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In which I bring you one of the sharpest minds in fundamental equity analysis, my friend Ryan O'Connor of Crossroads Capital.

Ryan is a multidisciplinary thinker who combines rigorous fundamental analysis with a lot of of wit and wisdom. In this conversation, we dive deep into one of his ideas, none other than Nintendo. We discuss Ryan’s original contrarian thesis, how the business transformation has played out, and what to expect with recent release of the Switch 2.

If you enjoy this discussion, I highly recommend going back to listen to my 2020 interview with Ryan and checking out the Crossroads Capital investing letters, both masterclasses in thoughtful equity analysis.

Intro: Can’t Hardly Wait - The Replacements

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All opinions expressed by Andrew Flattery and his guests are solely their own and do not reflect the opinions of Flattery Wealth Management, a registered investment advisor. This podcast is for informational and entertainment purposes only and should not be relied upon as investment, tax, or legal advice. Clients of Flattery Wealth Management may maintain positions in Bitcoin and the securities discussed in this podcast.

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FULL TRANSCRIPT

Lightly edited for clarity.

Andrew Flattery: Ryan O’Connor, welcome to Gentleman Speculator. How are you?

Ryan O’Connor: It’s good to be back.

Andrew Flattery: It’s been a few years since you were initially on the podcast. Good to have you back. We’re going to talk about some ideas today. But first, I’m looking at you in your office, and you’ve got stock certificates on the walls. What do you have going on back there?

Ryan O’Connor: A lot of my favorite business case studies over time. I’ve got a railroad — the Erie Wars is a famous Gilded Age capitalist dust-up. I was able to get their first annual report, that’s up on the wall. I also have some old newspapers of the crash in ’87 — ever-present reminders that things can get crazy very fast, and you should always be prepared. Having great crash memorabilia framed all over the house might sound a bit morose, but I look at it as the opposite. When you are the sacred trust of preserving and growing someone’s savings, it helps to always keep the downside in mind. Those act as ever-present reminders that crazy things can happen — stocks can drop a lot farther than you think they can or should. Over the long run, people think great returns come from focusing on the upside. I think, in reality, it’s much closer to the downside. If you have the downside covered, the upside usually takes care of itself. My office consists of tons of little reminders to be aware of the limits of my own knowledge and to be prepared for the foxhole.

Andrew Flattery: I was in a Catholic bookstore with my son Henry, who is four, and they had one of those fake skulls — like the Shakespeare play, or the medievals who used to have a skull on their desk. And he wanted to buy it, and it was so cute that I had to buy it for him. So now my four-year-old thinks about his death the way the medievals did. And in the same sense, you as a professional investor have reminders of our own mortality hanging up on the walls.

Ryan O’Connor: Indeed. I actually have, if you go over to the right here, an actual page from Aquinas’s Summa Theologica. It’s pretty cool — that was hard to get.

Andrew Flattery: An actual first edition? What do you mean?

Ryan O’Connor: It’s a page with Aquinas’s handwriting on it. Unless some collector could tell that I was an easy mark. But from the authentication work I’ve done, it appears to be real. It’s a sheet of paper that’s almost a thousand years old, so it’s kind of wild to think about.

CROSSROADS CAPITAL: BUILDING FROM FIRST PRINCIPLES

Andrew Flattery: We’re going to talk about a couple of your ideas, but first — Ryan, you are running Crossroads Capital now, here out of Kansas City. Tell us a little about your firm.

Ryan O’Connor: Normally when people start tossing out Buffett comparisons, eyes start rolling, and rightfully so. But because of a family connection and various other things, I decided to start Crossroads. The fund itself is modeled on the original Buffett partnerships and how he invested as a young man, prior to having several hundred billion in capital to put to work. You could broadly think about how we invest in terms of two buckets. The first is special situations — investments where we have a very clear idea of what should make the stock work, and more specifically when. Merger arbitrage would be a simplistic example. These types of investments should outperform during downturns and help preserve capital. We just had a position in a company called Alpha Wave that was set to be bought out by Qualcomm. As long as you’ve done the work and analyzed the deal correctly — the financing being in place, the deal actually closing — that profit should be earnable regardless of whether the market goes up or down. I think we earned roughly 27 percent absolute within a few months.

