Nintendo Gets Back in the Game

TOKYO - Only a few months ago, it looked like it was 'game over' for Nintendo

Its mainstay GameCube console was losing ground to Microsoft's Xbox (news - web sites) and Sony, which had already ousted the company from the top slot in the home market, announced plans for a hand-held game machine to challenge Nintendo's Gameboy Advance.

Nintendo answered with a series of price cuts that rejuvenated GameCube demand and sent holiday sales up more than 70 percent from a year ago. It is also launching a new, hand-held game machine that is not as high-tech as what Sony and Microsoft plan to roll out but still breaks new ground in the gaming world.

Investors are starting to sit up and take notice.

"It's undergoing a bit of a reconciliation and if you stop forecasting worst case scenarios, it looks quite cheap," said Jeremy Hall, a fund manager at Henderson Global Investors.

The stock had a dismal 2003, tumbling to a six-year low in May and losing 10 percent in a year when the Tokyo stock market posted its biggest rise since 1999.

Analysts say that was an overreaction, especially given Nintendo's solid finances.

"If you consider that its balance sheet is ridiculously strong and there is so much in cash and assets...then I don't think the company's valuation has been formally recognized," KBC Securities analyst Hiroshi Kamide said.

It has 660 billion yen ($6.18 billion) in cash and carries a price-to-book (PB) ratio -- a favorite indicator for value investors -- of 1.6, compared with valuations of 7.9 for software competitor Electronic Arts and 1.8 for Sony.

If Nintendo's PB ratio rose to 1.83, the average level for all the companies included in Japan's benchmark Nikkei 225 N225> , the stock would reach 11,880 yen. That is 15 percent above Thursday's closing price of 10,370, which was up four percent from the start of the year.

SIMPLE IS BEST

Sony and Microsoft are developing microprocessors to power the next generation of game machines, but Nintendo seems to be heading in the opposite direction -- so much so that one high-ranking Sony executive recently joked that Nintendo's next new product might be a deck of cards.

The comment was a dig at the company's humble origins as a maker of playing cards, but also a reference to Nintendo's notion that video games should be fun and simple, like toys.

With that in mind, Nintendo has unveiled details of a new, portable video game system, codenamed "Nintendo DS." The hand-held device, due for launch later this year, will feature two LCD screens, one above the other.

"It's going to be a challenge for Nintendo to compete with Sony and Microsoft technologically, so it behoves Nintendo to try different forms of gaming, such as the "DS" product," said Credit Suisse First Boston analyst Jay Defibaugh.

It already has one hand-held product in the Gameboy Advance, which controls almost the entire portable gaming market, but Nintendo says the new "DS" is unlike any existing game system.

The dual screens might allow the user to view the game from two angles at once, in racing games for example.

Nintendo's new product might still be overshadowed by Sony's PSP, an advanced hand-held gaming device set for launch by the end of the year.

Sony's PlayStation guru, Ken Kutaragi, has said the PSP will be the "Walkman for the 21st century" and it will play not only games, but music and movies as well.

PS2 RULES

The "simple is best" strategy has not helped Nintendo in the home console market, where the company is neck and neck with Microsoft for second place, way behind Sony, whose PlayStation 2 (news - web sites) (PS2) controls roughly two-thirds of the market.

But Nintendo has seen a surge in sales in the United States after it slashed GameCube prices to less than $100, a 40-percent discount to PS2 and Xbox.

Nintendo officials now say it will "easily" meet a target for the year to March to sell six million GameCubes, a goal that looked very much in doubt when it sold less than a million units in the first six months of the business year.

"You can explain almost all of the recovery, the renaissance in GameCube interest with the price cut," said CSFB's Defibaugh.

One concern is Nintendo's exposure to currency fluctuations since it generates over 70 percent of its revenue overseas and foreign profits will be cut in yen terms by the yen's strength.

Goldman Sachs analyst Ken Uryu wrote in a note to clients Last week that if the dollar stayed around its current level of 106 yen until the end of March, there was a danger that Nintendo would suffer a currency-related loss of 65 billion yen.

Nintendo based its net profit forecast of 60 billion yen for the year to end-March -- which would be down 11 percent from last year -- on an assumed dollar rate of 114 yen.

Analysts say this does not affect the company's intrinsic value but the yen's strength will have an impact on earnings because Nintendo holds almost $5 billion of dollar-denominated assets that are revalued in yen terms every six months based on prevailing currency rates.