More Upside Likely for Nintendo Stock
Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) has suddenly lost more than 18% of its value after two weeks of success. Why has Nintendo stock collapsed? Simply put, investors suddenly discovered that the huge success of “Pokémon Go” has reached an extent so outlandish that fully grown adults, who have never owned a gaming console or used a game app, have wasted much thought and data trying to play and explain it.
There is a shortage of sensible analyses to explain Pokémon Go’s success and effect. All that is clear is that Nintendo stock has lost almost a fifth of its value at the Tokyo Stock Exchange after the company released a statement on July 22. In it, Nintendo conceded that the worldwide craze for Pokémon Go—the app to play Pokémon on your smartphone using augmented reality (AR)—would have a “limited” impact on its profits. (Source: “Notice Regarding the Impact of “Pokémon GO,” Nintendo, July 25, 2016.)
Nintendo was honest enough to warn that it has not revised its 2016 earnings targets upward. This, it seems, was what attracted so much bullish attention to Nintendo stock in the past weeks. Yet, Nintendo never once even so much as hinted that it would revise its profit targets for 2016 upward. Therefore, analysts and investors alike should not be surprised by Nintendo stock’s collapse from a peak of $37.37 on July 18 to $29.00 on July 25.
Nevertheless, not all is lost—Nintendo is not just Pokémon.
I’m Not Dumping Nintendo Stock Just Yet
There are indeed reasons to be bullish on Nintendo stock that have nothing to do with Pikachu and the rest of the Pokémon.
In recent years, Nintendo has focused on defending its role in the console gaming industry, while Pokémon Go was merely its first foray into the smartphone app business. Yet it was clear from the outset—and Nintendo did not make any effort to deceive investors in this sense—that Pokémon Go was developed by U.S. company Niantic Labs. True, Nintendo has a 32% stake in Niantic through The Pokémon Company, which is the Nintendo subsidiary that deals with all products related to Pokémon (video games, TV series, films).
Niantic pays The Pokémon Company for the rights to use its characters as well as compensation for collaboration in the development of the app. Therefore, Nintendo warned shareholders that its accounts would not experience a sudden benefit from its Pokémon Go collaboration.
Nintendo stock predictably dropped, but it is still trading at much higher levels than before Pokémon brought attention to Nintendo again. Some stock analysts still believe that the market reaction was excessive and that this year already, the company will derive more profits as a result of Pokémon Go.
Pokémon Go was officially released on July 6 in the United States, Australia, and New Zealand, and was later made available in other countries. The app generated almost immediate success, which many have tried to exploit.
In Japan—Pokémon’s native land—more than 10 million people have downloaded the Pokémon Go app in the first day it was made available (July 22). The problem was that some shareholders expected Nintendo would revise its earnings upwards on the back of the Pokémon app’s success.
This is the case even if some analysts aren’t too keen on Nintendo stock. Many analysts, in fact, have warned investors that Nintendo would not be the one to gain the most from the Pokémon phenomenon.
Pokémon Go is not currently compatible with the “My Nintendo” ecosystem, which uses a cross-platform account built by the Kyoto firm as part of its strategy for its mobile games and future console, the “NX,” expected in March 2017. (Source: “Nintendo News: Pokémon Go impact, NES Classic Edition reveal, NX console update,” The Mirror, July 25, 2016.)
Ultimately, apart from the new consoles that are rumored to have all kinds of flexibility and compatibility options (possibly even virtual or augmented reality), Nintendo has probably learned a great lesson from Pokémon Go. This is that it should release more of its properties as apps—especially as the launch date for its new NX console approaches. (Source: “Nintendo Does Not Deserve Most Of The Credit For ‘Pokémon GO’s Success,” Forbes, July 25, 2016.)
Nintendo Stock Outlook Still Favorable
The bottom line is that the Pokémon Go app has pushed Nintendo stock beyond reasonable levels in the past two weeks.
Yet, the company has potential and it was likely trading at too low a price in the first place. The Pokémon frenzy has come and probably gone, but Nintendo investors who managed to keep cool heads still have strong gains to enjoy.
Until Pikachu appeared on a smartphone near you, Nintendo stock was trading at approximately $17.00 per share. Today, after falling more than 11%, it’s trading at $25.75. So, there’s reason to be bullish on Nintendo stock—just don’t get carried away.