Nintendo Stock Upgraded to 'Super Mega Buy' [Game Trader]
Posted February 1, 2012 by Asif A. Khan, CPA and Adam H. Kraus, JD, MBA
IndustryGamers today presents you with the latest in our exclusive ongoing "Game Trader" series, from the folks at Panoptic Management Consultants. If you're investing in any gaming stocks, this is a must read!
Changes to Our Ratings
We are upgrading Nintendo to Super Mega Buy from Buy. We are upgrading Take Two Interactive to Buy from Hold. We are downgrading Google and GameStop to Holds from Buys. We are upgrading Sony to Hold from Don’t Buy. We are initiating Zynga at Don’t Buy.
Super Mega Buy
Nintendo - NTDOY
6/23/10 price $37.40
1/22/11 price $34.14
1/31/12 close $16.94
-54.71% return since we initiated coverage at Buy on 6/23/10
High since our last report $38.60
Low since our last report $16.13
What do you do when a stock that you thought was a buy at $33/share falls to $16.50/share? You reassess your investment thesis and act accordingly. We thought Nintendo offered a good long term value investment opportunity before the tragic tsunami in Japan and after a 50% drop last year we feel it is now a great long term investment. Nintendo’s cash and cash equivalents currently comprise around 50% of its market capitalization. It has gotten so cheap that we had to create a new rating, Super Mega Buy. We feel that Nintendo’s stock currently has more upside than Apple. Our investment thesis is that Wii U will return the Big N to revenue and earnings growth for the next 3 years. We also feel that reports of the death of the 3DS after its release were greatly exaggerated. Clearly we have been early, but our investment thesis has not been refuted as of yet. As a result, we are upgrading Nintendo today to Super Mega Buy from Buy. Goldman Sachs has their Conviction Buy List, we now have the Super Mega Buy rating.
The Buys
Apple - AAPL
6/23/10 price $270.97
1/22/11 price $326.72
1/31/12 close $456.48
68.46% Gain since we initiated coverage at Buy on 6/23/10
High since our last report $458.24
Low since our last report $310.50
Apple continues to eat market share across most of their product categories. The stock is being given an unfair valuation of 9.74 times forward earnings mainly because of the law of large numbers. Apple is now the largest company in the world, but at the same time no company has ever reached this mega cap status while growing earnings at revenues at such a rapid pace. The stock could trade hands at $600/share and still not be incredibly overvalued. The problem with attaching a high growth multiple to such a huge company is that $200 billion dollars of capital inflows do not happen overnight. It will take time to realize the next big leg up in Apple shares, but patient investors could do a lot worse than buying the best brand in consumer electronics.
Electronic Arts - EA
6/23/10 price $15.29
1/22/11 price $15.13
1/31/12 close $18.58
21.52% Gain since we initiated coverage at Buy on 6/23/10
High since our last report $26.13
Low since our last report $14.80
Next Earnings Report: 2/1/12
Electronic Arts has had a strong yet volatile performance over the last year. The stock has dropped to $18.58 from its high of $26.13 in the last month. EA was looking pretty lofty at $26.13/share. At its current price we think, though not incredibly cheap, it’s not a bad pickup. We like what Electronic Arts is doing in terms of expanding into social and mobile gaming in a big way and we think they are acting in a more forward thinking manner than Activision. Investors can wait until after the upcoming earnings announcement before they enter into a position as weak sales of Star Wars: The Old Republic may push shares lower in the near term.
Take-Two Interactive - TTWO
6/23/10 price $9.57
1/22/11 price $12.15
1/31/11 close $15.60
28.40% Gain since we downgraded the stock to a Hold from Buy on 1/21/11.
High since our last report $17.58
Low since our last report $10.63
Next Earnings Report: 2/2/12
When the facts change, our opinions change. GTA V is coming and we want a piece of it. Take Two Interactive is a victim of the GTA software cycle and usually ramps up into the sales numbers for GTA releases. At a market capitalization of $1.35 Billion, the company remains in the takeover rumor mill. The amount of revenue that GTA V will generate makes the company worth a shot at the current valuation. In response to the GTA V announcement, we are upgrading Take Two Interactive to Buy from Hold.
