So, so you can share it. So basically I have that. From the launch of the Switch 1, Nintendo had stocked 3 billion yen of raw materials. Right. For the launch of the Switch 2, they had stocked 179 billion yen. So it's 60 times more in terms of raw material. And then. And this is in addition to 10 times more of finished inventory. So I'd say it's very, very significant. Yeah, I guess, yeah.

Brett Shafer (12:53)

If we look at the March 17, March 2017. Yeah. Significantly lower than March 2018, which would been before the launch of the Switch 1. So I think that. Yeah, that's better context for sure. All right, why don't we talk about software? I've seen, even my friends have texted me, you know, hey, Nintendo's not putting out any games. I'm seeing remakes, old games, third party games that aren't very popular. And notoriously, management doesn't talk much about their software plans ahead of time. So what, for someone that's been following the company for a long time now, what do you think management's plan is for software? Meaning games, subscriptions, all that stuff. And are they just giving up on producing any of these anymore or. I'm kind of asking that facetiously, but what are your thoughts in general on the software?

Leandro (13:44)

I think that software is a topic where you can see the glass half full or half empty. And how you're going to see the glass is going to depend whether if you're a consumer or you're an investor. So from the point of view of consumers, you're like, okay, so the one piece of the first party software lineup has not been great at launch. So I basically don't have a reason to buy the Switch 2 right now. Right. From the point of view of an investor, I see that as these guys are going to sell 19 million Switch 2 without a strong first party software lineup. So what's going to happen when they start monetizing their best IP in the Switch 2 platforms? I think a lot of the games have also been cross platform and they have not pulled the lever of exclusive Switch to games which are evidently going to. Will probably drive Switch to sales. And I think this has been a deliberate strategy. Right. I mean management probably knew that Switch 2 sales were going to be strong. Either way, first year post launch, there's no, I mean, there's no reason to sell 40 million or to try to sell 40 million because you're not going to have enough supply for that. So if you know that you're going to be, you're going to sell pretty much all of your supply, why would you exploit your. One of your best selling points, which are, which is software to sell hardware, right? Because in this business, evidently it's the software that's. That's selling their hardware. And I think this is a deliberate strategy. And you can see it clearly in the fact that Nintendo is launching the first movie this year, right? Instead of meeting with, they could have done it to launch the first movie in the first few months of the Switch 2, right, and try to sell as many Switch 2 as possible. But they didn't. And in the last Q and A, Furukawa was quite clear that they know that years two and three of the platform are probably the most important ones. Because year one, it's novelty, you're going to do well. But years two and three is really when you're going to need to prove that the platform is durable. And the way to do that is with software, right? So as a consumer, I would be probably disappointed with the 1P lineup, but as an investor, I'm like ecstatic, right, that they've managed to sell 19 million units and they've not even launched a Zelda game. That probably comes in 2027 when the movie is launched. They've not launched a good 3D Mario game. That probably comes this year with the movie. So I don't know. I mean, I think a lot of those games will probably be exclusives, right? That will drive upsell from Switch one to Switch two or an upgrade. So I understand the criticism, but at the same time, I think Nintendo's management is thinking ahead of this year, right? In terms of software.

Brett Shafer (17:01)

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Leandro (18:48)

So how I would frame this is that when they launched the Switch 1 had a better first party lineup. They needed the Switch 1 to be a success, right? They were coming from a failed platform with a Switch 2. I think it's more they knew the Switch 2 was going to be a success so they didn't need to force anything. Right? In the Switch one you could not afford to not have software selling your hardware with the Switch 2 you can afford that. And they've proved it, right? Because they have not released a lot of first party massive games and they've sold like hotcakes. So I think that the two environments are very, very different. So I'm not very worried because I know that a good 3D Mario game is coming. I know that a good Zelda game is coming sometime. I know Pokemon Generation 10 is coming down the line. So I see it more as a tailwind rather than a tailwind for the future rather than a headwind today. Right? Because I mean they are still selling a lot of hardware. So it's basically you cannot see the headwind in the numbers, but you are going to see the tailwind of software releases in the numbers eventually.

