Is Nintendo Stock's Rally a Poke Bubble That Is Poised to Burst?
A month ago, burying one's head into a smartphone in search of a monster planted in the real world would have seemed bizarre.
Japanese technology giant and video game maker Nintendo (NTDOY) unleashed a new kind of frenzy when it released the augmented reality version of its Japanese character-loaded game Pokemon Go on July 6.
Can the company sustain this sort of momentum, or does it face a day of reckoning?
What followed with Pokemon Go's introduction was a video game epidemic that saw young and old people, smartphones in hand, entering graveyards, museums, parks and public restrooms in search of the hundreds of versions of the video game character.
The game turned out to be the most downloaded application on the mobile app stores of Alphabet's Google and Apple, and it ate into the popularity of Facebook's Instagram, Tinder and Twitter, among others, not even a week after its debut.
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The Pokemon Go madness naturally drove Nintendo's stock higher, and its market capitalization has doubled since the game's release. However, those gains may be wearing off.
After successful game launches in more than 30 countries, Nintendo, along with Google spin-off Niantic and Pokemon Co., both of which it has partially funded, were set to bring Pokemon Go to its home in Japan on July 20.
However, TechCrunch reported that a leaked email from McDonalds, the first sponsored location of the game that would allow users to use its 3,000 locations to find creatures and battle it out, raised concerns that the hype generated would overburden servers. The launch of the game was thus postponed with no communication of a new launch date.
In addition, China recently dethroned Japan as the biggest market for generating mobile-game revenue last year.
These two nuggets of information are enough to understand why the stock price of the Japanese video game maker recorded its second decline in nine sessions on Wednesday. There are better and safer growth opportunities than Ninetendo.
If the overnight success of the game can't sustain its momentum, it won't take time for the market to book profits and scram.
Analysts from Deutsche Bank and UBS are beginning to question the company's valuation and spike in market cap and have downgraded the stock.
Others, such as CLSA, argue that Nintendo's complicated owner structure makes it look as if it will benefit from its stake in the other two companies backing the augmented reality game, but in reality the direct profits are limited.
"Nintendo receives royalties for Pokemon titles but surprisingly little direct profit, benefiting instead from the impact of Pokemon titles on hardware sales and penetration," the bank said in a note, according to Business Insider.
CLSA has a sell rating on the stock.
In fact, one company that might benefit from the mania is Apple. Although the game can be downloaded free of charge, users need to buy PokeCoins from the app store to get the other features in the game.
Some analysts say that Apple pockets 30% of the revenue generated from Pokemon Go and can garner $3 billion in revenue from the game.
Many analysts are still trying to assess the actual impact that Pokemon Go will have on Nintendo and its bottom line. However, the euphoria around the game itself is surely evaporating.
Those invested in the stock might want to book profits and celebrate windfall gains. Others who are keen to buy should analyze deeper or wait to see what Nintendo actually stands to gain.
Investors don't want the same fire that fueled the rally to burn their fingers.
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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.