This article by MOI Global instructor Ryan O’Connor is excerpted from a letter of Crossroads Capital, based in Kansas City, Missouri.
We’re proud to report that Nintendo, current heavyweight champ of the console world and 800-ton Godzilla of the increasingly resilient, fast-growing videogame industry, became our largest investment during the tail end of Q4 and early January.
Our thesis is simple: Nintendo offers a unique opportunity to purchase a dominant, wide-moat business undergoing transformative, value-unlocking change. Moreover, this market leader’s unrivaled roster of iconic videogame franchises gives it an overwhelming and durable edge in a high-return industry where intellectual property (IP) is king.
Despite its many successes, Nintendo has long suffered from cyclical volatility in its core videogame console business and massive undermonetization of its beloved game characters. But new leadership turned those pages years ago, setting the stage today for a multi-year run of exponential earnings growth. Yet the company is trading at less than 12 times next year’s consensus earnings – and just 8 times after backing out its roughly $9 billion in cash.
That’s cheap, but we think Nintendo is actually a far greater bargain then it initially appears. “Mr. Market” has become downright delusional about the medium- to long-term trajectory of the company’s increasingly high-Quality earnings. Street estimates will have to come up. Way up. We can’t recall a company of this quality languishing at such an extreme discount to its intrinsic worth.
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Disclaimer: Past performance of the financial instruments mentioned in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. Any projections, market outlooks or estimates in this presentation are forward looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect their returns or performance. Any projections, outlooks, or assumptions should not be construed to be indicative of the actual events that will occur. Future returns are not guaranteed. If a financial instrument is denominated in a currency other than the investor’s home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from that financial instrument. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk. While the information prepared in this document is believed to be accurate, Crossroads Capital, LLC (the “Investment Manager”) makes no representation or warranty as to the completeness, accuracy or timeliness of such information. The Fund and the Investment Manager expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained herein. The Investment Manager has no obligation to update any information contained herein, and may make investment decisions that are inconsistent with the views expressed herein. Any holdings of securities discussed herein are under periodic review and are subject to change at any time, without notice. This report does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors, and investors must make their own investment decisions based upon their specific objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider this report as only a single factor in making an investment decision. All information provided is for informational purposes only and should not be deemed as investment or other professional advice or a recommendation to purchase or sell any specific security. This report, which is being provided on a confidential basis, shall not constitute an offer to sell or the solicitation of any offer to buy limited partnership interests of Crossroads Capital Investment Partners, LP (the “Fund”) which may only be made at the time a qualified offeree receives a confidential private offering memorandum (“CPOM”), which contains important information (including investment objective, policies, risk factors, fees, tax implications and relevant qualifications), and only in those jurisdictions where permitted by law. In the case of any inconsistency between the descriptions or terms in this document and the CPOM, the CPOM shall control. The interests shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful until the requirements of the laws of such jurisdiction have been satisfied. This document is not intended for public use or distribution. All trade names, trademarks, and service marks herein are the property of their respective owners, who retain all proprietary rights over their use. This document is confidential and may not be disseminated or reproduced without the prior written consent of the Investment Manager.