Pokémon Go: Is It Time to Take Profits on Nintendo Stock?

PokémonHas the Rally in Nintendo Stock Run Its Course?

Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) gained some 25% on Monday morning. Nintendo stock shares continued to soar, converting the initial gains to more than 30%. This surge of optimism for Nintendo stock, when so many had all but given up the company for dead, is due to the unexpected appeal of the augmented reality (AR) game “Pokémon Go,” featuring among many creatures some lovable rodent-like characters. Rats might be bad in the restaurant business, but they seem to be good for the tech sector.

A general analysis of Nintendo stock and its prodigious recovery might focus on Nintendo’s adoption of augmented reality. Evidently, technology advancements remain essential to keeping related companies alive and thriving in a changing world. AR is one of the major trends driving the future of the tech sector.

Consumers are getting a taste of it through the little monsters known as Pokémon, but the applications of this technology extend far beyond the purely recreational. AR can help companies in tourism, education, commerce, and, of course, entertainment. AR can also gain favor from the defense establishment, helping train soldiers. The U.S. marines are already using it. (Source: “Augmented Virtual Reality Emerging as Game Changer for Marine Corps Training,” Defense News, December 10, 2015.)

For now, the big AR-fueled gains will concern video games in particular. Nintendo stock gained some $7.0 billion within days of the new Pokémon game’s release. It seems people love to interact with “Pikachu,” Pokémon’s most famous ambassador—the brand ambassador if you will. The AR game makes it possible for users to interact with onscreen characters through their device’s camera. Basically, the game maps characters over the player’s real-life surroundings on their device’s screens.

Millions have already downloaded the game, available in the U.S. via app stores, since it became available on July 6. In fact, within a day of its launch, users downloaded “Pokémon Go” onto more “Android” phones than the popular dating app “Tinder.” (Source: “Pokemon Go Is Already Bigger Than Tinder,” Fortune, July 11, 2016.) It seems hormones are no match for the power of video games.

The big question for investors is this: how does Nintendo expect to monetize the game, which everyone can download free?

Nintendo itself is unlikely to receive much profit from the game. It was but one of the developers and not the main one. That honor went to U.S.-based games developer Niantic, a specialist in augmented reality. Unfortunately, it’s a private company that Alphabet Inc (NASDAQ:GOOG), better known as Google, spun off in 2015.

So, for now, Nintendo stock is the most visible vehicle for those wanting to secure gains from AR. Indeed, Nintendo said it plans to launch four more AR smartphone games by March 2017. (Source: Ibid.)

Like every major stock surge, nobody could have expected the kind of rally that Nintendo stock has experienced, least of all Nintendo itself. Such was demand that by Saturday, just two days after the game’s launch, the company’s servers gave up, unable to keep pace with users.

The runaway success of this launch is due to a combination of three key factors: a growing sector, a strong brand, and a revolutionary technology. Nintendo’s success also shows that the future of gaming has shifted to smartphones in a major way. This explains why Nintendo stock was suffering such lows until this week. Users had all but given up on its “Nintendo 3DS” and “Wii U” consoles, launched in 2011 and 2012, respectively. They are due for a replacement next year. Perhaps, the success of the Pokémon game will help boost sales of the next Nintendo console.

The way Nintendo monetizes the Pokémon game, apart from the hope of more console sales down the road, is by including a series of purchases within the game application itself. Users can buy “lucky eggs” and “incense” (bait) using PokeCoins. You get 150 for about $1.00—you can also add to the pile by winning certain stages. The app allows users to buy as many as 14,500 PokeCoins for $99.00. (Source: “Pokémon Go lets lazy people buy up to $99.99 of Pokécoins,” The Verge, July 6, 2016.)

The bottom line on Nintendo stock is that the Pokémon game has launched the company face-first into the mobile game market. The success has defied all expectations to the point it could boost sales of forthcoming new console units. Their release will happen around the same time Nintendo plans to launch more AR games.

Nintendo stock has gotten a huge boost. The enthusiasm may wane over the next few days, but Nintendo stock is back and could be an interesting opportunity after the present zeal softens.