Why Nintendo at Y70,000 a share is bigger than sex

There are some truly dismal moments in life when even the most ardent proponent of free markets is  forced to admit that they don't work. Or at least, they work, and tell us something pretty nasty about ourselves. This post is genuinely about Nintendo, I hasten to add, it just needs a build-up.

I think it's important to acknowledge, at this still early stage in the game, that the whole idea of making pots of cash out of the greying of Japanese society is a myth. It's simply never going to happen. Companies can talk bravely about tapping the retiree Baby Boomers and all their savings and optimistically forecast how silver-haired tourism is going to be a sure-fire money-spinner for spas and railway companies up and down the country. They can even, as I heard from Yamaha at the Tokyo Motor Show yesterday, design four-wheeled hogs with geriatric Hell's Angels in mind.

But, come on. None of it is actually going to work. Like an embittered nurse in an old people's home, Japan is simply putting a brave face on a terrible job.

Here, in all its slipper-shuffling, half-moon spectacled misery is the truth about Japan's demographics: the Sanatogen Armageddon has already begun and the Four Horsemen of the Apocalypse are thundering into town - Stinginess, Prudery, Conservatism and Insularity.

Increasingly, both in attitude and demeanour, Japan is behaving like a cranky old man. Daft little rules, a fear of change, and the sort of proud parsimony that dooms the place to deflation.

More worryingly, the ageing of the populace is starting to affect (fatally, in some cases) the lives of the  young. Why, in a country with such a low birthrate, would a young doctor want to specialise in obstetrics? They don't, and those very market mechanics mean there is national shortage of obstetricians. That shortage in turn makes young couples all the more nervous about starting families, and the vicious cycle begins. The supply/demand balance in the doctor market is, in effect, a regulator in Japanese bedrooms.

And yet, amid all this the Japanese stock market has made an extraordinarily bold leap forward. By punting Nintendo off the charts, Japan has placed an incredibly potent bet on the power of young, innovative thinking.
Nintendo, you see, is not behaving like a normal Japanese stock, and that is a gloriously encouraging thing. In dismal markets, Y70,000 per share for Nintendo could even be the most optimistic thing to happen to Japan since the end of the 1980s bubble.
And it's not because a video games console maker is suddenly Japan’s second most valuable company. It's because the market suddenly believes in Japan's capacity to generate Big Ideas that will sell around the world. And that is something utterly vital now that investors are all (crazily) assuming that China will be manufacturing everything physical in a few decades.

Certainly, Nintendo has physical products to sell: and second quarter results released today proved that it is shifting them in quite staggering volumes. Everyone wants the innovative Wii and a lot of very unexpected customers want the hand-held DS machine for the commute into work.
But that is not, in reality, why Nintendo is so deeply and alluringly sexy to the investment community. Nintendo is up there because people are using it as a proxy for the future of an industry. A proxy for the future of entertainment. And that means big bucks.

Through the Wii, Nintendo has come up with a conduit that supposedly brings adults, en masse, into the world of video games.  It may pan out that way, but even if it doesn't and adults do quickly lose interest, they will still better understand why the kids are hollering for that new game. Thus Nintendo becomes not a seller of machines, but a seller of "family gaming", of a whole new concept in family entertainment. For investors who believe in the stock, it's like buying Vodafone shares just as mobile phones were moving from the business-user only model, to something everyone in the world has in his pocket.

Certainly, Nintendo may not be the eventual winner of that trend – any more than AOL or Cisco have fulfilled their formerly imagined roles as stewards of the Internet. But for a while they were undoubtedly stewards of the dream.

What has happened to Nintendo’s stock is remarkable for several reasons – reasons that could, if they don’t fizzle out too soon – transform Japan’s moribund investment scene. Nintendo’s perception as a stock has effectively been “Google-ized”. Yes, there are extraordinarily healthy till receipts and shipment bills somewhere in the mix, but the buying focus is on enormous, jaw-dropping potential.

Previously – and perhaps most strangely – the Japanese market did not treat stocks like this. Neither the Japanese financial media, nor many domestic investors, allowed themselves to be carried away by the power of thought. Japan is an exporter of cars, electronics, black boxes with wildly complicated tiny  components, nuclear power stations and ultra-strong steel. Ideas – exciting visions of the future projected onto a particular stock – were for discussion, never investment.

Industries rich in potential have withered because of Japan’s investment blind-spot for companies peddling intellectual property, rather than physical things. The Japanese anime industry, for example, has been starved of investment capital because the Tokyo market has never believed that Japan can export the intangible.
Nintendo, riding high at Y70,000, suggests that finally, Japan may be ready to embrace the “Big Idea” stock as well as the master of miniaturisations. If it does happen, there are, in fact, plenty of young entrepreneurs waiting in Japan’s wings with big ideas to sell.

Comments

[Lobu]

You don't think that Nintendo's maybe going up because it's one of very very few companies in Japan that isn't completely dreadful?

[KHyde]

Readers who'll be in New York on FRI., NOV. 2 may be interested in attending a noontime talk at JAPAN SOCIETY by Nomura chairman Junichi Ujiie, who’ll speak about the current state of Japan's financial and capital markets, and the challenges that remain. NYSE Euronext CEO John Thain will preside.

The luncheon is sold out but seats still available for the lecture 1-2 pm; www.japansociety.org