IA to PS3 Fanboys: Buy the Console, NOT the Stock

It has been some 12 months for Nintendo. E3 2006 and the build-up of the Wii. The super-successful launch in the fall. And, most importantly, the impressive follow-through in both console sales and developer interest in writing for the platform. It truly couldn't have gone any better. On the flip side, you have Sony. The entire company has struggled, and PS3 has been a lightning rod for criticism around Sony's corporate culture, supply-chain management and siloed business structure. I've written quite a bit about their strategic and tactical miscues, and have gotten smacked around by those who say I am a Nintendo fanboy and don't know sh*t about sh*t. I also said that the Japanese market was an important barometer for success on a global scale. No, no, some said. Japan doesn't matter any more. It's a small market that's not reflective of the global gaming marketplace.

All I can say at this point is - well, I'm far too polite (at least in writing) to say that. Consider these facts from today's Reuters story:

TOKYO (Reuters) -- Nintendo Co. Ltd.'s Wii game console outsold Sony Corp.'s PlayStation 3 by a ratio of over 6 to 1 in June in Japan, a game magazine publisher said, solidifying Nintendo's leading position.

Nintendo sold 270,974 units of the Wii in the four weeks ended June 24, compared with 41,628 units for the PS3 and 17,616 units for Microsoft Corp's Xbox 360, according to data from Enterbrain.

The Wii's lead against the PS3 was 4 to 1 in April and 5 to 1 in May.

The Wii's strong performance, coupled with continued brisk demand for Nintendo's portable game gear, the DS, helped the Kyoto-based company shoot past Sony, a company with sales eight times as big as Nintendo's, in market capitalization last week and become one of Japan's 10 most valuable companies.

These are facts, friends, not opinions. It is very important to discriminate between these two things. I try to build objective, financially and strategically-driven arguments to make my points. But still, when it comes to gaming, people tend to get pretty emotional. That said, and stripping all emotions out of the dialogue, consider the following chart (courtesy of Morningstar):

Would anyone like to guess the company whose stock price is represented by the fat, dark line? You got it - Sony. And the thin, sharply upward-sloping line? Right again - Nintendo. This is a 12 month comparison of total returns. For those who are keeping score, the numbers are approximately 14% for Sony vs. 119% for Nintendo. It is this kind of performance skew that led to Nintendo's market cap eclipsing that of Sony, even though Sony's sales are 8x those of Nintendo's. Do you know what that is a comment on? The investment community's view of the relative margins and perceived growth prospects of the two companies. Nintendo is lean, focused and highly profitable. Sony is not lean, most definitely not focused and possesses far less attractive margins than Nintendo. These are facts, not opinions.

At the end of the day, I'm thrilled that PS3 devotees are digging their consoles and kicking some serious a** on those hardcore games. But I hope for their sakes that their 401ks aren't a reflection of their console preferences, because they'd be leaving a lot of money on the table by pursuing passion instead of profits.

Comments

[Roger]

Jack, thanks for the note. I enjoy your site will be fascinated to see how the financial picture for NTDOY/SNE/MSFT plays out. Best, Roger

[Jack]

First, bonus points for using the word pedantic.

Second, there are games worth playing on the PS3?

Now THAT's being a fanboy.

More seriously-- keep up the good posts Roger. When you fight back with factual arguments and not name calling, you win.

[Lakh]

Roger,

Thanks for the clarification - and for the great posts. It's good to see fact based financial reporting on technology. I enjoy reading your blog.

[Roger]

Lakh,

To be clear, when I stated "facts" versus "opinions," I was referring to the world from my perspective. It is a fact that the investment community sees what I stated; it is their opinion, not mine. When people have taken shots at me it has been because of my opinions, not specifically those of others. Hopefully this clarifies things. Thanks for commenting.

[Lakh]

I don't meant to be pedantic, but when you write the following:

"The investment community's view of the relative margins and perceived growth prospects of the two companies. Nintendo is lean, focused and highly profitable. Sony is not lean, most definitely not focused and possesses far less attractive margins than Nintendo. These are facts, not opinions."

You use the words 'view' which I take to mean it's a shared perspective that's priced into the stock. Which makes them the market opinion - not market fact.