Is Nintendo following in the footsteps of Apple?

I don’t normally link to stock pitches, but this annual letter detailing Ryan O’Connor’s long-form, 122-page (!) thesis on Nintendo is a particularly engrossing and well-told story of corporate reinvention and business model innovation. (It’s especially interesting to me, a former grade-school addict of the 1993 Zelda franchise on Nintendo’s Game Boy. 

To be clear, I have no personal opinion on the stock either way. But it’s rare, and certainly admirable, to see an investor go to a near book-length depth on a specific company—and in such lucid detail. 

O’Connor, the founder and portfolio manager of Crossroads Capital, makes the case here that Nintendo, like Apple a decade ago, is on the cusp of reinventing its business model—and the market has yet to notice. “Then, as now,” he writes, “institutional and retail investors alike had a hard time telling the difference between a hit-driven hardware manufacturer and an integrated hardware-software platform business, creating huge tactical opportunities to exploit this consistent misperception along the way…. With time, Mr. Market came to realize Apple’s iPhone was not simply a single purchase device, but a ticket into a one-of-a-kind software-based ecosystem – and revalued the company accordingly.”

“In fact, Nintendo’s current setup reminds us of Apple’s about a decade ago. Back then, the power of Apple’s own radical transformation was consistently overlooked and understated for years, even as the iPhone became the most dominant consumer product in history. Those mistaken assessments didn’t stop the stock from going up tenfold over the last decade, but they did cause occasional periods of investor doubt and unsustainably compressed multiples, just as we see with Nintendo today…. Of course, by now, whatever upside remaining from awareness of this key insight is negligible, as that view has become mainstream, and Apple is now a $3 trillion business that has become the single most valuable company in the world. The real rewards, in other words, went to investors who understood the software and ecosystem aspects of Apple’s growing potential early on. We mention it because we believe the market is just starting to go through a similar slow-motion awakening on Nintendo – and that means the time to buy is now.”

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What Joel Greenblatt learned from Warren Buffett

I thoroughly enjoyed this interview between William Green and Joel Greenblatt this week. Lots of good sections to chew on: Greenblatt’s views on concentration, what he learned from Warren Buffett, qualities of exceptional businesses, and much more. 

“Warren Buffet said, let’s say you sell your business and you get a million dollars. Then you look around town at a couple hundred businesses and pick six—or eight—that you can buy at a good price. [They are] good businesses, with management that you think is going to do a good job, and you did your homework… As a businessman, no one would think you are crazy—they’d think you’re pretty prudent. You took that million dollar windfall from your business and divided it in six or eight places, they’d say, “Hey, you’re a conservative guy.” But put a stock price on it every day, people change the analysis.”

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A few more links I enjoyed: 

How People Think – via Morgan Housel
“Tribes are everywhere – countries, states, parties, companies, industries, departments, investment styles, economic philosophies, religions, families, schools, majors, credentials. Everyone loves their tribe because there’s comfort in knowing other people who understand your background and share your goals. But tribes have their own rules, beliefs, and ideas. Some of them you might disagree with; some are even abjectly terrible. Yet they remain supported because no one wants to risk being shunned by a tribe that’s become part of their identity. So people either willingly nod along with bad ideas, or become blinded by tribal loyalty at how bad the ideas are to begin with.”
No longer tolerating the decline of American industry – via Lux Capital
“All of which is to say that precision manufacturing is one of the most important ingredients to long term economic growth and human flourishing. Every additional degree of tolerance we can tighten — at cost or cheaper — can open up a wide range of new applications that have never been possible before.”

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