Ryan O’Connor: The other half of our book really boils down to what I would call undiscovered, emerging compounders — the great businesses of the next five or ten years. Think of buying Walmart in the seventies or Microsoft in the eighties. Businesses with substantial moats, preferably widening, that are for whatever reason generally underappreciated. With these names, we focus on what I simplistically term value-unlocking change — scenarios where the future and the past look very different. We try to skate where the puck will be and get invested prior to their true quality becoming manifest. Unlike the special situations, which tend to turn over faster, these are the names we’d like to hold forever. We think they can compound tax-free for many, many years at very high rates of return. We’ve gotten somewhat of a reputation for our writing — we tend to produce hundred-page annual letters. If anyone wants to dive into the three hundred or so pages we’ve written on Nintendo, you’re more than welcome to go to our website.

Andrew Flattery: You said modeled after Buffett’s early partnerships. What’s your structure and who do you work with? Is it family offices or high net worth?

Ryan O’Connor: Initially it was all individual investors, like Buffett’s original partnership — no institutional investors. That was the idea for at least the first six years: very aligned LPs who truly thought and acted long term. We started out adorably naive in terms of scaling a boutique hedge fund in flyover country. I would put my work out into the world, people would find it, and they would self-select into the fund. About a year and a half ago, I decided to institutionalize the firm, build out the team — my version of a dream team. We’re in the process of going out there, and ideally we’d like to have a handful of very long-term institutions and endowments. Of all the things I’m most proud of, we certainly have some really remarkable LPs that have made all the difference in our returns over time. In the long run, funds get the investors they deserve.

Andrew Flattery: I remember reading in one of your letters about how the easiest thing for a fund to do is fit into some sort of style bucket — small cap value, large cap growth — and I think you’ve always rejected that. It’s like, “Hey, we make money,” and you sell yourself to people who understand your own philosophy.

Ryan O’Connor: That’s exactly it. We built the firm from the bottom up, from a first-principles basis, in a way that was above all focused on the mission: generating hall-of-fame, intergenerational returns, the way Buffett did. Practically speaking, we didn’t do ourselves any favors. We’ve gone about everything in basically the opposite way of the typical industry standard playbook. The style box nonsense and various industry conventions handcuff investors like us — and RIAs — under the guise of doing what’s best for the client. The industry standard playbook is built to maximize the business of investing, which is scaling and growing, versus the fine art of intelligent investing. Most mutual funds have to own sixty stocks. My head would explode trying to hold that amount of information and continue to make wise judgments. Whether it comes down to our fee structure or our lockup — it’s a soft lock, but I’m always amused when potential investors want you to invest long term but insist on asinine conventions like daily liquidity. It’s hard to invest long term when half your money can walk out the door a day later. Crossroads isn’t for everyone, but for the right type of value-oriented, long-term investor, I think we’ve built something pretty special.

Andrew Flattery: I visit the website, crossroadscap.io, because I’ll pull up your research there. Ryan, is that the best place for folks to go?

Ryan O’Connor: Yeah, that’s the best place. I appreciate the plug.

THE NINTENDO THESIS: A BUSINESS MODEL TRANSFORMATION

Andrew Flattery: I want to talk to you about Nintendo. We had the Switch 2 release last week, which I want to hear about. But taking a step back — you wrote what I think is a magnum opus investor letter in 2019. I was reviewing it before this call, and the ADR was trading at around seven dollars at the time. Today it’s probably somewhere around twenty, which is a 184 percent gain outpacing both the S&P 500 and the Nasdaq. We all know Nintendo — every one of us millennials is familiar with the name. So what stands out to you as an investment opportunity? What’s the hook?

Ryan O’Connor: When we released that original piece, people thought we were crazy, just because it was so far outside of consensus. Luckily, five or six years later, time has proven us pretty much bang-on across the board. This really revolves around the transformation of Nintendo’s business model. When I was growing up, you had the original NES, then Super Nintendo, then the N64, but the common denominator — the Achilles heel — was that Nintendo would release a new console, build up an active user base, and then three to five years later release a new console generation. Every time that happened, Nintendo’s installed user base reset to zero. I used to call it “console roulette.” A lot of video game hardware companies didn’t get a huge multiple on their business because every new generation was basically a prayer session where you hoped the console was received well.

