Unless you’ve been living under a rock, you’ve likely heard about Nintendo’s popular new video game, Pokemon Go. Yet you might not know that Pokemon Go is available for free. That’s right, you can download Pokemon Go to your smartphone at absolutely no cost.
If Pokemon Go isn’t pulling in revenue with each download, one has to wonder why Nintendo stock (NASDAQ OTH: NTDOY) has gone through the roof since the game’s release. Pokemon Go was made available to the public on July 6 and Nintendo stock has since jumped from $14 to $23. That’s a near 60 percent increase in a mere 3 weeks.
Don’t buy Into the Pokemon Go Hype
If Nintendo charged a nominal sum of money for access to Pokemon Go, its stock’s considerable leap might be somewhat justified. Yet Nintendo executives decided it would be prudent to make the mobile app available to everyone at no cost.
Their logic for this seemingly colossal business blunder is unclear. Perhaps Nintendo executives believe Pokemon Go players will become loyal to the Nintendo brand and purchase the video game company’s consoles and software in the months and years to come.
Or, maybe Nintendo has a trick up its sleeve in the form of additional pay-to-play Pokemon Go downloadable content. The company used a similar business tactic with its wildly popular Mario Kart 8 game for the Wii U.
The key difference between these games is the fact that Mario Kart 8 players initially paid $59.99 for the game. They proceeded to shell out small sums of money to download additional racers, vehicles, wheels, race tracks and other goodies.
Even if Nintendo unleashes a flurry of pay-to-play Pokemon Go downloadable content in the near future, it will not justify the company’s bloated stock price. The bottom line is that investors flocked to Nintendo stock based on hype.
Sure, Pokemon Go has over 15 million downloads in less than three weeks of existence yet Nintendo hasn’t made a single penny on those downloads. As it stands today, Nintendo has lost money on the hit mobile app.
It is a fact that few “bandwagon” investors were aware of when purchasing Nintendo stock. It can be said without reservation that the recent influx of Nintendo investors have fallen victim to a new age version of tulip mania.
Years of Stagnation Give way to an Unheralded Increase
Anyone who has followed Nintendo stock over the past five years or so knows that it hasn’t moved much. Though the company still sells consoles and video games, it hasn’t achieved much success since the original Wii craze faded.
Nintendo’s beta is a mere 0.67, meaning the company’s stock is anything but volatile. Over the past three months, an average daily volume of 232,071 shares changed hands. This figure jumped to a whopping four million on Tuesday, July 12, a mere six days after Pokemon Go’s release.
The fact that a free mobile app (Pokemon Go) spurred the stock to a dramatic rise in price and trading volume should be cause for alarm. After all, Nintendo’s Wii U has been quite the dud, having only sold a grand total of 12 million units.
Nintendo is still the king of the handheld gaming market thanks to its 3DS mobile gaming unit. Nearly 60 million Nintendo 3DS units have been sold along with nearly 275 million software units.
Yet the company still trails Sony and Microsoft in the gaming sales category that matters the most: consoles. This is precisely why Nintendo recently announced plans to abandon its failed Wii U console and shift its focus to a new console dubbed the “Nintendo NX”.
Do Fundamentals Justify An Exorbitant Price
Pokemon Go will inevitably become a profitable piece of software as Nintendo gradually figures out how to monetize the app’s popularity. However, there is no way to accurately estimate how much value the app will actually provide.
If Nintendo continues to give the app away for free, it will have to bank on sales of Pokemon merchandise, movies, memorabilia and other auxiliary sources of revenue to turn a profit. When you take a look at the company’s fundamentals, it becomes clear that the recent stock price upswing is unjustified.
According to Nintendo executives, the company will release five more smartphone games across the next two fiscal quarters. These releases have the potential to propel the company’s annual profit to the $400 million range. Yet Nintendo’s market capitalization is approaching $32 billion as of the date of this writing, creating a price-to-operating profit ratio that is absurdly high.
The company’s shares are much pricier than those of its gaming industry peers. Nintendo shares are currently trading at well over 100 times anticipated 2017 earnings while other gaming companies like Activision Blizzard Inc. and Tancent Holdings Ltd. trade at a mere 23 and 37 times anticipated earnings, respectively. It is clear that Nintendo stock is drastically overpriced at its current level.
Regards,
Ethan Warrick
Editor
Wealth Authority
