Has Nintendo Reached Its Zenith With Pokémon Go?
Editors' pick: Originally published July 20.
Just as the saying goes, all good things must come to an end. And that especially appears to be the case for Nintendo (NTDOY) today. Following a record-breaking two-week surge, shares in Nintendo have swooned, falling more than 12% in early-morning trading today.
Analysts are beginning to take note of the weakness behind the stock, as well. Deutsche Bank has downgraded Nintendo from a buy to a hold.
But how has Nintendo taken such a large plunge so quickly? And is Nintendo still an attractive stock for investors?
The Japanese video game and console company has featured in headlines during the past two weeks as the international Pokemon Go craze has run rampant.
The app, which has become the most downloaded mobile game of all time, has taken the world by storm. Featuring augmented reality (AR) technology in which digital characters appear when looking through your phone's camera lens, Pokémon Go has passed 30 million downloads. And studies indicate that players are using the app more than they are checking their Facebook feeds.
However, investing in Pokemon Go has proven something of a challenge. The game was developed by Niantic Labs, a private startup and a spinoff of Alphabet (GOOGL) - Get Report . Since you can't own shares in Niantic directly, investors have been piling into Nintendo. As a result, the company more than doubled in value as of the market's close on Tuesday.
However, Nintendo really can't profit all that much from Pokemon Go. And it looks like the clock for those stupendous Nintendo profits might be winding down.
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Pokemon Go is free to download, but players can spend real-world money in the app to purchase extras, such as Pokemon bait. In addition, the game is picking up sponsorships from physical establishments such as McDonald's, which provide incentive for players to visit.
But Nintendo isn't the direct owner of Pokemon Go. Instead, it partially owns the rights to the characters featured in the game, along with Pokemon Co., the producer of the game and a company in which Nintendo is invested. In addition, Nintendo, Pokemon Co., and Alphabet have invested undisclosed sums in Niantic.
It's clear that Nintendo stands to make money from the in-app purchases of Pokemon Go. What isn't clear is how much it will profit.
Nor is it clear whether or not Nintendo's quick stock gains are sustainable. In fact, today, signs are pointing to the latter.
Investors bailed this morning upon the announcement of a delay with the game's release in Japan. If Nintendo can take that much of a beating in such a short period of time, it doesn't bode well for continued Pokemon profits for the company.
It looks like the stock has grown too fast, too soon. As Deutsche Bank analysts have pointed out, Nintendo's market cap has doubled to about $27 billion, close to those of Electronic Arts and Activision Blizzard. These game sector leaders each have about 5% of the global video game market share, while Nintendo has only 2%.
If investors are looking for continued profits from Nintendo, they should look past the current game craze. Instead, in the longer term, Nintendo will benefit if Pokemon Go convinces the company to essentially revamp its own business plan.
Nintendo has been late to the mobile game sector, preferring to focus on consoles. But hopefully the success of Pokemon Go will lead the company to increase its mobile game output, capitalizing on its other popular franchises such as Mario Brothers. Otherwise, investors don't have much more to look forward to.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.