License software

Nintendo’s small licensing business could have a big future

Nintendo‘s (OTC: NTDOY) the stock has fallen about 30% this year, with investors worried about its post-pandemic slowdown. The Japanese gaming giant’s revenue rose 34% in fiscal 2020, which ended in March, as many people bought consoles and Switch games throughout the pandemic.

Unfortunately, Nintendo expects its revenue to drop 9% in fiscal 2021 compared to a difficult year-over-year comparison. He expects the current chip shortage to make this slowdown worse, and he faces new competition from Sony and Microsoftmost recent consoles.

These concerns dampened market enthusiasm for Nintendo shares, as the company generated nearly 97% of its revenue from its game consoles and software in fiscal 2020. However, investors should not neglect its tiny licensing division, which could get much bigger in the next one. a few years.

Image source: Nintendo.

A closer look at Nintendo’s mobile and licensing activities

Nintendo’s ‘mobile and intellectual property revenue’ unit generated 3.2% of its revenue last year, while the legacy playing cards unit – which has been in existence since Nintendo was founded in 1889 – generated only 0.1% of its income.

Nintendo’s mobile and IP division has generated most of its revenue from mobile games since the launch of the first title, Super mario run, in 2016.

He then launched more mobile games, including Fire Emblem Heroes, Animal Crossing: Pocket Camp, Dr Mario World, and Mario Kart Tour – most of which were developed by its licensed partner DeNa – as well as nearly a dozen Pokemon games with its co-owned subsidiary, The Pokémon Company.

Nintendo’s mobile gaming business got off to a very good start in fiscal 2016, but its momentum quickly faded over the next four years:

Mobile and IP business

FISCAL 2016

FISCAL 2017

2018 financial year

FISCAL 2019

FISCAL 2020

Income Growth (YOY)

322.9%

62.1%

17%

11.5%

11.3%

Percentage of turnover

5%

3.7%

3.8%

3.9%

3.2%

Data source: Nintendo. YOY = year after year.

This deceleration can be attributed to the slow pace of new releases of mobile games from Nintendo and the intense competition from other games. Last June, company president Shuntaro Furukawa said Nintendo “isn’t necessarily looking” to release “a lot” more mobile games.

Instead of trying to generate further growth for the business segment by releasing more mobile games, Nintendo will likely follow in Disneyin the footsteps of securing more intellectual property licensing deals for its flagship franchises, which include Mario, Zelda, Donkey kong, Animal crossing, and Metroid.

How is Nintendo going to develop its licensing business?

Nintendo is targeting four markets with its license agreements: merchandise, mobile apps, theme parks, and visual content like TV shows and movies.

In the commodity market, Nintendo has licensed its characters to third-party toy makers like Hasbro and Mattel, clothing brands, including Levi’s and Puma, and cosmetics manufacturers such as ColourPop.

In the mobile market, Nintendo will likely license more of its major franchises to DeNa and other developers, allowing it to release a steady stream of mobile games without incurring more development costs.

In the theme park market, Nintendo has worked with Comcast‘s (NASDAQ: CMCSA) NBCUniversal will develop Super Nintendo World expansions for its Universal Studios theme parks. Universal already opened its first site in Japan earlier this year and plans to expand its parks to California, Florida and Singapore.

On the visual content side, Nintendo is working with Illumination from NBCUniversal, the animation studio that created Minions, to create a Super Mario Animation Film. The film, which will be released next December, could pave the way for additional films based on the Nintendo franchises.

Licensing activity could become much more important

Nintendo’s licensing activity won’t generate enough revenue to move the needle anytime soon. But the business could grow significantly in the future, as Universal opens up more Super Nintendo worlds and gives the green light to more movies and TV shows.

Nintendo’s collaborations with Levi’s and Puma could attract more clothing manufacturers, and the company could enter into additional partnerships with Hasbro, Mattel and other leading toy makers. All of these licensing deals could make Nintendo characters as ubiquitous as Disney characters while also attaching new generations of consumers to its flagship game franchises.

Therefore, Nintendo’s licensing business may seem tiny today, but it could still have a very bright future and gradually diversify the company’s core business away from the cyclical market for video game consoles.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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