Ryan O’Connor: We were the first to realize early on that Nintendo was adopting what I’d call the iPhone model. It’s an iterative hardware model that sits at the center of a software-based ecosystem. Instead of entirely new consoles every few years, you get minor iterative upgrades — the original Switch, then the Switch Lite, then the Switch OLED. Just like an iPhone gets incrementally improved over time. The Switch platform was forever, for lack of a better term, and that had tremendous implications for hardware sales but more importantly for the video game sales built on top. That was such a profound difference from how analysts had been thinking about this company for twenty years. The Switch 2 is the culmination of everything laid out in that original research piece. It’s the first major iterative upgrade of the Switch generation, and with its much higher power, it unlocks an incredible runway for the next three or four years.

Ryan O’Connor: It’s bittersweet standing here with my Switch 2 in hand. It’s kind of wild that we’re finally at the point in time we wrote about so long ago, and not only has it come together pretty much exactly as we hoped, the hardware itself has blown away my expectations. I’ll put it this way: I’ve spent an arguably unhealthy amount of time playing Mario Kart World since I received it.

SCUTTLEBUTT: PLAYING THE GAMES AS RESEARCH

Andrew Flattery: That’s what everyone’s wondering, Ryan. Is scuttlebutt for you, in this context, playing video games?

Ryan O’Connor: I didn’t play video games for fifteen, twenty years. But growing up, Nintendo is the ultimate weaponized nostalgia in terms of consumer goods. Being a Nintendo-generation kid in the late eighties, early nineties, it was a very big thing in my life. My favorite game was always The Legend of Zelda. The last game I remember finishing was Ocarina of Time on the N64 when I was in high school. When I saw the Switch was coming out and a very wise friend tuned me in to start digging, and the flagship launch game was a new Zelda, I decided to play again. It was a crazy experience — it brought me back to when I was eight years old, getting the whistle in the seventh dungeon of the original Zelda. It brought to life all of that intangible Nintendo goodness that comes from their mastery of gameplay loops and game design. I fell in love with it all over again.

Ryan O’Connor: I genuinely believe Breath of the Wild and its sequel are about as close to high art as video games can get. Since that point, at least with their big marquee titles, when they come out it gets filed under research expenses. The takeaway from playing is clear: have they lost their touch? If you look through the rearview, these developers are in a league of their own. The top twenty-five bestselling games of all time — various Nintendo teams were responsible for something like eighty percent. The average Metacritic score of their marquee Switch titles was around an 86, which essentially ranks in the top one percent of critical ratings. In the end, it’s the games that sell the systems, not the other way around. Knowing that these developers are every bit as good, if not better, than they’ve ever been is obviously important to the thesis. The qualitative difference between Nintendo and Western game developers has never been as large as it is now.

THE GRAPHICS ARMS RACE AND DIMINISHING RETURNS

Andrew Flattery: I was listening to Tyler Cowen and he had a guest on — a YouTuber who talks about video games. He was making this point that you had Pong and the early arcade games, which obviously had room for improvement, but when you get to Zelda, it’s really just as good as any other game that’s come since. You could play the original Zelda and have a lot of fun today. He doesn’t think video games are going to get that much better in the next twenty years. And it lined up with something I think I’ve heard you say — that Nintendo didn’t really engage in this arms race of graphics the way some of its competitors did. A lot of the hardcore gamers criticized them for that, but their games are just as fun despite not winning on graphics.

Ryan O’Connor: I think that’s bang on. It’s not like when we were kids, where the difference between the NES, the Super Nintendo, and the N64 blew your mind with the graphical leaps. One of the things we wrote in our original piece was about the limitations of higher-powered hardware hitting a wall, really with the eighth generation around 2013 — the PS4 era. You look at the best PS5 game versus a PS4 game and maybe the hair looks more realistic, but you’ve hit a law of diminishing returns. Not only did the incremental boost in photorealistic visuals hit a ceiling, but in a million ways it caused a lot of Western developers to lose the plot. It has structurally broken the Western game dev business model. Nintendo can spend fifty million dollars on a game that the average user plays for four hundred hours, with smiles and delight everywhere. Meanwhile, these mediocre higher-powered console games have development costs in the three-hundred-million-plus range.

