The Nintendo Cinematic Universe, Berkshire Bits, and What I'm Reading
Watch out Marvel (and Disney), Nintendo is coming for you
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Nintendo 🎮 x Dynamo Pictures 🎬
It may not rival Microsoft’s $68.7 billion acquisition of Activision Blizzard, but sleepy ol’ Nintendo finally dipped its toes into the M&A waters. On Thursday, the Kyoto-based video game pioneer announced the purchase of a 🇯🇵 computer graphics shop called Dynamo Pictures.
When the deal closes on October 3, 2022, Dynamo will “focus on development of visual content utilizing Nintendo IP” under its new name of Nintendo Pictures.
From a gaming perspective, this is a bit of a yawner. Dynamo doesn’t make games and no new killer exclusives will arrive on Nintendo Switch as the result of this acquisition.
But I don’t think people should sleep on this news.
Particularly from an investment standpoint.
With Switch dominating the console wars, Nintendo has turned some of its focus to expanding the scope and reach of its unparalleled stable of intellectual property.
Finding new ways to put franchises and characters like Mario, Luigi, Princess Peach, Bowser, Pokemon, Donkey Kong, Link and Zelda, Animal Crossing, Splatoon, et al. in front of more people — especially non-gamers — could unlock serious value for Nintendo. And hasten the company’s transition into a Disney-like outfit.
If that sounds a bit quixotic, take a look at what Nintendo’s been working on:
Super Nintendo World “lands” at Universal Studios theme parks
Super Mario Bros.: The Movie (2023)
That’s pretty much the Disney playbook right there.
The animated Mario movie will release in theaters thirty years after the fairly-odd, forgettable original. But Nintendo and Illumination Entertainment are pulling out all the stops to make sure that this film successfully launches the lovable plumber into a Hollywood leading man.
For one thing, it’s being made under the watchful (and protective) eye of Mario creator Shigeru Miyamoto. And, for another, Nintendo seems pretty pleased with the early returns — naming Illumination’s Chris Meledandri to the secretive game maker’s board of directors.
Plus, they’ve secured a buzz-worthy voice cast: Chris Pratt (Mario), Anya Taylor-Joy (Princess Peach), Charlie Day (Luigi), Jack Black (Bowser), Keegan-Michael Key (Toad), and Seth Rogan (Donkey Kong).
I think everyone is expecting big things from this movie.
Okay, back to Dynamo Pictures.
Dynamo won’t be involved in the Mario movie, but this purchase shows Nintendo’s continuing ambitions to conquer the wider entertainment space. No word yet on whether Dynamo will focus on animated shorts (like its previous Pikmin Short Movies project), television shows, anime, gaming cutscenes, feature film support, or something else entirely.
But, while details remain scarce, Nintendo is undeniably moving deeper into non-gaming entertainment — and Dynamo has a part (maybe a big one) to play in that future.
Interestingly, for a smallish company, Dynamo boasts unusual experience with CGI, cutting-edge motion capture, and VR/AR applications for use in theme parks.
Easy to see how that skillset could slot into Nintendo’s expanded vision for its IP.
Nintendo currently trades at just 12.5x earnings — a multiple curiously smaller than other gaming competitors like Electronic Arts (45 P/E) and Take Two (35 P/E). Plus, the company previously announced a 10-for-1 stock split set for October.
With Switch continuing to sell like hotcakes and ongoing investment in non-gaming growth areas like movies, theme parks, and more, Nintendo’s valuation may not stay depressed for too much longer.
Some odds and ends out of Omaha…
Slowly, But Surely. Berkshire Hathaway inched up to a 19.2% stake in Occidental Petroleum after purchasing another 4.3 million shares of the Texas oiler last week. That moves Berkshire tantalizingly close to the magic (equity method) threshold of 20% — and, with it, a projected $2 billion boost to the company’s bottom line.
Bailing on BYD? 225 million shares of BYD recently popped up in Hong Kong’s market clearing system — an amount eerily similar to Berkshire’s stake in the Chinese electric vehicle and battery maker.
Some believe this move to be a precursor to Berkshire exiting BYD entirely, while others see it as an innocuous filing meant to convert the stock from paper to electronic. No clue here about who’s right. Stay tuned.
Berkshire’s initial BYD investment of $230 million — made in 2008 at Charlie Munger’s behest — has grown into about $8.5 billion today.
The Outsiders. In 2012, former Capital Cities CEO Tom Murphy — one of Warren Buffett’s favorites — was profiled in a chapter of William Thorndike’s “The Outsiders”.