Brett Shafer (20:10)

Not to mention Animal Crossing, Splatoon, Those are both 10 million unit sellers as well.

Leandro (20:17)

And Pokemon Procopia, I think it's like two weeks till launch and I think it's already number one in Amazon Japan.

Brett Shafer (20:32)

Yeah, I mean the Japanese consumer loves Nintendo and I think they did mention that hardware was a little bit better in Japan and it was slightly underwhelming in the United States, which did freak people out a bit. The last thing I want to talk about with the launch they guided for 19 million hardware units this year for the Switch 2, not including the Switch 1. But when you look at the, the pace of sales and this is how I was looking at it, they might have already surpassed 19 million units sold by the time they made that guidance in February. So do you think they're purposely sandbagging the guidance? And what do you think the actual figure could be for fiscal year 2026?

Leandro (21:12)

I mean you guys had a, a great piece on Nintendo a while ago that I think that you compared hardware units, actual numbers to management guidance and that you release two charts. I actually used those charts in some of my articles. And I think when you look at that, you can clearly tell that Nintendo's management tends to be much more conservative with software guidance than with hardware guidance. So I mean I think they can beat 19 million, but at the same time I don't think they're massively sandbagging the number. So could we see 20? Yes, potentially. But I think in terms of when I think about management sandbagging, I always think about software rather than hardware because through history that's where most of the Delta has been rather than in hardware. But I mean it's possible that they sell more than 19 Delta 19 million.

Ryan Henderson (22:17)

Okay, let's talk the, I guess non gaming aspects to Nintendo. So they had the original Mario movie launch, I want to say around 2022, 2023. I might be getting those dates wrong. They had the launch of the theme park at Universal Studios in 2023 as well. And I think they've got the second Mario movie slated to come out. I'm seeing previews for it. I don't know what the date is for the movie actually launching. How is this sort of full entertainment flywheel impacting Nintendo's business? How has it benefited the actual gaming operation as well?

Leandro (22:57)

So I think the IP monetization is something that people are taking for granted because you know, it's Nintendo, they have great ip, they are monetizing it. But in reality it's evident that Nintendo is now more open to monetizing and utilizing its ip. Right? I mean the current management team has been much more vocal about, hey, we're not just a video game business, we're an entertainment business. And we want to increase the number of touch points with our consumers, be it through video games, movies, theme parks, whatever, right. I think a lot of people, when you tell them that Nintendo is monetizing their ip, they'll focus on direct monetization. So they'll say, okay, how much money is Nintendo going to make with a new Mario movie that comes out in April? But I think the most important part of it is the operating leverage that it creates on the video game business. Right. I typically say that Nintendo is one of the few companies that gets paid to do marketing because they'll release a movie, they'll make revenue from that movie, but at the same time that movie is serving as marketing for the video game platform. And I mean, this was very evident when Nintendo launched the first Mario movie. It was I think the sixth or seventh year of the Switch one cycle, maybe seventh. And when they launched this, I mean you could clearly see in hardware and software sales that the movie had been launched. Right. So Nintendo saw massive leverage in sales and marketing, massive leverage in R and D. So I think that's the most interesting part of the ip. And obviously the most interesting part is that Nintendo historically has not monetized it to the extent that they are going to monetize it going forward. That was actually one of the criticisms that the company received, Right. I mean, they're Japanese, they're sitting on this treasure trove of IP and they are not willing to monetize it. And that would be very high margin revenue. Right. So I think that you can clearly see now that they are not only more open, but have more of a strategy to do it. So they're going to release one movie per year. We have Mario this year, Zelda next year, and we still don't know what the third year will be. And I mean, I think it's going to be spectacular. Right. Because if the results were good on a seven year old cycle, what are the results going to be on a newly launched console and maybe a newly launched game? I mean, I think it could be incredible, right? In terms of operating leverage, right.

