Japan’s reforms may reboot Nintendo
Gaming company has finally found better use for its $8.7 billion cash pile: buybacks
Japan Inc.’s push to unwind cross-shareholdings is throwing up investment opportunities—just look at Nintendo.
The Japanese gaming giant has lost nearly 40% of its market value since a peak in January last year, underperforming the broader stock market and rivals like Sony. That’s despite the popularity of its latest gaming console, Switch. Since its launch in March 2017, Nintendo has sold 32.3 million units, which compares favorably with sales of other hit consoles like the PlayStation 4 at a similar stage.
There are valid concerns that the strong growth could fizzle, especially if Switch fails to land popular titles from third-party game studios. But investors would be unwise to ignore Nintendo’s $8.7 billion of net cash— equivalent to about 27% of its market value.
True, the company has been sitting on the cash for years, but there are signs of change. On Friday, Nintendo said it would about $300 million to buy back 0.8% of its stock as some of its largest shareholders—mostly Japanese regional banks—sell down their holdings to satisfy the government’s push to unwind corporate cross-shareholdings. The amount might seem small, but it is Nintendo’s first buyback since 2014, when its founding Yamauchi family were selling their shares.
Cross-shareholdings were set up in the name of building relationships, but have dragged down returns. The state push to unwind them, as part of Prime Minister Shinzo Abe’s corporate governance reforms, could bear other fruit as well. For example, Bank of Kyoto, which is based in the same city as Nintendo, owns 4.1% of the gaming giant even after Friday’s selldown—a stake worth nearly half the lender’s market capitalization. Further share sales could benefit the bank, whose stock gained 8% on Monday, and it could also push Nintendo to spend more of its cash on buybacks.
Nintendo’s enterprise value, which strips out the net cash, amounts to less than eight times its prospective earnings before interest, taxes, depreciation and amortization—close to its lowest multiple in five years.
If the company is serious about finding better uses for its cash, the game is finally on for investors.