Ryan O’Connor: Where Nintendo has teams of thirty monks and masters working in a tight-knit fashion, I compare the Western developers now to Foxconn sweatshops — huge armies of programmers chasing the photorealistic dream. The games have basically turned into motion-capture movies with real actors and written scripts, which is how you get these crazy price tags. A lot of these developers have historically done Sony PlayStation exclusives, but when you’re spending three hundred million on a game, even if every single PS5 owner bought it, the return on that investment spending isn’t all that attractive. That’s why Microsoft is going multiplatform with all their big games — releasing titles they used to keep exclusive to Xbox across all consoles, because it’s the only way developers can make a sufficient return.

Ryan O’Connor: Nintendo called the shot as early as 2004, saying they saw where this ends: it’s fundamentally unsustainable, and it misses the entire point of why one plays a video game, which is immersion, escapism, and fun. Here we stand today where Nintendo, especially with the Switch 2, has caught up and can play these games that were historically limited to higher-powered consoles for the first time in twenty-five years, in true fidelity to their intended gameplay. One of the launch games for the Switch 2 was Cyberpunk, a game that was basically bricking the PS5 when it first released because it was so intense. It now plays and looks as well as the PS5 version on a low-powered handheld portable device, which is kind of mind-blowing. But do people really care that the hair looks better? The answer for the vast majority of gamers is no. Sony and Microsoft are in the process of figuring out their way forward at a very inconvenient time, given that Nintendo is playing with power for the first time in twenty-five years and gunning for a lot of their market share.

WEAPONIZED NOSTALGIA: NINTENDO AS THE FAMILY BRAND

Andrew Flattery: You mentioned the weaponized nostalgia thing. My emotional attachment is with the NES — I have fond memories of visiting my grandma’s house where my Aunt Jenny had the NES. I have kids, and it makes perfect sense why my generation would want to share Mario and Zelda with them. You sent me a video of Jensen Huang at Nvidia acknowledging that Nintendo has been the family brand. Where does that position fit now, especially with the Switch 2’s ability to reach into the more competitive gaming market?

Ryan O’Connor: I think both Sony and Microsoft are realizing the full weight of the consequences of having basically abandoned the kids’ market in video games years and years ago. They aged up with the Nintendo generation that grew up, and the vast majority of their active playing users are adults. Nintendo has maintained and reinforced their lock on younger kids starting at six years old and up, while also leaning into it more heavily with the theme parks and the movies. The intergenerational nostalgia that exists now is powerful — there are grandparents who loved Nintendo, and they’d love to introduce it to their kids and play together as a family. It’s one of the few things they can all play together. Unlike Disney, which started to subvert and attack half of their customer base — quite literally the most insane thing you could do given the nature of mass-appeal entertainment — Miyamoto himself has taken a few shots at Disney for antagonistically attempting to subvert over half their audience.

Ryan O’Connor: A lot of these dominant leaders — these kings of family entertainment — have essentially abandoned their post. Nintendo has been building up since about 2015, and they’re in a position to not only take Disney’s crown as the king of family-friendly visual content, but to stand alone in maintaining the integrity of their bond and trust with families and parents. I think of Nintendo like muscle cars with our parents — something deeply meaningful to our generation that is the natural thing to want to share with your kids as a bonding experience. Mario Kart is the perfect example. The prior Mario Kart game was released with the Wii U thirteen years ago and was still the best-selling game on the original Switch, because it truly is evergreen. You’re never going to get sick of blue-shelling your opponent five seconds before they cross the finish line. These games are somewhat timeless and sell year after year. Ninety-five percent of Sony and Microsoft’s game sales come within a few months of release, but Nintendo’s games remain fun for years because they focus on the things that actually matter.

