The power of publicly listed companies is that you, as a holder of capital, can invest in companies when they are at the head of a trend, and pull money out when they get behind the times. A great example of this at play is the tragic case of Nintendo (NTDOY).
Although a Japanese company, Nintendo is bought and sold in the OTC Markets, where it sees limited volumes that have been rapidly declining in the past few years. Taking a long-term view, Nintendo has reverted to the mean–that is, its daily volumes below a quarter million and price range in the low teens was the norm in the early 2000’s, and that’s where Nintendo is trading at now. In between, there was a mountainous spike.
That mountainous climb (and fall) was due to one product: the Nintendo Wii.
The Wii came out in late 2006 (when the stock was trading in the high 20s), and it was such a popular device that serious shortages created a huge secondary Wii market on sites like Ebay, where people were willing to buy the console at a price premium.
Despite its outdated graphics and inferior hardware, the Wii was a tremendous success because it was easy to use and offered a new motion-based control system. Both of these features appealed to a wide range of potential customers outside of the gamer subculture, allowing it to expand its market share beyond the size of the market. In other words, it made more people become gamers.
The result was tremendous earnings potential, and the company’s profits–and its share price–grew at an exponential rate throughout 2007. An investment in Nintendo would have more than doubled in that year.
Then, throughout 2008, the decline began. This was certainly aggregated by the negative market as a whole, but it was not solely caused by that. Sales growth of the device matured and declined in 2008, as it saturated the casual gamer market and failed to attract net new interest in the gamer market.
After reaching saturation at the beginning of 2009, competition began. In the middle of the year, Nintendo’s main competition, Sony (SNE) and Microsoft (MSFT), announced their own motion controllers, the Move and Kinect, respectively. Investors were very slow to recognize the potential market share erosion that these products posed to Nintendo, largely because analysts assumed a split between casual and more serious gamers would silo both device sales growths. In 2011, the failure of the Nintendo DS to spur topline growth for the company caused the stock to tumble, and the trend just continued throughout 2012 to its historical low-teen range, where it remains today.
The stock is by no means dead, however. At the end of 2012 a new console, the Wii U, was announced, and it is already two quarters into the market. Meanwhile, Sony and Microsoft have announced next generation consoles.
The question for investors now is simple: which of these has an edge for both casual and serious gamer markets? Which console will outpace the others and result in more sales? The WII U is clearly targeted at casual gamers, while Sony and Microsoft are focusing on latest and greatest graphics quality to steal market share. Has Nintendo already captured as much of the casual gamer market as it ever will, and will Sony or Microsoft dethrone the other for the hardcore gamer market?
These are the questions that investors need to answer. Those who answer it rightly can make a lot of money.