Saudi Arabia Wants a Piece of This Classic Video-Game Maker

The Kingdom of Saudi Arabia just welcomed Mario and Luigi into its empire...

Saudi Arabia's Public Investment Fund (or "PIF" for short) is one of the world's most unique investing groups. It started in 1971 as a sovereign wealth fund to manage the kingdom's funds.

Five decades later, the PIF's assets are valued at about $600 billion. And much of that growth has occurred in recent years... The value of its assets is up around 300% since the end of 2015.

Thanks to a broad investing mandate and little regulatory oversight, the PIF often makes unorthodox investments...

For example, in October 2021, the PIF paid about $400 million to buy the Newcastle United Football Club. The soccer team finished in the middle of the English Premier League table this season. But many fans believe the Saudi government's involvement will help the club compete better in the coming years.

And now, the PIF is setting its sights on the video-gaming space as well...

The fund started building stakes in video-game makers and esports companies over the past couple years. And earlier this year, it disclosed interests of more than 5% in two Japanese gaming companies – Capcom and Nexon.

The Saudi government reportedly wants to create its own video-game content. And with the Japanese yen weakening so far this year, it seized the chance to load up on these video-game stocks at a discount.

In addition to Capcom and Nexon, the PIF just disclosed a 5.01% stake in the Japanese video-game king – Nintendo (7974: JPN). The fund is now Nintendo's fifth-largest shareholder, giving it a leading voice in the future of iconic characters like Mario and Luigi.

While most folks connect Nintendo with video games, its history dates back much longer than that...

The company started in 1889. It produced handmade playing cards in the beginning. By the 1960s, it started dabbling in other businesses – like toys, taxis, and instant rice.

Then, of course, Nintendo got its big break through video games in the 1970s and 1980s...

Its landmark games like Donkey Kong and the precursor to Super Mario Bros. became popular in arcades. The company soon carried that success and recognition into homes with the Nintendo Entertainment System. And it hasn't stopped innovating since then...

Over the past four decades, Nintendo has made a few of the most popular and revolutionary video-game systems of all time. Its creations include the handheld Game Boy in 1989, the dual-screen Nintendo DS in 2004, and the motion-controlled Wii in 2006.

However, the Wii started to lose its popularity about a decade ago as more advanced consoles from Sony and Microsoft (MSFT) took over the market. In turn, Nintendo struggled to make money for more than five years.

That all changed in 2017, when the company released its latest revolutionary system – the Nintendo Switch. The Switch can be either a handheld device or played as a home console.

And it has been a gold mine...

We can use our Altimeter to dive deeper into why the PIF is pouring money into Nintendo...

Regular readers know the Altimeter breaks a company into performance- and valuation-based grades based on its Uniform-based financials. And in this case, we can use it to see how Nintendo is performing...

In short, the company is throwing off cash and getting excellent performance grades.

Since the release of the Nintendo Switch, the company's Uniform return on assets ("ROA") has exploded. It's up from 2% in 2017 to a staggering 162% in 2021.

This incredible performance led the company to earn an excellent "A" Earning Power grade for its 2022 expected returns. However, analysts expect Nintendo's earnings to slide from their 2021 highs. So as a result, the company only earns a "C" grade for the Earnings Power Trend.

Altogether, Nintendo receives a solid "B" overall grade in the Altimeter. Take a look...

The PIF's investments in Japanese video-game companies are more than just a vote of confidence in that country's foothold on the market. They're also a vote of confidence for the industry as a whole.

With that, it's clear why the Saudi government is backing Nintendo. It's one of the long-term powerhouses in the space. And today, it's back on the right path with the Switch.

But that doesn't necessarily mean that Nintendo is a good stock to buy right now...

We also need to know if the market has already priced in the profitability trend that Nintendo has been riding since 2017. For that, we need to look at its valuation grades...

If you're an Altimeter subscriber, you can click here to see how Nintendo is valued based on Uniform Accounting – and if the story is being correctly priced in. And if you're not already a subscriber, you can find out how to claim a seven-day pass to the system right here.

Regards,

Rob Spivey
June 2, 2022