Brett Shafer (25:40)

I mean, for context, for the listeners, the Mario movie, I think, yeah, Ryan is right. It was either 2022 or 2023. I believe early 2023 was the year. But that helped promote the old 3D Mario game which came out in 2017, I think with the launch of the Switch 1. So if you have the either follow up to Mario Super Mario Odyssey or a new 3D Mario game going this holiday season or maybe even earlier, it'll Launch. I mean, yeah, that could just be a much better. In conjunction when you're actually launching that and Orion. You have something to add there, I

Ryan Henderson (26:16)

was going to say. And I also, I think there's. There's maybe a tendency for people to think that they are milking their existing brands for by producing all this content around them, like having the movies, the second movie, all the derivative games off of Mario that people kind of think like, well, they're sort of eroding the brand, but it just has never proven that way. And adding touch points, a theme park, movies, more games. I think if anything it's just expanding the fan base around Mario. And I guess Pokemon has had its own sort of TV shows as well, Own ecosystem.

Brett Shafer (27:02)

Yeah, yeah.

Leandro (27:03)

I mean, my wife has never been a Nintendo fan and when we went to watch the Mario movie, she enjoyed it. So you never know when she's going to end up like becoming a Nintendo fan. Right. And I think there's probably some fears that Nintendo maybe becomes Disney with Marvel. But at the same time, if you think about it, so we have a Mario movie this year, we have Zelda next year. Probably in 2028, you're gonna have a different franchise. Who knows, maybe they do something with Pokemon. So then you wouldn't have theoretically any new Mario movie until 2029 because they're gonna do one movie per year. So then you have three years between Mario movies, which doesn't seem like they are overexploiting the ip, right. I mean, Nintendo evidently has heavy hitters like Mario, Zelda, Pokemon, but the IP is pretty broad. Right. I mean, I suppose that Mario is going to sell much better a Mario animated movie than a splatoon movie. Right? But I mean, that's for sure. But I don't know. I mean it's. The return on these things have to be crazy. I mean, even the return on the movie itself is already very good. Right. You make quite a significant profit of an animated movie. But when you factor in all the sales that you're making in hardware and software based on the movie, I mean the returns have to be exceptional. Probably one of the highest that I've ever seen. And the only problem is that there's no way of calculating it. But I mean, management probably knows that this is quite a profitable thing to do.

Brett Shafer (28:46)

The last thing on the entertainment expansion. How important do you think it is that the essentially the founder of modern Nintendo, at least from the entertainment's perspective, Shigeru Miyamoto. Apologies if I'm mispronouncing His name is in charge of this stuff from a broad perspective he switched kind of from being in charge of the video games to being in charge of that. And this kind of what I would say as an older man, he is kind of his final curtain call for the company. What thoughts on that and the importance of him maintaining quality for as they expand to new entertainment form factors.

Leandro (29:21)

I mean I think he has been very, very important for Nintendo, right. And evidently not having him in the future is worse than having is much worse than anything. But at the same time, I mean this is a Japanese company. If you want someone to think about succession, you know that there is going to be Japanese probably. So I think it's not going to be a huge change to Nintendo but at the same time there's uncertainty because the modern Nintendo has not lived without Miyamoto at the creative helm. Right. So I think it's good that he focuses on on the movies because that's where Nintendo when they're appealing to the masses, that's when they have to try to bridge the IP with having a broad appeal. Whereas before they could just appeal through the fan base and do very well. But now they are trying to expand beyond that. So I think it's very, very interesting. And I would also say that the monetization of the IP has also brought a non Japanese director to the board which is Chris Melendandri I think is his name. He's the, I think he's the founder of Illumination. So I mean Nintendo is changing, right. They are a Japanese company but they are slowly but steadily modernizing their operations.

Brett Shafer (30:51)

Okay, let's talk a little financials. I'm someone who follows the company disclosure. I do own, own some shares as well. Now when I was trying to, and this can lead into more of the valuation discussion but I was trying to think about how much over the life of the Switch to roughly in cash the company can generate in cash earnings. I kind of came up with a $30 billion number. Could be a little lower if memory chip prices are high for you know, a doomsday scenario five year period. Although I think that's very unlikely given what you outlined. Do you agree or disagree with that rough assessment on their capability to generate this much cash over however long the Switch 2 is in existence?

Leandro (31:34)

I, I think, I think. I don't know if to say I think or I wish, but I think it's going to prove to be conservative.

Brett Shafer (31:42)

I hope you're right.

