Wedbush Securities analyst Michael Pachter has once again provided a negative assessment of Nintendo, deeming global president Satoru Iwata a “pretty poor CEO.”
Within his weekly Pach Attack show, he found himself posed with the question as to whether we would ever see a situation within which Nintendo stopped making hardware.
“Having to? No, never,” he began. “Wanting to? Not while their biggest shareholder is Mr. Yamauchi, who I believe is around 70-years old, and not while Mr. Iwata is CEO.”
He continued, “I think those two guys are deeply rooted in tradition and in the past in what made Nintendo great. I think the Nintendo formula for success for the last 35 years has been manufacture a console, sell it at a profit, and support console sales with proprietary software. Then, when your console sells well, collect royalties from third-parties for the privilege of putting their software on the console.”
It’s a lack of profit on hardware sales that’s lead Pachter to such an opinion, Nintendo making far less money on either the Wii U or Nintendo 3DS.
“I think that model is broken for Nintendo,” he explained. “I think Nintendo is no longer able to compete the way they did in the past, and sell their consoles at a big profit.
“I think the Wii, when it first launched, they were probably making $100 profit per unit, and the DS when it first launched was probably generating about $50 per unit. The 3DS is barely making a profit, the Wii U is barely making a profit – I’m talking $5-10 per unit.
“So Nintendo’s hardware profits are so low, that it really doesn’t make sense for them to be in the hardware business, but I don’t think they realise that yet. That’s a business decision, so this is a criticism of Mr. Iwata not of Reggie.
“Reggie and the marketing team, they’re great. They do what they can – you have to play with the cards that you are dealt. They’re dealt the Wii U, they’ll do the best they can to market it and do the best they can to get you excited about the software.
“I love the US marketing guys, I think they’re phenomenal and I have no problem with any of those guys. I think Mr. Iwata is a pretty poor CEO, I think he’s done a very poor job of running the company. I have a neutral rating on Nintendo but I have to say only because their cash levels supports their current share price. It’s a bad company that doesn’t make money.”
It isn’t all negative, with Pachter reasoning that Nintendo can continue to “run for 50 more years and keep losing money,” without being in any danger.
“The good news is Nintendo have something around $8-9 billion of cash on their balance sheet,” he discussed. “When they lose money, they lose something like $1 billion and frankly I think next year their losses will be smaller. I think if they lose money it’ll be $100 -200 million. They can run for 50 more years and keep losing money, and they’re not going to go out of business. So, they’re not forced to do anything.
“Mr. Yamauchi owns something like 16 per cent of the stock, he shouldn’t be the controlling shareholder because he doesn’t have 50 per cent, but I guess the gentleman’s society in Japan among the shareholders is the founding family member, which is Mr. Yamauchi, can pretty much control the company and nobody says anything.”
With competition approaching from the next Xbox and PlayStation 4, Pachter believes the hardware business “makes no sense for Nintendo” who would make far more profit from selling multi-platform software.
“I’m surprised Nintendo’s investors have watched the 63,000 yen fall to 8000 yen, and have stuck with the management team,” Pachter criticised. “The stock has dropped to cash value, so there’s no value in investing in it the only way anybody is going to make money going forward is if Nintendo suddenly starts making money and they’re not going to make money on hardware, not at these prices. I don’t think they can raise price, that commodity component costs are coming down that fast, and they’re facing competition from the next Xbox and the PlayStation 4.
“I think the hardware business makes no sense for Nintendo. If Nintendo were to make its software multi-platform, it would sell more units of its software if its just on the Wii U and the 3DS. If Nintendo’s business is trying to make a profit, once they conclude that they aren’t going to make any money on hardware, of course they should exit the hardware business.
“If they were to put their software on multi-platform they would probably sell twice as much software. So I think Nintendo, if they were to follow the SEGA route would be immensely more profitable, but it’s not in their DNA. Mr. Yamauchi is a member of the family that founded Nintendo, all of his wealth was built on Nintendo following this formula.
“I mentioned his age, because us old guys have trouble changing, we have trouble adapting to the environment as it changes around us. There is something called the ‘Winning Formula,’ it’s the reason successful people got there, it’s what you did to get you to the position that you’re in today.
“Mr. Iwata has always done things right, which is how he became CEO of Nintendo, and when he starts to do things wrong, and I’ll say that’s the been the last couple of years, it’s hard for him to change. He keeps practicing the things he’s always done right, once they’re wrong he doesn’t recognise it.
“I think he’s a pretty bad CEO, I think Nintendo will not exit the console business as long as he’s there, and I don’t think the new CEO if Mr. Iwata leaves will change anything because Mr. Yamauchi will get to select him.
“So when Mr. Yamauchi is no longer a shareholder, Mr. Iwata is no longer there, maybe. But I’d say they’re going to keep fumbling around and trying to make money in hardware – don’t think it’s gonna work.
“I’m not particularly optimistic about an investment in Nintendo’s stock, and I’m a stock market guy. I’ve been pretty good about stock market investments. If you don’t like that answer Nintendo fans, deal with it.”