Investors used to love Disney (DIS -0.89%). The movie and theme park giant was flying on all cylinders a decade ago, riding high on prior acquisitions such as Pixar, Marvel, and ESPN. But in the last 10 years, the company has faced some major headwinds that are now showing up in its financials.
The consumer transition to internet streaming TV has ruined Disney's cash cow -- the cable bundle -- a trend that will continue in the years to come. There are also major signs of consumer fatigue with the seemingly endless content from studios like Marvel.
Shares of Disney have now only posted a 48% total return over the past 10 years, severely trailing the 203% return for S&P 500 investors over that time period.
One entertainment giant has fared much better for investors in the past 10 years. Enter Nintendo (NTDOY 0.27%). The video game stalwart has posted 329% returns for investors who bought it 10 years ago and is just getting started expanding its entertainment ambitions.
Here's why I'd buy Nintendo stock way before Disney.
DIS Total Return Level data by YCharts
Vertically integrated video game development
Nintendo is unique in the video game industry in that it dominates both hardware and software development. Unlike competitors at Sony Playstation or Microsoft Xbox -- who have spent tens of billions acquiring gaming studios in recent years -- Nintendo built dominant gaming franchises organically. These include Mario, Zelda, and Animal Crossing, as well as a deep partnership with The Pokémon Company.
Having its own titles exclusive to its own gaming hardware gives Nintendo an advantage over other game publishers. If you are one of the tens of millions of Mario fans across the world, you have to buy Nintendo gaming systems in order to play the latest games. This is the key reason Nintendo's latest hardware called the Switch dominated the market in recent years, selling 132 million units since it was launched in 2017.
Vertical integration also keeps Nintendo from paying high commission fees for selling gaming software on other systems, which also includes smartphones. This gives the company a ton of operating leverage, which has led to huge profit levels in recent years. For the fiscal year ending in March 2024, Nintendo is guiding for $2.83 billion in net profits, most of which will come from its integrated video game business.
But that's not all of Nintendo's plans.
Successfully expanding outside of video games
For many years, Nintendo stuck with its niche and didn't expand much beyond video game development. That has changed. The company is spending a ton of money building four new pillars to its entertainment empire: visual content, theme parks, merchandise, and mobile applications. These are all meant to reinforce fans of its gaming franchises.
The two most important -- at least in the next five years -- will be visual content and theme parks. Nintendo released its first movie earlier this year called The Super Mario Bros. Movie, which ended up being a global hit. It is planning to follow this up with a live-action Zelda movie, which director Shigeru Miyamoto said he has been planning for around 10 years.
While not guaranteed to succeed, Nintendo is planning to be methodical with movie development in order to not ruin the specialness of franchises. Disney, on the other hand, has diluted its content by producing so much year after year. Returning CEO Bob Iger plans to fix this, but it will be a difficult task. It takes decades to build a reputation in the entertainment industry, and only a few bad movies to ruin it.
Nintendo is going after the theme park business a bit differently, deciding to license its properties to Universal (a Comcast-owned business), which has expertise in building theme park rides. Two "Super Nintendo Worlds" have been opened around the world -- one in Japan and the other in California -- with one each in Singapore and Florida opening by 2025. Nintendo is only going to make a licensing fee on these theme parks, but it will be at extremely high margins because Universal is fronting all the costs. It will also drive more people -- especially young kids -- to become Nintendo fans.
DIS EV to EBIT data by YCharts
Better balance sheet, cheaper stock
Another problem at Disney is its rough balance sheet. Disney has more than $32 billion in net debt compared to negative $13 billion for Nintendo. This creates inflexibility for Disney as it will need to generate hefty profits over the next few years to pay back these loans. It isn't the end of the world, but it is an issue that Nintendo doesn't have to face. The Japanese company has the flexibility to focus on what is best for the business over the long term.
Taking into account these debt loads, Nintendo trades at a significant discount to Disney from an enterprise value-to-earnings basis (earnings before interest and taxes, in this case). Its EV/EBIT is 8.3 compared to Disney's 32.3.
Add all these factors together, and it is hard to make a pitch for owning Disney over Nintendo at these stock prices. I plan on holding my Nintendo stock and never selling.