Leandro (31:45)

I have higher numbers in my model from today to 2033 and I'm not assuming that a lot of things are happening in the Switch 1 platform. To be fair, the Switch 1 platform this year was fairly strong in Switch 2 launch year. But at the same time we already said that a lot of games were cross platform, right? When games stop being cross platform or there are certain exclusive, then I think the Switch one business is not going to do as well and you'll probably see it decrease more. I think that another reason why it's going to prove conservative is not only because I think the Switch to cycle is going to do very well, but also because we must not forget that Nintendo has built a lot of inventory for launch year. And when all that inventory unwinds, then you're going to get a lot of working capital benefits and that's going to flow directly to to the cash flow. Right? So I would say that 30 billion is very doable over the Switch to Life cycle.

Ryan Henderson (33:00)

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Brett Shafer (34:01)

So 30 billion and EV is about 45 to 50 billion. Since they have such high net cash.

Ryan Henderson (34:09)

Yeah, maybe we can talk about that net cash. So a common critique of Nintendo and I guess a lot of Japanese companies in general is that they tend to hold a lot of cash on the balance sheet. Do you think they will become more aggressive with their capital returns? What do you think they'll do with the cash on the balance sheet? And I think rough numbers about 25% of. They hold about 25% of the market cap in cash currently on the balance sheet. So pretty significant.

Leandro (34:44)

Yeah. So I think I'm going to say something that maybe in Japan is considered someone who follows Japanese companies. When I say this, maybe says that I'm crazy, but I think we're going to see buybacks eventually for Nintendo and significant buybacks, right? I think so, for several reasons. First, like you guys said, they have a huge cash pile. I think it's around 14 billion, something like that. 14, 15 billion. Then you have to add to that that they are going to generate a lot of free cash flow. So all the impact to cash flows has already been filled because they had already built the inventory. So from now on it can only get better in terms of generating cash. Then you also have management, which now seems much more comfortable to return more cash to shareholders. I mean, we already saw this year that Nintendo is increasing the distribution of operating profit as dividends. So eventually Nintendo is going to have, if they don't do anything with the money, they are eventually going to have, I don't know, 25 billion in cash. And they have already proven to themselves that they can transition from one platform to the other more or less seamlessly. I mean, the cash pile is there for a reason, right? In 2012, Nintendo suffered its first financial loss in 30 years. Right. Probably that scared the heck out of management who said, hey, when we're transitioning across platforms, we need a lot of cash because Nintendo is not going to fire anyone. So now they know that they can transition seamlessly from one platform to the other and all the IP monetization is just more of a safety net on top of that. Right. And then the last reason is that because contrary to what many people think, Nintendo has already bought stock before. So this wouldn't be the first time. Right. Sometimes in the past it did so strategically because the founding family was selling their shares, so Nintendo bought them and canceled them or whatever. But in the switch one cycle, I think it was around, maybe I'm wrong, 2021 or something like that. Nintendo bought back stock, I think it was 700 million. That's correct, I think.

Brett Shafer (37:14)

And they did it really quickly. They announced it finished in a week or maybe a couple weeks.

Leandro (37:19)

Yeah. So I mean if you think about it, Nintendo could basically spend 10 billion of their cash pile repurchasing shares, reduce shares outstanding pretty significantly and still have 5 billion in cash on a 50 billion market cap and have all the cash available that they are generating with a switch to platform. So I think it makes sense. And I think, I mean, I'm going to say it again, I wish, I think, I wish and I think that we're going to see buybacks eventually. For Nintendo, I don't know when now would be an exceptional moment. Maybe we get more news at the end of the year, but now would be great. I don't anticipate that Nintendo's management is going to think a lot about the stock price. If they want to do buybacks, they'll just think, hey, I have to buy back stock because I don't know what to do with the cash. Just buy it at whatever price at that moment it is. I think it was very telling the dividend change, right? I mean, Nintendo saying, hey, Instead of distributing 33% of operating profits, we're going to go up 40%. I don't think it's significant because it's a 700 basis points increase, but more so because it's kind of management team telling the market, hey, I know that I can distribute more of my cash, right? I mean, I'm safer now. I don't need to keep my operating profit. I have a huge cash pile. So I think capital returns for a lot of Japanese companies are going to go up and I hope it does. I mean, I think Nintendo's management today announcing a buyback would send a huge signal to the market and probably you'd see a very, very strong reaction. But I mean, they are Japanese. They take their time, right? So I don't think they're going to do anything crazy. Like it's not like a typical American company where the stock price is down and then you get, hey, the board just had an urgent meeting and we're approving a buyback, which we are going to do this quarter, right? This is going to be probably more measured and maybe Nintendo at the end of the year saying, hey, we're going to return cash through buybacks, right? Which is crazy because I would just buy the stock and not tell everyone. Because when Nintendo claims that they're going to do a buyback, probably they're going to start repurchasing at not great prices.