The Holds
Activision - ATVI
6/23/10 price $11.21
1/22/11 price $11.24
1/31/12 close $12.34
9.79% Gain since we downgraded the stock to a Hold from Buy on 1/21/11.
High since our last report $14.40
Low since our last report $10.40
Next Earnings Report: 2/9/12
It has been a bumpy ride for shares of Activision since we downgraded them to Hold from Buy last year, and they do not have much room for error at the current market capitalization of $14 billion. Near term positive catalysts are the sales of Skylanders as well as the inevitable release of Diablo III. We remain interested in what Bungie is working on for them, but the stock is just not that cheap. The bar has been set very high with the sales of Modern Warfare 3 and we are not sure how much longer they can keep pumping out the same IP before it goes all Tony Hawk on them. They should just man up and buy Take-Two Interactive. They could do it straight cash.
GameStop - GME
6/23/10 price $18.89
1/22/11 price $20.90
1/31/12 close $23.36
23.66% Gain since we initiated coverage at Buy on 6/23/10
High since our last report $28.66
Low since our last report $18.34
Next Earnings Report: 3/21/12
We are downgrading GameStop to Hold from Buy after a nice run in the stock. At current levels we see more downside than upside. Sales will benefit from the ongoing PS Vita and 3DS product cycles as well as the release of the Wii U in the second half of the year. It is fairly priced at a PEG ratio of 1, and we would take a look at getting long again below $20/share.
Google - GOOG
1/22/11 price $611.83
1/31/12 close $580.11
-5.18% return since we initiated coverage at a buy on 1/22/11
High since our last report $670.25
Low since our last report $473.02
We are downgrading Google to Hold from Buy for a number of reasons. The biggest problem we see with the company is how they manage their cash. Their purchase of Motorola Mobility was the final straw for PMC. We exited almost all positions for our clients and Virtue LLC also liquidated its Google holdings. Google has shown time and again that they will sacrifice profits to adhere to their ideals, and this is just not what is best for shareholders. Google’s stance in China has effectively handed over search market share to Baidu and allowed Apple’s iPhone to really tear it up in overseas sales. Adding to our concerns is the news reported by Comscore this week that FaceBook has surpassed Google in display ads. If Google had bought HTC, we would feel completely different about their future prospects. They paid too much for a loss leader like Motorola and we expect margins to be affected going forward. The management team at Google has to show us that they have a clear vision for the company before we will jump back on board. In the meantime, we will keep our money at Apple instead.
Microsoft - MSFT
6/23/10 price $25.31
1/22/11 price $28.02
1/31/12 close $29.53
16.67% Gain since we initiated coverage at Hold on 6/23/10
High during the period $29.95
Low during the period $23.65
We love the Xbox division. If it was a separately traded company, it would be a fantastic buy. Sadly, Mr. Softy is comprised with a number of slower growing divisions. The upside potential for the company rests with the upcoming Windows 8 release. Shareholders are hopeful that Windows Phone will gain traction and the future Windows tablet releases will be able to slow Apple’s iOS ecosystem. We had a hands on with the Nokia Lumia 900 phone running Windows Phone 7 at CES and were underwhelmed. We don’t feel the phone is nice enough to lure potential customers away from the more established Android and iOS offerings. Microsoft pays a nice dividend of 2.7% and does not trade at a high valuation, so we wouldn’t blame investors for owning it. Anyone who has been in this stock knows how painful it has been over the last 10 years, so here’s hoping the next 10 years are better. Perhaps Kinect integration in PCs and the Windows 8 release will lead us to upgrade this stock some time in the future, but don’t hold your breath.