THE SWITCH 2 LAUNCH: BREAKING RECORDS

Andrew Flattery: Reiterate then: the Switch 2 is a vindication of your thesis. They are clearly following the iPhone model, which you’ve been talking about for years. The users stay in the Switch ecosystem, the hardware is backwards compatible and forwards compatible. You’ve been very optimistic about the Switch 2 release — how has the initial launch lined up with market expectations and what you’ve been expecting?

Ryan O’Connor: I had very high expectations. I’ve always been firmly convinced they would break the console launch record, and that is exactly what’s happened. We’re a week and a half, two weeks removed. They sold over three and a half million in the first three to four days, and given it all sold out instantly, it’s really like the first day. That 3.5 million figure reflects actual sales to customers, not what they’ve shipped to retailers. The PS4 and PS5 were tied for the launch window records — the PS4 held the first few days record at a little over one million. So Nintendo has almost tripled the prior record. For the next several years, they will sell every system they can produce. This year, if they can produce over thirty million, they’re going to sell over thirty million. We’ve assumed around twenty million for our investment underwriting; consensus is around seventeen or eighteen million.

Ryan O’Connor: A couple weeks before the Switch 2 launch, Nintendo guided for the full year of sales based on what Switch 1 did — they’re notorious for trolling Wall Street with ludicrously low guidance. With the Switch 1, there were a couple years where they came close to beating full-year guidance before the end of the second quarter. With the Switch 2, they basically sold more than twenty-five percent of their full-year guidance in a single day. A lot of people talk about PC gaming handhelds like the Steam Deck and the ROG Ally — it’s a ludicrous comparison. They sold more Switch 2s in a single day than I believe they have sold Steam Decks over their entire lifetime since release three or four years ago. The Switch 2 really has no competition.

THE SOFTWARE PIPELINE AND MARKET SHARE OPPORTUNITY

Ryan O’Connor: The software lineup that is going to drop, both first and third party, over the next twenty-four to thirty-six months — you’re going to get all of the best franchises from Nintendo. About two years ago, as their internal dev teams pivoted to Switch 2 development, there was a collapse in the system-selling games they’d release in any given year. Their best dev teams had started working on Switch 2 games five to seven years ago. From a first-party perspective, you have a murderer’s row of their best games and biggest franchises that will be firebombed through the calendar for the first three years. And for the first time in twenty-five years, you have not only Nintendo games but the best franchises from all the higher-powered consoles — Madden, Call of Duty, Fortnite. The original Switch was built on essentially 2013-era mobile technology, and a lot of the biggest games in the world literally could not run on the system because of its lack of power.

Ryan O’Connor: Now, if you can play all the same games you love in true fidelity from your Sony and Microsoft consoles, plus Nintendo games, and you add the fact that you can play them in your living room or pick the system up and play portably — the utility and value proposition of the Switch 2 is so much better than anything we’ve seen in recent memory. It’s going to take a lot of market share in ways people don’t quite expect. A big chunk of the biggest games today, like Fortnite and Call of Duty — the reason PC has been the primary way people play these is mouse functionality. Now Nintendo is offering all the same games with mouse support on a system that’s both a home console and a portable console. I’d be shaking in my boots if I were the competition.

Ryan O’Connor: Out of Sony’s 124 million active users, twenty-five to thirty percent are still playing on the PS4. Microsoft has a little over a hundred million active users, but the vast majority are playing on old hardware. They’re due for an upgrade, and they’re going to be making a purchase decision with Nintendo as a legitimate option for the first time. And then there are about 1.86 billion PC gamers worldwide. If you look at Steam, the average power of the average PC gamer’s rig is now slightly beneath the PS5. When you include Nvidia’s DLSS technology, the Switch 2 is practically as powerful, if not slightly more powerful, than the average PC gamer’s computer. If PC gamers love power, utility, and the ability to play all the best games from anywhere, a big chunk of those 1.86 billion PC gamers might be in for a Switch 2 as well.

Ryan O’Connor: I would be surprised if the Switch 2 doesn’t end up selling more, pound for pound, than the original Switch. The original Switch is five or six million console sales away from becoming the bestselling video game system of all time, previously held by the PS2. You put all of that together and you have a wall of earnings that should go up several fold with a very high degree of predictability over the next three to four years.

