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Can Pokémon Go drive Nintendo higher?

Nintendo, a Japanese video gaming firm, has struggled to increase sales of its Wii consoles in recent years. 

Japan flag
Source: Bloomberg

Their reluctance to bring their games to the mobile platform also did not help improve the bottom line. Consequentially, Nintendo’s share prices suffered, plunging over 80% from 2007 to 2011. Between 2012 and 2014, its stock was trading at one-seventh of the peak in 2007.

In March 2015, Nintendo announced something it had previously said it would never do, which was to bring its games to smartphones. Nintendo’s stocks flared to life. However, subsequent bad news, including a delay in the release of Zelda and the passing of President and CEO Satoru Iwata, saw the Nintendo’s stock retreating significantly.

Nintendo’s stock seemed destined to languish at the bottom until now. Pokémon Go, an app for smartphones, proved to be a massive success since its release on 6 July in America, Australia and New Zealand. Nintendo doubled in value within days. Such was the demand for the gaming firm’s shares that Nintendo broke the single-day trading record in Tokyo this century! $4.5 billion worth of Nintendo’s stocks were exchanged. The stock is currently trading near JPY 30,000.

 

Nintendo Chart

The Pokémon craze was so potent that when McDonald’s started selling Pokémon Happy Meals in Japan, the fast-food restaurant saw a bump in sales and a jump in its share price too.

Apparently, where Pokémon goes, money follows.

 

What could hinder Nintendo’s rally?

However there are three things to consider for those who are bursting with exuberance over Nintendo. First, Nintendo’s shares are getting way more expensive than its peers in the gaming industry, which could limit future appetite. According to FactSet and Wall Street Journal, Nintendo shares are trading at 96 times 2017 earnings, double or triple Activision Blizzard (World of Warcraft) and Tencent Holdings (Clash of Clans). Only Zynga, the developer of ‘Farmville’, is more expensive at 120 times projected profits.

Second, the yen is awfully strong now, up more than 10% this year. This could be a negative for Japanese companies. Third, it is important to remember that Nintendo does not fully own the franchise. The company is a part owner in the independent Pokémon Company (32% stake) as well as Niantic, the American software developer who developed the game. Any revenue earned from the gaming app must be shared among the partners.

 

Will Nintendo go higher?

Nonetheless, Nintendo’s stock outperformance shows that its foray into mobile platforms has an enormous potential. Moreover, the phenomenon success of Pokémon Go may benefit other companies. While the app is free to download and play, additional items are payable. This means that every time players buy these items, Apple and Google, which dominate the app markets, make money.

At around ¥25-30,000, the company’s stock price is still considerably lower than the high it hit in 2007 when Nintendo was trading in ¥60-70,000 range. With vast media coverage on Nintendo’s stock and Pokémon GO, interest in the company remains strong.

Looking at the company’s stock value and volume over the last 10 years, we can see a mammoth volume spike recently. At IG, 98% of our client accounts who has open positions in Nintendo expect the company’s share price to rise, as of 20 July.

Don’t forget, Pokémon Go still has not been released in Japan, ironically. After releases in the US, most of Europe, Australia and New Zealand, Niantic’s CEO John Hanke expected the app to be released in the land of the Pokémon by the end of July. We could see Nintendo’s stock getting another boost. 

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