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Ryan Henderson (40:46)

Details@lowes.com SameDayDelivery yeah, yeah, it's sometimes you can kind of, I think management teams often not Nintendo's management team, but management teams often use the we're going to buy back as a way of kind of creating a buoy for the stock price. Let's maybe talk briefly about tariffs. So I think around 40 to 50% of Nintendo's businesses in the Americas, broadly, that's not purely the US but they have a large United States business. Do you think this is something worth concerning yourself over as a shareholder? How do you think through any sort of tariff risk?

Leandro (41:30)

I mean, I'd say that a lot of the tariff risk is already behind us. I hope so. But I see it very similarly to memory. To memory costs, right? I mean this is a incremental price that they're putting on your hardware. But for margins, if you don't raise prices at the same time, you're going to make most of your money with software. Tariffs don't play a huge role there. Tariffs there can even be positive because if you raise prices on physical games but not on digital games, then in some sort of way you can push more digital sales, which are higher margin for you. So I'm not extremely, extremely worried about it, to be honest. And also Nintendo has diversified away from China to other countries and you also have to take into account that they have the inventory, probably have a huge pile of inventory in the US as well to help, to help reduce the impact of any additional tariffs. But evidently it's a concern and also from the point of view, if you see it from a discretionary spending point of view, right, if people have to pay more for other goods because there are tariffs, then maybe they have less money to spend on things like video games. But I still think video games are probably together with music, the cheapest form of entertainment. Pokemon, Firered and Leafgreen. They're launching soon where maybe when this is up, they've already launched, but it's going to be like $19 for a game that you're probably going to play like 30 hours. I mean, yes, it's a very old game, but if you do the cost per hour, it has to be like super low, right? You buy two games per year and you think about how much time you spend playing them and then you Think about going out to dinner four times and probably going out to dinner four times was much more expensive than all you spend on video games that year.

Brett Shafer (43:44)

Yeah. Even if you look at the price increase that they implemented on the Mario Kart World launch, I think again, it was went from 60 to 80 bucks. People were concerned about that. There's all the, let's say, completely overblown online fake boycotts of putting air quotes for the listeners that aren't watching the video. But there was no impact to demand on Mario Kart World because you increased it to 80 bucks because the people are still going to play that over. You know, the core audience is going to play that for 40, 50, 60 hours a year, maybe a couple hours a week. That adds up. And it's not overly expensive, especially when Nintendo implements the updates for, I think, Nintendo Switch Online members, all that stuff.

Leandro (44:31)

And then you also have to. I think Nintendo was very intelligent with Mario Kart World because they said, okay, do you want it as a standalone game? $80. Do you want it with the Switch? Then it's 50, do whatever you want. And they're probably going to do that with a lot of strong, with part of their strong IP. Right. When they release a new maybe Mario 3D game, they probably bundle it. Zelda, they are probably going to bundle Pokemon, they can also bundle. So I mean, Nintendo has a lot of tailwinds with their software platform to sell hardware. Right. So I'm not overly worried about the weak software that everyone's talking about.

Brett Shafer (45:16)

Okay, let's talk about some other. This is a question from the audience that I thought was interesting. It's something we forgot to address when making our own questions. And is the fact that Roblox active users and daily usage or whatever metric you want to use are growing rapidly, is popular among younger people, meaning like people under the age of 18. And there's concerns. It's almost like some of these viral AI posts that, oh, Roblox is going to upend the entire video game market. People aren't growing up as fans of Nintendo.

