My youngest sister made our day yesterday by stopping by the house to visit for a few hours. She had been at the NakaKon convention in Overland Park and saw an 8-bit pixel Metroid collectible she thought I’d love. She was right. Upon holding the specimen, I temporarily reverted to a six year old, 1980’s-living, NES-dominating beast. Behold, and listen to the theme if you need some adequate inspiration.
Interestingly enough, I had run an analysis on Nintendo’s balance sheet that morning so the timing was perfect. The company had reported results recently and I hadn’t, yet, gone through them. There were some news outlets reporting on the details so I added it to my task list. It was some straight-up 1934-style Benjamin Graham. I almost did a double-take.
Despite its lackluster performance, the video game maker had maintained its legendary cash horde, built up from decades of selling Metroid, Zelda, and Mario titles. The entire business was divided into 141,670,000 shares, and the market was placing a value of ¥11,910 per share on each piece of ownership. The cash sitting in the bank, short-term investments, and other equivalents had a value of ¥8,665, and if you backed out all of the debt, you could get a net working capital figure of ¥6,860 per share.
In other words, if you paid ¥6,860 per share, you were getting the entire business for free, along with all the intellectual property. You were paying nothing. Talk about a margin of safety! There was a point in the past few years when it briefly got within that range. I wasn’t watching it when that happened, so I missed it, but there was a money management firm in New York picking up quite a lot, which is how it came across my radar (and one of the reasons it was on my mind last Christmas).
If they could actually turn things around, you would have this insurance policy sitting there that made wipe-out near impossible. That’s what I mean when I talk about tilting the odds in your favor. There was a point at which the price of Nintendo stock became so low relative to the high quality assets backing it that the income statement wasn’t the most important consideration. In fact, the proper analysis at the moment would be to back out that ¥6,860 figure, with a few adjustments, and value the enterprise relative to earnings on the resulting, lower number as that’s the real price of the stock. I wish I had a college finance course to teach, I’d make the students write a paper on it. It’s not often you see this in the wild; a company that is trading for around half of what the stock price would indicate.