VALUATION AND UPCOMING CATALYSTS

Ryan O’Connor: Based on where the stock trades today, despite having done very well over the last five or six years, I very much think the best is still ahead. Two or three years from now, they should do operating profit between eight and ten billion. If you slap the low end of what I think is a reasonable market multiple — twenty to twenty-five times — on that number, you get a very attractive eighteen-to-twenty-four-month return from here. I think it’ll be four or five years before we even get close to the next cycle’s peak. And then you have things like the Mario movie sequel coming out next year, followed by the first of a trilogy of Legend of Zelda movies the year after. If there was one area where they dropped the ball last time, it was not pairing a new game release with the movie launch. A hundred and seventy million people saw the first Mario movie within six months — to be able to advertise a new game in that preview is basically an infinite return on marketing spend. Even without pairing a new game, Mario software sales went up something like 52 percent. There’s a network effect that feeds back into console and game sales from the movies themselves, plus the theme parks. Everything they’ve been working on since the mid-teens is all starting to come together. Charlie Munger referred to this as a lollapalooza effect.

PROTECTING THE CROWN JEWELS: IP MONETIZATION DONE RIGHT

Andrew Flattery: I have to ask you about this because we started this podcast with you showing me your St. Thomas Aquinas handwritten page. I had a family member during Covid who lost his mind doing the Nintendo games collector thing on Facebook Marketplace. And I’ve heard a concern that by adopting the Apple model, Nintendo is doing the walled garden thing and abandoning the collector ethos and the emphasis on physical products. Obviously as investors, the software model is much better. But I recognize the tension. On the other side, you’ve got intellectual property companies that overdo it — the Mel Brooks Spaceballs joke about merchandising. Is it just a matter of striking the right balance?

Ryan O’Connor: Those are really good questions. Yes, it is all about striking the right balance. Part of the original opportunity was that the process of creating the Super Mario Bros. movie in 1992 essentially scarred Nintendo to where they became absolutely maniacally insular and focused on protecting their IPs at all costs. That’s why you had twenty-some-odd years where you’d never see a Mario t-shirt anywhere — they wouldn’t do cash grabs or any of the things companies like Disney have done as they destroyed Star Wars and a big chunk of my childhood by rushing out inferior content for the bottom line. Nintendo is the opposite extreme. But what we identified in our original thesis was that Nintendo would start to properly monetize what was indisputably the best video game IP library that has ever existed.

Ryan O’Connor: There is absolutely an appropriate balance, and they’ve gone slow. Like all things Nintendo, they’ve started to open retail stores, expand through Universal theme parks — they go in a very measured, baby-step way. Where a Western company would do something in three or four years, Nintendo takes six or seven. But that measured pace of learning, iterating, and making big decisions has come back to me, and I’ve realized how profound and wise it is if your goal is to protect the moat and preserve the affinity that these globally beloved franchises have built. When they announced the Legend of Zelda movie, Miyamoto promised they would never betray their most loyal fans by not coming with the heat. The Mario movie itself was delayed an extra year. They take it deadly seriously.

Ryan O’Connor: The thoughtful, discerning way and measured pace in which they have begun to properly monetize their properties is night and day from most IP owners. When you look at the various IPs that have been turned from video games into movies or TV shows, it’s clear as day that the ones that treated the characters and stories with the fans in mind — and were almost obsessively faithful to the source material — have done orders of magnitude better than those that have not. The Last of Us on HBO is a perfect example — a wildly successful show because they kept the fans in mind.

PHYSICAL TO DIGITAL: HAVING YOUR CAKE AND EATING IT TOO

Ryan O’Connor: From a collectible perspective, there will always be some percentage of Nintendo’s software sales that remain physical — probably ten to fifteen percent, in part solely because of the collectibles market. But against that tension, digital games are night and day in terms of convenience — instead of going to your local GameStop, waiting in line, hoping physical copies haven’t sold out. The percentage of physical game sales as a percent of the whole has been rapidly asymptoting towards zero for many years.

Andrew Flattery: By the way, no tariffs on digital games, which has obviously been the talking point recently.

