The Stock Market and Q1 ’07 Nintendo Earnings

It’s been a little while since I did a post about the market. Come to think of it, it’s also been awhile since I did my quarterly finance post also. I’m behind by a quarter or two!

Nintendo (NTDOY)

In Japan, Nintendo just announced its quarterly earnings. Its net income (profit) was $668 million. A year ago, in the same quarter, it only made $129.5 million. Such a massive ramping of sales has caused Nintendo stock to go from $15 to $62/share in about 15 months.

Nintendo will have sold more Wiis worldwide by Christmas than Microsoft will sell 360s. The Wii is still in incredibly short supply and continues to outsell the Sony PS3 and Microsoft Xbox 360 by multiples — outsold only by Nintendo’s handheld, the DS.

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But the best part of this story is that Nintendo is making a profit per unit. It’s not known exactly how much, but its hardware sales are profitable. I don’t know if the 360 is yet, and the PS3 definitely isn’t yet. Most of Nintendo’s best-sellers are first-party games too, which means they receive the lion’s share of the revenues from those games.

To put $668 million in a quarter in perspective, look at what other top companies are making.

Apple (AAPL)

Apple (see below) just made $818 million in net income in the same quarter. It went up about 6.4% today after those earnings were announced. Apple also has exponential revenue growth although it is more mature in its product cycle. Somehow I doubt their estimate of selling 10 million iPhones in 2008 — not unless they drop the price or upgrade it a lot!

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Amazon (AMZN)

Amazon has been killing the short-sellers. It trapped a bunch of short sellers when it gapped out to the 60 level from the 40s. I forget the news story on that one. Then it just reported earnings and rallied up another 10 points. How much did it make last quarter? Just $78 million! As a result it has a 141 P/E ratio, compared with AMZN and NTDOY which are approximately 45ish. I really can’t fathom where investors seek AMZN’s future growth from, considering they earn a sliver off retail and require efficiency boosts in order and shipping processing in order to make money.

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Crocs (CROX)

I also want to take a moment to mention Crocs. I don’t know if you know what this godless company is but they sell these rubber/plastic galoshes-things that everyone’s wearing now. And apparently, they’re fucking popular. Luckily there are people out there who agree with me and think these things are horrible. I mean, bright colors, obnoxious child toy appearance… Like out of a Japanime movie.

Well SOMEHOW they blew out their earnings this evening and as a result the stock was trading over 10 points higher to about $60! What the hell! They sold $224 million worth of those shoes, for a net income of $48 million. Piddly.

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To be fair, Crocs sound like they’re very comfortable and light and the flipflops they sell don’t look ridiculous. They just cost $40!

The Market

So Nintendo is now the fifth biggest company in Japan somehow. I’m looking for an exit point but am thinking it might not be for another few quarters, since I am pretty sure that revenue growth will continue as Wii’s become easier to find (and continue to sell wildly) and the big hitters in terms of game titles begin to come out for the system. Plus Nintendo is still pushing its handheld games which are often more popular than the bigger brother. Sony on the other hand has neglected its PSP handheld, despite the PSP consistently outselling the PS3 and rivaling the PS2! Talk about a failed business strategy. Nintendo should see its stock rally into Christmas since cyclically that’s the best time of year. But after that, I’m just not sure what to do.

Nintendo’s appeal to the broader market means that they are creating new users, while Microsoft and Sony are fighting over the same diehard players. I think this is a winning strategy and there’s potential for huge opportunities that we can’t see at this point.

[Edit: The latest sales figures came out of Japan (more here). Nintendo had 41 out of the top 50 best-selling game titles. Sony’s PS3 had one title on the list, at #50. The DS sold 155k units, the Wii 110k, and the NEXT best-selling was the Sony PSP handheld at 33k units. Astonishing numbers.]

Just think about this. Nintendo is making $668 million in a quarter selling video games. Not just in Japan but worldwide. It has such low costs already, even for its newer products. Expanding markets and lower costs to sell to them. It’s astonishing that a video game company can become the fifth largest company in Japan based on market cap.

Anyway, as for the rest of the market, I’ve been uncertain of what to do. I went into government securities a little while ago, cashing out of the market. The market rallied a bit later but had a massive selloff today because of the unexpected (yeah right) worsening of the housing market and subprime lending industry, affecting market liquidity. Primarily I got out because I don’t believe in summer rallies although this year has already shown atypical summer patterns.

My reservations about the future are based on economic concerns, not business concerns. It’s clear that many companies are making shitloads of money. Exxon sold off a bit today because it ONLY made $10.3 billion in one quarter. Internationally, indices have been hitting new highs as trade becomes more intermingled between nations.

I’d been worried about the rapidly ballooning money supply. But it occurred to me finally that perhaps the Fed has been printing such vast quantities of money because the economy is expanding so much. Maybe that’s why economists don’t clamor about it so much? I don’t know — it seems to be ramping up exponentially and not constantly like GDP growth is. The economy needs a larger money supply to expand without causing massive escalation of the dollar’s value, but perhaps the effect is that the dollar is getting weaker and weaker, compounded by the fact that large firms and foreigners are redistributing into foreign currencies that are more stable and stronger.

Mostly I’m worried about the US’s competitiveness internationally. I’m afraid that no one is going to step up and lead the country effectively by reversing protectionist policies and isolationist diplomacy. The War on Terror will continue to be a drag on economic progress until it ends — just look at the effects of past military efforts like Desert Storm on the economy’s output. The US is noticeably dumber and lazier and more reliant on faith and stupid theoretical fallacies under the banner of free market and democratic principles. It won’t even notice that it’s been left behind until it’s too late. It will be interesting to see whether such massive income inequality will cause societal unrest as has been theorized in policy circles.

It bothers me that the world is ramping and Chinese cities are blossoming at an astonishing rate, and that Europe has gotten its shit together and is building a fairly solid economy, and that Asia in general is booming. Not because they’re successful, but because most people in the United States are completely unaware of it. London is once again the financial capital of the world.

What’s going on is, in my opinion, far bigger than just a ruinous Bush administration. The US has lost its way for now. Managing the debt plague will be a big issue for my generation I think.

That said, I’m going to grad school, am doing pretty well in almost all respects, and so are my friends and family. Tech and internet entrepreneurship are still dominated by Americans and the educational system is still the best in the world. I think many cities and counties and states are beginning to take initiative where the federal level has let them down, so at those levels things are getting done. It’s not all bad. I’m just thinking long-term here.

I will probably go long on international investments and avoid American investments after the dangerous August-September-October trading months pass.

Tomorrow morning is the release of the Q2 GDP numbers, so it could be a wild Friday. I’m a little skeptical of the bounce back that economists predict will come, after such a weak Q1 GDP.

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