Why Ryan O'Connor is bullish Nintendo $NTDOY

Episode Summary

Executive Summary: Andrew Walker interviews Crossroads Capital founder Ryan O'Connor about his value-investing evolution and his bullish thesis on Nintendo. O'Connor argues that market structure has made small-cap value inefficient, so he seeks hard catalysts and liquidity-driven re-ratings. He says Nintendo is transitioning from cyclical hardware sales to a recurring, software- and IP-led platform with major optionality across subscriptions, mobile, licensing, movies, parks, and potential platform partnerships.

Main Topics: Crossroads Capital’s investing style and evolution (Priority: 5/5): O'Connor explains that the fund focuses on small/micro-cap value and special situations, but evolved to emphasize hard catalysts and liquidity-driven re-ratings because market structure has become less efficient. Broken market structure and the decline of small value (Priority: 5/5): He argues indexation, passive flows, and radical monetary policy have weakened price discovery in small and illiquid stocks, making traditional 'mispriced and wait' value investing less reliable. Case study: GAN as a catalyst-driven winner (Priority: 4/5): GAN is used as an example of buying a misunderstood business before a likely liquidity event/uplisting. O'Connor highlights how a hard catalyst plus strong business quality created a multi-bagger. Why he avoids energy and heavy-asset businesses (Priority: 4/5): O'Connor says he learned that commodity/asset-heavy industries often have poor returns on capital, bad management, and hard-to-underwrite economics, making them structurally unattractive. Nintendo’s shift from cyclical hardware to recurring software/IP (Priority: 5/5): The core bullish thesis is that Nintendo is becoming an iterative platform business, similar to Apple, with more stable, recurring revenues driven by software, subscriptions, and a persistent console ecosystem. Nintendo optionality: mobile, licensing, parks, movies, and cloud (Priority: 5/5): He sees multiple monetization levers beyond consoles, including Nintendo Switch Online, mobile games, theme parks, film adaptations, and possible tie-ups with other platforms or services. Bear cases and execution risks (Priority: 4/5): The discussion includes concerns about Nintendo’s culture, slow monetization, and possible missed opportunities, but O'Connor argues management is moving in the right direction and the optionality still provides a margin of safety.

Key Arguments: Small-cap value is less efficient today than in the past, so investors need hard catalysts, not just cheapness and good fundamentals, to get paid. Liquidity-driven re-ratings matter because passive flows and indexation can keep good small businesses cheap for years. GAN worked because it combined a quality business, a low valuation, and an identifiable catalyst that would unlock broader institutional demand. Energy and other asset-heavy businesses are often poor long-term investments because returns on capital are weak and outcomes are hard for generalists to underwrite. Nintendo is no longer just a cyclical console manufacturer; the Switch ecosystem can become a recurring software platform with more durable earnings. Nintendo’s first-party IP is its moat; Mario, Zelda, Pokémon, and related franchises can be monetized across games, subscriptions, movies, theme parks, and licensing. The market still values Nintendo through an outdated cyclical lens, so a re-rating could be substantial as investors accept the platform model. Optionality is the key source of value: many different strategic paths could add billions to Nintendo’s equity value. Nintendo’s recent actions suggest management is aware of the need to modernize monetization and preserve relevance with younger audiences. Even if some initiatives fail, the combination of cash, IP, and platform value gives Nintendo a large margin of safety.

Data Points: Crossroads Capital launch: June 2016 - O'Connor says he started the fund about four and a half years before the interview. GAN purchase period: Q4 2018 - He says Crossroads began buying GAN in the fourth quarter of 2018. GAN valuation at purchase: <2x sales - He cites GAN as trading at less than two times sales. GAN valuation at purchase: single-digit forward free cash flow multiple - He describes the stock as very cheap on forward FCF. GAN enterprise value: $40M-$50M - He estimates GAN’s enterprise value was roughly this range when he began buying. GAN performance: 4-bagger - He says GAN had become roughly a four-bagger before later volatility. GAN decline in March 2020: ~75% drop - He says the stock then fell another 75% after the COVID shock. Afterpay valuation: ~40x sales - He says Afterpay looked expensive on a trailing basis. Afterpay normalized valuation: ~1.5x free cash flow - He argues its normalized earnings power looked much cheaper than headline sales multiples implied. Mario Kart Tour play pattern: 20 minutes/day - O'Connor says he plays the mobile game about 20 minutes daily. Afterpay customer acquisition: ~123M download opportunity - He refers to the size of the potential mobile user base and network effects in discussing Mario Kart Tour and other platform games. Nintendo R&D increase: ~$150M uplift - He cites a quarterly increase in R&D as evidence of cloud/online investment. Nintendo stock upside scenario: stock could quadruple - He says if Nintendo fully embraced multi-platform licensing, the stock could potentially quadruple. Animal Crossing sales: ~20M copies - Used as an example of the scale and durability of Nintendo IP. Breath of the Wild sales: 20M+ copies - Used to illustrate the power of first-party IP and recurring monetization potential. Mario Kart Tour downloads: 123M downloads - He references the game’s massive download opportunity and network effects. Nintendo Switch Online price example: $10-$30/month - He uses this as a rough range for recurring subscription monetization possibilities. Theme park milestone: Next year opening - He mentions Super Nintendo Land as an upcoming monetization catalyst. Movie project: Super Mario movie - He notes Nintendo funded part of the project, implying meaningful earnings contribution potential.

Pivotal Quotes: "Hope is not a strategy." — Ryan O'Connor: He uses this to explain why Crossroads requires identifiable catalysts rather than relying on mean reversion alone. "There is no more cycle." — Ryan O'Connor: He argues Nintendo’s Switch ecosystem is evolving away from old console replacement cycles toward a perpetual platform model. "One word to describe it, it would be optionality." — Ryan O'Connor: His summary of Nintendo’s long-term investment appeal and multiple value-creation paths.

Implications: The interview argues that modern value investing increasingly depends on catalyst timing and structural awareness. For Nintendo, the thesis is that the market may still underestimate a platform/IP flywheel that could unlock substantial long-term value across several monetization channels.