Ryan O’Connor: Yes, they definitely dodge and weave around any tariff considerations. From a developer’s perspective, they make a lot more money on digital, and it’s the same from Nintendo’s perspective. The transition to digital is one of the biggest drivers of the step-change increase in run-rate profitability over the next several years. Right now it’s approximately fifty-fifty. All of the third-party games coming to the Switch 2 will be either game key cards — essentially digital margins — or fully digital. First-party, it probably goes at least 80-20. But Nintendo will never abandon cartridges for their first-party titles. They understand from a family perspective that the vast majority of physical game sales take place over Christmas, because they understand the power of being a kid on Christmas morning ripping open that wrapping paper.

Ryan O’Connor: Sony and Microsoft are already at eighty to ninety percent digital, and with that you’ve lost something essential — not only to being arguably the most family-friendly brand in all of entertainment, but those tangible experiences you have as a kid. You can’t quantify that on an income statement, but it very much matters when thinking about the longevity of the brand.

Andrew Flattery: There was something sacramental about blowing on the cartridge, putting it in a certain way, and tapping the machine to make it work. That was part of the brand.

Ryan O’Connor: Oh yeah, absolutely. That is Nintendo in a nutshell. It’s right up there with going and getting the latest copy of Nintendo Power because there was no way you were going to beat the game without devouring that accompanying literature. Nintendo is still very much aware of that. For the health of the industry, for their own bottom line, and for the utility of their partners and users, the transition to digital is kind of an inevitability. But at the end of that line, I don’t think it’s a hundred percent digital, zero physical. I think it’s more like 85-90 digital, 10-15 physical. If that plays out, you get the best of both worlds — you meet the needs of both ends of the spectrum, you get the big uptick in profitability, and you keep the tangible magic alive. They’ve been very thoughtful about threading that needle.

LOOKING AHEAD

Andrew Flattery: On Nintendo — what are you looking for in the coming weeks and months?

Ryan O’Connor: It should be an eventful year, to say the least. They just announced today that the next big launch game — the first new Donkey Kong franchise entry in at least twelve, thirteen years — is getting a Nintendo Direct. I think it’s next week. They’ll have a bigger Direct focused on not just third-party games coming to the system over the next year, but also Nintendo’s first-party lineup. They haven’t revealed what the big holiday title will be this year. Some people think it’s the next Mario Odyssey. I personally think it’s more likely a ground-up remake of Ocarina of Time, which Zelda fanatics like myself would scream like sixteen-year-old girls at a 1960s Beatles concert over. The head developer in charge of the Zelda franchise has hinted as much — he denied certain other rumors but would not comment on whether Ocarina of Time was in the works.

Ryan O’Connor: I think system sales for the Switch 2 will remain at an extraordinary level and probably accelerate into the new year. It’s pretty much smooth sailing. Eighteen months from today I’ll revisit and see where we are. But it should be nothing but up and to the right for Nintendo’s earnings power for the next four to five years.

Andrew Flattery: That’s going to pass compliance, too.

Ryan O’Connor: Yeah, exactly. I didn’t expect us to just riff on Nintendo for over an hour.

Andrew Flattery: I want to talk to you about another name too, but I also want to give it the time it deserves. Ryan, do you want to do a part two at some point?

Ryan O’Connor: Absolutely. Let’s do that. It’s an extraordinary story. While the equity has done very well this year, as Munger said, the real money in investing is in the holding, in the waiting. While the stock’s up quite a bit, I think it is a truly world-transforming business that is still in the second inning of its story. It’s the only investment since we started Crossroads eight years ago where my level of obsession has reached Nintendo levels — most of the last six months, all I’ve been doing is reading about RF engineering and trying to gobble up every bit of information I can. It’s a fun name.

Andrew Flattery: We’ll save it for part two. This has been awesome, Ryan. Thank you for sharing your expertise and coming on Gentleman Speculator.

Ryan O’Connor: My pleasure, brother. Can’t wait to do the next one. Have a good one.

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Ryan O’Connor is the founder of Crossroads Capital, a boutique hedge fund based in Kansas City modeled on the original Buffett partnerships. His extensive research on Nintendo and other investment ideas can be found at crossroadscap.io.

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Gentleman Speculator is produced by Flattery Wealth Management.

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