Sony - SNE
6/23/10 price $27.74
1/22/11 price $34.22
1/31/12 close $18.22
-34.32% return since we initiated coverage at Don’t Buy on 6/23/10
High since our last report $36.97
Low since our last report $16.16
Next Earnings Report: 2/2/12
Not too much has changed at Sony operationally since the last time we rated them at a Don’t Buy. However, based on the beating that the stock has taken over the last year we now feel that it is cheap enough to be upgraded to a Hold from Don’t Buy. The big changes are that they now have Sony Ericsson all to themselves and Sony is in the process of releasing the PlayStation Vita globally. It is still an open question on how successful the Vita will be, but for the time being we will give Sony the benefit of the doubt. It’s a solid piece of hardware and they are clearly devoting a lot to its software development. We did like what we saw coming out of Sony’s camera division at this year’s CES, though we can’t pin our hopes on just one division in such a Goliath of a company. Sadly, the most exciting division we saw also happens to be in a product segment that will most likely see erosion from more people switching over exclusively to smart phone cameras. We are very happy to hear that Howard Stringer is stepping down from his CEO role and the company is elevating Kaz Hirai to the leadership position. Even though this news is great, Sony still needs to get back to making quality products before we get too excited. It’s about time that they substantially streamlined their product offerings. Sony needs to focus on a fewer products and devote more resources to make sure the products they do release are innovative and market leading. While we currently don’t have too much to say that is praiseworthy of the company, it is trading at an incredibly discounted .59 times book value. At its lows of the year 2011 back in November we even considered upgrading it to a Buy.
The Don’t Buys
THQ - THQI
6/23/10 price $4.68
1/22/11 price $5.61
1/31/12 close $0.67
-85.68% return since we initiated coverage at Don’t Buy on 6/23/10
High since our last report $6.53
Low since our last report $0.63
Next Earnings Report: 2/2/12
THQ would have been a great short for anyone who reads our Game Trader features. We have been negative on this company since we began writing at IndustryGamers. The stock is now trading below $1.00 and has received a warning from the NASDAQ exchange that they may be de-listed. Some investors may look at a low price per share stock and think it is cheap, but this is not the case at all with THQ. There is a chance that THQ may be bought out, but it’s just as likely that a potential white knight purchaser would choose instead to sit and wait for a bankruptcy so they can pick up pieces of THQ at fire sale prices. The company has a market capitalization below $50 million and $100 million of debt. A better trade/investment may be to buy the THQ convertible bonds which are trading at 50 cents on the dollar. Their CUSIP is 872443AB2. Those bonds are paying a 10% interest rate right now, but we are not entirely sure if THQ will even be able to pay off their debt at their current cash burn rate. Bottom line, do not buy these shares! If you want to make a bet on THQ surviving, check out their convertible bonds.
Zynga - ZNGA
1/31/12 close $10.49
Next Earnings Report: 2/14/12
This may not be a popular opinion, but we believe Zynga is overvalued. Trading at 140 times trailing earnings and 47 times future earnings, the bar has been set very high for this company. While we do think they offer good games, their best asset is their user base. We would remind our readers that eyeballs were the choice metric of the 2000 tech bubble and we believe users are the new metric of choice for this generation’s bubbly tech cohort. Users only have value if they are active, and our concern is that there are very few barriers to entry for a lot of Zynga’s best IP. EA and Disney have both made entrances into social and mobile gaming and that definitely will provide competition to Zynga going forward. The major risks we see to the company are slower earnings and revenue growth and lower than expected margins as a result of increased competition. As a result, we are initiating Zynga at a Don’t Buy rating until we see them live up to the lofty earnings expectations that their IPO price has set for them.
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Investors should do their own research or consult their advisor before acting on this information. Panoptic Management Consultants, Inc. is a Registered Investment Advisor that was founded in 2008. Please go to our website www.panopticinvesting.com for more information about fundamental investing as well as technical analysis. For prospective client inquiries please contact us at panopticmc@gmail.com.
Full Disclosure:
At the time of this article our CEO, Asif A. Khan, CPA, his family members and/or Virtue LLC had the following positions:
Long Apple
Long Electronic Arts
Long Microsoft
Long Nintendo
Long Take-Two Interactive
At the time of this article our COO, Adam H. Kraus, JD, MBA, had the following positions:
Long Apple
Long Nintendo
At the time of this article, clients of Panoptic Management Consultants Inc. had the following positions:
Long Apple
Long Google
Long GameStop
Long Nintendo