Leandro (45:52)

Yada, yada, yada.

Brett Shafer (45:54)

10, 20 years from now, Nintendo's fan base keeps declining. That, you know, heritage. Well, what's the word that people use? The nostalgia is gone.

Leandro (46:04)

This.

Brett Shafer (46:04)

These are some of the viral tweets that I was reading in preparation for this episode. What are your thoughts on that? And is the Roblox bear thesis warranted in your opinion?

Leandro (46:16)

Well, I don't think so. First, I think they're probably complementary. I think that Nintendo consoles are played in A different way to many other video game platforms. I'd say Roblox is probably much more recurring while Nintendo is much more of a one time use. So for example, I have the Switch 2. I've not touched my Switch 2 in three months. But if there's a game from a franchise that I like, then I'm probably going to use it a lot. So I think it's more dependent on software releases which are not, are not going. Roblox is not going to change much of that. And I would also say that we might be today the first time that Nintendo has had two generations firmly crossing. So for example I played the first Pokemon game I played I think was Pokemon Firered. I mean I could have a kid today and they're launching this again. So it's the first time that I would find like a cross generational game. Right. So a lot of people who grew up playing even now the modern Nintendo, the more modern Nintendo are probably in a position to start sharing it with their, with their kids. Right. Whereas I don't think there's that connection with Roblox. Right. So it's very tough to get an intergenerational connection with Roblox, mainly because the parents of a lot of these kids have never played. Right. So I think that will always make Nintendo special. And I mean Nintendo has competed. This has been the bear argument for Nintendo for ages. No Xbox, PS5, they have best graphics

Brett Shafer (48:11)

in general, mobile games in general, right?

Leandro (48:13)

Yep. And at the end what you saw is that Nintendo kept chugging along and in some sort of way, like a luxury company, management doesn't think much about the competitors, but rather about what they have to do to sell well. Right. It's not, hey, I'm going to react to what PS5 or Xbox does. I'm basically doing my thing, I'm going to do my thing. And that's probably going to be the best strategy. I mean the amount of criticism that Nintendo got on not chasing the excellent graphics on games, like saying that they were staying behind the switched one was going to be a disaster because you couldn't play games with very high resolution at the end it's close to being. Unless Sony makes up another 20 million PS2 sold, the Switch 1 would be the most sold system in history. Right. So I don't know, I understand why this happens with all the great brands. Right. You have a very loyal fan base and then you have the detractors. Right. It's like super polarized. You don't have people saying, yeah, it's Fine. No, you have people saying it's the best or you have people saying it's the worst. And I think that's also a characteristic in Eren to, I would say also management teams, but management teams and companies that are outsiders. Right. When you're doing something out of the norm, then you're going to be either loved or hated. Right? You see that with a lot of management teams where maybe they. The CEO is a bit eccentric, he's different, he doesn't treat Wall street the same way. And then you have a lot of people who hate him and a lot of people who love him. Right. So I think that's also a characteristic of being such a special company.

Brett Shafer (50:24)

Another analogy you can make here is YouTube didn't kill Disney as much as Disney in the Marvel Star wars stuff. They really. And look, it shows the durability of those brands. They've kind of done poorly managing those brands in the last decade and the company is still printing money through its Entertainment flywheels. So YouTube and Netflix didn't kill Disney, just as I don't think Roblox or mobile games in general are going to kill Nintendo. Let's hit one more question and this is another one from the audience before we hit a wrap up question. And it's on earnings durability. I think I know what they're trying to get out here is that people say, hey, the Switch 2 is going to launch. They're going to see a huge jump in earnings, but then it's going to collapse again. And I'll give some context for the audience using again our sponsor fiscal AI, use our link in the show notes, get 15% off any paid plan in yen terms, I think this would be billions of yen. Before the launch of the Switch 1, they were generating almost breakeven, you know, $29 billion. 29 billion yen. And at the bottom of the Switch 1 cycle, before the Switch 2 launched in March 2025, they were at close to 300 billion yen. And now it's beginning to grow again. Do you think there is now definitive proof we're in an era of more earnings durability for the business?

