Pokémon Go: Is There More Upside for Nintendo Stock?

Pokémon GoTime to Bail on Nintendo Stock?

Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) is certainly worth considering thanks to the incredible success of its “Pokémon Go” gaming app. This is the case even if some analysts aren’t too keen on Nintendo stock. In fact, many analysts have warned investors that Nintendo will not be the one to gain the most from the Pokémon Go phenomenon.

Indeed, that grand result will be mostly for the benefit of Niantic and Apple Inc. (NASDAQ:AAPL), say analysts from Macquarie Research. The former actually developed the Pokémon Go game and the latter takes a cut from in-app purchases. (Source: “‘Pokémon Go’ is not enough to stop banks from telling investors to abandon Nintendo stock,” Business Insider, July 14, 2016.)

The logic would then suggest that Nintendo stock has little to gain from Pokémon Go. However, that is a rather narrow view of Nintendo stock.

More Upside for Nintendo Stock?

Nintendo has gained 108% in the past month, yet it has gained 116.64% year-to-date. This means that Nintendo stock was already in a bullish mode before the Pokémon Go phenomenon entered the scene. The fact is that, whether or not the game was developed by another company, the popular Pokémon Go augmented reality (AR) game has clearly contributed greatly to the perception of Nintendo stock.

From July 2014 to July 2015, Nintendo stock gained some 39%. This suggests Nintendo was already in a bullish mode—from a long-term perspective—before users went cuckoo for Pokémon Go.

After all, it was Nintendo that developed the first Pokémon games in 1995. The new Pokémon game’s present success is not about to falter. It can only grow, given that the app has been released in a limited number of markets at this time but could be made available in many more. In fat, John Hanke, the CEO of Niantic, the company which developed the new app, told Reuters that his company intends to deploy Pokémon Go in nearly 200 markets “relatively soon.” In order to address the increased demand that’s sure to spike at that time, the company is also promising to increase its server capacity.

Note that Nintendo stock, while currently hovering at prices not seen since 2011, has traded much higher in the past. Nintendo stock’s peak performance was in November 2007, when it was trading at approximately $76.00 per share. That’s more than double the Pokémon-fueled peaks of recent vintage. Nintendo holds 33% of the actual Pokémon Company, which still allows for the company to collect about 30% of the revenue the app generates. (Source: “How Much Money is Nintendo Going to Make off of Pokémon Go?,” Shacknews, July 11, 2016.)

In the eyes of its analysts, the economic benefits of Pokémon Go seem too nebulous to sustain the bullish sentiment on Nintendo stock. But any forward-looking opinions on Pokémon stock must reflect the fact that the point is the success of AR itself. Nintendo will adapt AR to other games. Indeed, AR and its cousin, virtual reality (VR), have as many chances of revolutionizing games as they have actual business and services.

Travel agents and educators could use AR and VR to enhance their services, while military departments worldwide—including the U.S. Marines—can train troops using the technology. (Source: “Augmented Virtual Reality Emerging as Game Changer for Marine Corps Training,” Defense News, December 10, 2015.)

As for Nintendo itself, the popularity of VR and the Pokémon Go app will trickle down to Nintendo more directly as the company prepares to launch a new console in February 2017. (Source: “Nintendo NX Spec Rumors Say The Console’s Games May Support Open-Source Virtual Reality,” Design&Trend, July 19, 2016.)

The success of Pokémon Go has not only revived interest in Pokémon, but it has also revived interest in Nintendo. Everyone is talking about Nintendo and this bodes well for sales of the new “NX” console, which promises to use open-source virtual reality. (Source: Ibid.)

The Bottom Line on Nintendo Stock

The bottom line is that Nintendo has gained in visibility from Pokémon Go, regardless of how much of the revenue it actually gets. The enthusiasm for the Pokémon Go game might wane eventually, but Nintendo can exploit the renewal of interest in the company to promote its consoles.