Even if it’s rotten, Nintendo
So the popular colloquial saying in Japan goes, meaning even if it isn’t in its glory days, Nintendo is still a wise choice.
No truer is this saying for those who owned Nintendo stocks before the release of the latest global phenomenon, Pokemon Go, an augmented realty app that enables its users to ‘catch’ Pokemon out on the streets and battle them against other players – here is a video of it in action:
Since its release in July the app has been downloaded a staggering 30 million times and is played by 21m people on a daily basis in the US alone, eclipsing popular social media app like Whatsapp in terms of minutes spent per day.
Unsurprisingly, there has been a huge surge in demand for Nintendo stocks, causing the share price to increase by 89% in the past couple of weeks.
Yet is this rise really justified. As always, it is earnings that drive share prices over the long period and new shareholders jumping on to the Pokemon Go bandwagon are anticipating a huge growth in earnings due to Pokemon’s initial success. It may also be a case of ‘herd mentality’ – investors buying just because Pokemon Go is such hot news right now – without understanding the underlying business.
Most worryingly, is that investors are not aware that Nintendo does not actually own Pokemon Go. The game itself is owned by Niantic, of who Nintendo made an investment of $30m dollars into in 2015 (along with Google), bagging themselves around 30% of the company. It is unclear exactly how Niantic will divide up its profits and how much of that will eventually go to Nintendo.
Secondly, although Nintendo did turn a profit in 2016, they made revenues of 504B JPY ($4.8B) and a net profit of 16.5B JPY ($164m), their earnings over the past few years have dipped in and out of profitability.
Not taking Pokemon Go into account, this is not a company I would consider owning. Their current revenue model is based around the averagely popular Wii console and licensing of popular Nintendo characters such as Mario.
So investors are betting that Pokemon Go will be a real game changer for Nintendo. Now this be the case, Clash of Clans, the world’s largest grossing online game made $2.3B in revenues and $930m in net profit in 2015, and the way that Pokemon Go is heading it may very well exceed Clash of Clans in popularity. Yet they have yet to prove how to make money from it – as with all free to play apps, monetisation is always the key and once users have to pay to play then customers may be put off. Additionally we do not know if this is a passing fad or not – the game was only launched a couple of weeks ago. Traction has yet to be tested over a 6-18 month period.
Additionally we have no idea how Nintendo will receive a share of the profits. Certainly the value of their investment in Niantic has increased, but until we start seeing some revenue figures investors are betting on thin air.
Thirdly after such a rapid rise in the price of Nintendo stocks, the original share holders must be tempted to sell – an 89% gain in a week is an unprecedented gain in Nintendo shares, which would probably result in a drop in share price over the short term to more reasonable levels.
To conclude, if you have just jumped on the Pokemon bandwagon recently well done, but you should take a long hard think about locking in some of those profits.