Leandro (51:49)

I think so. And I think I would differentiate between revenue durability and earnings durability. I think earnings are much more durable just for the reason that software eventually makes up a much more significant proportion of sales because you're selling more software to a larger installed base and that helps protect the bottom line. Right. So maybe you're not growing revenue as fast, but your earnings are much more durable. And then Nintendo has already proven that they can continue through platforms and there's an openness of the management team to make the business less cyclical. And part of that is the continuation of the hardware and part of that is the IP monetization which is going to be. This is the one thing that I said at the beginning that was constant across platforms was the ip. The only problem was that it wasn't monetized recurrently across platforms. It was more so monetized through games. And with every platform now you have a recurring hardware business and you also have more recurring IP monetization through platforms. So I think earnings are pretty durable. And I mean if we look at the briefly at the valuation, I think Nintendo is trading at 20 times EBIT on enterprise value, something like that. This is despite Nintendo being at the early stages of the cycle and what this means for margins. So margins are evidently not optimized right now, despite the durability inherent to its ip, which a lot of people say, well yeah, but how much is that worth? Well, you can actually look it up. Right? Let's look at other M and a. Microsoft bought Activision for a price close to Nintendo today on ebit. Okay. Some people would say yeah, but Activision is a software business. Okay, but I think, I don't know if that's an advantage or a disadvantage compared to Nintendo, which has both things. They have the hardware to protect their software. In an AI world, maybe Nintendo proved to be much more durable than purely software business. And then silver lake bought EA for around 30 times EBIT. I mean there's a lot of value in the, in the ip, right? So I'm not concerned about earnings durability more so now that management has openly shared that they want to monetize the IP more recurringly.

Ryan Henderson (54:26)

Okay, last question here for this episode. What is one thing you think investors misunderstand about about Nintendo's business?

Leandro (54:38)

I'd say one thing that I feel that a lot of people who are new to Nintendo believe is that Nintendo is more discretionary than it really is.

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Leandro (55:48)

A lot of people say, hey, but during an economic downturn, these guys are getting destroyed. Well, I mean, it's no doubt discretionary. I'm not going to say it's not, but I don't think it's as discretionary as many people think. If you look at Nintendo's fundamentals during the global financial crisis and the Asian crisis, I mean, they were very, very resilient. And the stock was also pretty resilient, especially during the Asian crisis. I mean, in 2012, Nintendo had its first loss after 30 years. I think that speaks to a pretty resilient business. I also think that people misunderstand how loyal Nintendo's fan base is. Like a lot of people will say, I can't understand who's going to pay $20 for a Pokemon game that was launched in 2004. Well, a lot of people are going to do it.

Brett Shafer (56:47)

I like five myself.

Leandro (56:48)

Yeah, yeah, yeah. I mean, those Pokemon games are already number one and two in the Nintendo shop. And then also one thing that I believe Nintendo gets little credit for is how they protect the ip. But I mean, we talked about this before. I mean, Nintendo doesn't want to maximize short term profit by over monetizing the ip. They prefer to monetize it over time and have a durable business. Right. So I think those things are things that people who come from an outside view on the company maybe don't appreciate as much. But when you start looking into the company, you start to see that they are pretty important in terms of durability of the business and the ability of Nintendo to, to monetize the ip.

Brett Shafer (57:42)

Okay, Leandro, thank you once again for joining the show, taking the time to chat Nintendo with us today before we get out of here. Give listeners an elevator pitch on best anchor stocks and where they can find more of your written work.

Leandro (57:56)

Well, they can find it. The easy part is that they can find it@best anchorstocks.com and I basically publish research on a wide range of companies. There are two in depth reports available to read for free, which are John Deere and Stevanato. So they can gauge like the quality of the, of the research. So yeah, I think that would be my elevator pitch.

Brett Shafer (58:24)

All right, thank you the listeners, for tuning into this episode. Thank you once again. Leandro. As a disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guest may hold security is discussed in this podcast. May have held up in the past and may buy, sell or hold them in the future. Thank you to our sponsors, Interactive Brokers, Fiscal AI and others, and we'll see everyone next time.