In an aside at the end of the chapter, the author highlighted a company that he felt might offer CapCities-like upside in the years ahead: TransDigm Group out of Cleveland, Ohio.
And Thorndike was right!
If you had purchased $10,000 of the aerospace outfit’s stock after the book’s release, you’d now be sitting on $72,000. That’s good for a 22.5% compounded annual return.
Sometimes the best investing ideas are hidden in plain sight.
Birthday Boy. Last week, I celebrated a very Berkshire birthday with these little (and delicious) beauties. See’s Candies aren’t easy to come by in Ohio!
📚 What I’m Reading
Three things caught my eye this week…
The latest issue of Workweek’s The Crossover newsletter (written by the great Alan Soclof) dives into the perplexing valuation differences for professional sports teams in the private vs. public markets.
In this case, Alan wonders why Madison Square Garden Sports (owner of the New York Knicks, New York Rangers, and others) trades at a much lower price than the team(s) would sell for to a private bidder.
And I think he comes up with a pretty interesting answer.
It is important to recognize the disconnect between the fundamentals of the business and the valuation. The Knicks, for example, are trading at ~30x operating income, while the Rangers are trading at ~23x operating income. Very, very expensive.
A sports team is a luxury asset and, therefore, what people acquire assets for are not tied to the fundamentals. Additionally, historically, sports teams have struggled to be profitable and rather are funded by their multi-billion dollar owners.
This makes things difficult from a stock perspective as the likelihood of dividends, share buybacks, and increases in cash flows are unlikely and, therefore, the stock is missing a major catalyst to move the equity valuation higher.
Obviously, I agree.
And, while Alan chose Madison Square Garden Sports to make this point, my go-to example remains Manchester United. Now, granted, this world-famous soccer team has fallen on hard times of late — with huge LBO-induced debt, shambolic performances on and off the field, and no place at the lucrative UEFA Champions League inn.
Manchester United currently “boasts” a market cap of just $1.75 billion — a far cry from the $4.6 billion valuation that Forbes placed on the club in May. That startling discrepancy is unlikely to be resolved any time soon in the open market.
Terry Smith is one of my favorite investors.
Sometimes called the “British Warren Buffett”, he combines a love of low prices and high margins with an inclination to hold onto his positions for the long haul. 😍
His strategy is an exceedingly simple one (as all the great ones are):
Buy good companies
In his semi-annual letter to Fundsmith investors, though, Smith tackles a difficult (and timely) question: Are there any safe ports in this inflationary storm?
In inflationary periods, an acronym which is sometimes used to describe the investment options is TINA — There Is No Alternative. It refers to the concept that equities will be the least poorly performing sector in such conditions because of the ability of at least some companies to continue to grow revenues in real terms and generate real returns on capital above the rate of inflation.
Bonds with fixed interest coupons are certainly not the place to be in these conditions. Real estate may provide some safety, but it is a notoriously local market with poor liquidity and high frictional trading costs. Commodities have had a day in the sun at the start of this inflationary cycle and this may continue — or not. But there is no inherent return on commodities — no interest coupon, dividends, or profits reinvested. Investing in them is pure Greater Fool Theory — you can only make money by selling them to someone willing to pay more than you did. I have no confidence in my ability to accomplish that. All of which may point to the fact that There Is No Alternate to equities even though they have performed poorly so far this year.
In other words, it’s stocks or bust.
Too often, investment decisions are rushed by the whims of Wall Street. A particular stock gets pummeled down in price and investors, sensing a fleeting opportunity, frantically research the company in question before this “bargain” slips away.
Such a race against the clock is not exactly conducive to rational decision-making.
So, fittingly, this piece over at The Rational Walk’s Rational Reflections presents an eminently rational game-plan for avoiding those panicked, gotta-rush-through-the-annual-report-before-hitting-the-buy-button feelings that plague so many of us.
I firmly believe that it is almost impossible to successfully study or follow a business that one finds mind-numbingly boring. If you are an analyst working at a fund, you might be given a sector of the economy to cover. It doesn’t matter if you find that sector interesting or not — it is your job to cover it. Individual investors with a long-term mindset have no such constraints. You can look at what you find interesting and select companies that you will be motivated to follow over the long run.
One additional advantage of studying companies that might not currently be cheap enough to buy is that it can be done without feeling like some immediate opportunity is slipping through your fingers. I have looked at companies in the past that seem statistically cheap, and I was always nervous that the stock price would move away from me while I was conducting due diligence. I am sure that I prematurely purchased some stocks fearing that the quote would soon rise. That is a terrible way to research a company. It is much better to do so at a time when the stock might be too expensive to buy and there is nothing to “miss out” on in the short run.
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Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.