Newsletter from Motley Fool on Nintendo: Recession? What recession? We're in the midst of one of the worst holiday shopping seasons in decades, yet one item is still flying off the shelves.
No wonder Forbes declared it “recession proof.”
No wonder Forbes says this industry is “a little understood sector on so many levels.” And here’s why all of this matters for profit-seeking investors like you…
In fact, this once-obscure company is now a $50 billion behemoth with $11 billion in net cash, no debt, and $3.4 billion in free cash flow.
And that’s why David and Tom Gardner have named Nintendo (NTDOY.PK) as one of their “No Bailout All-Stars.”
This global technology giant will only get bigger. If you’ve got kids, grandkids, nieces, or nephews, you’re probably already familiar with Nintendo’s Wii. Heck -- according to recent demographic statistics, chances are you play Wii, too.
And not only has this cutting-edge video game console revolutionized the industry — it's fueled an all-out consumer buying frenzy. A recent Forbes article begins, “The question on every parent’s mind this holiday season: Will I be able to finally find a Wii for my kid?”
The good news for these frantic Wii-hungry parents is that this October, supply actually came close to equaling demand — for the first time since Wii launched in November 2006!
But make no mistake -- this doesn't signal that demand is not waning. It simply means that Nintendo is taking full advantage of an amazing profit opportunity. In fact, it shipped some 850,000 units to North American stores in October alone.
And here’s the kicker… unlike their two biggest competitors Nintendo actually makes money off the hardware it sells.
That’s right… each time Microsoft sells an Xbox or Sony sells a PlayStation 3 they actually lose money. At one point, BusinessWeek estimated these losses were as high as $126 per Xbox and $300 per PlayStation 3.
What separates Nintendo from its competitors? For one thing, of the big three video game makers, Nintendo is the only one dedicated solely to video games -- allowing it greater focus, efficiency, and innovation.
For another thing, Nintendo designed the Wii around a motion-sensitive controller that makes games more interactive and lifelike -- unlike their competitors who have designed their systems around cutting-edge graphics and extreme processing power.
By following this strategy Nintendo can forgo costly silicon processors and high-performance graphics cards -- allowing it to keep Wii affordable and turn a profit.
Another key advantage for Nintendo is that it produces profitable software and accessories -- which it inevitably sells to the hundreds of thousands of people who line up to buy Wii.
And it doesn’t look as though these sales will slow anytime soon -- even if the recession deepens. Forbes notes that “while $60 is a hefty upfront investment for a video game, it often lasts 20 or more hours, whereas a $10 movie ticket nets about two hours of entertainment.”
That difference might look insignificant on the surface, but when you consider that entire families are now playing video games together for hours on end, you can see why video game sales should continue to skyrocket even in our cash-strapped economy.
And I’m sure you’re beginning to see why Motley Fool co-founders David and Tom Gardner have named Nintendo among their “No Bailout All-Stars.” But as I told you yesterday, I wouldn’t want you to make a decision based solely on what I’ve shared with you here today.