As we noted yesterday, Pokemon Go is HOT – it is literally hotter than Mila Kunis (who is possibly invested in Nintendo?) as the game craze has overtaken porn among top results in Google search (we are all Japan now – not just because of bond yields…) – as we noted earlier and is beating instagram, Twitter, Snapchat and a bunch of other hot apps in downloads. Nintendo stock is rallying again up 5.1 percent in Tokyo trading.
— ValueWalk (@valuewalk) July 11, 2016
Pokemon Go – Here is the latest on the insanity from the sell side
Pokémon Go is one of the first mass-friendly augmented reality games with robust in-app sales. However, the contribution to Nintendo earnings is diluted by the shareholder structure. Pokémon IP belongs to the Pokémon Company, in which Nintendo has a 32% stake. If the Pokémon Go app generated annual sales similar to Monster Strike (¥200 bn), we estimate it would boost Nintendo’s FY3/18E net profit by about 24% (see below). The risk is the high number of variables such as revenue share. Nintendo will be the main entity selling the accessory Pokémon Go Plus, which we expect will be reflected in consolidated sales and op. profits.
American AppStore sales rankings. We attribute this rally to: (1) expectations of direct profits from Pokémon Go; and (2) implications for Nintendo’s mobile game strategies.
Share price rally looks excessive based on profits from Pokémon Go alonePokémon Go was mainly developed by Niantic. Nintendo has developed the Pokémon Plus accessory, but has only limited involvement in game development. As such, the impact on its recurring profits will be limited to 32% of net profits from the equity-method affiliate The Pokémon Company. Assuming that Pokémon Go generates monthly turnover of ¥5–10bn, we calculate the boost to recurring profits at the Nintendo parent to be around ¥1–2bn a year. The recent share price rally accordingly looks excessive based on profits from Pokémon Go alone.
Forbes reports that Pokémon Go already accounts for 5.6% of Android smartphone downloads in the US, and users of this game account for about 3% of the US population (about 10 million people). SimilarWeb, the source of the data cited by Forbes, reports that average playing time is 43 minutes, higher than some popular SNS apps such as WhatsApp and Instagram.
As a peripheral device for Pokémon Go, Pokémon Go Plus (manufactured and sold by Nintendo) is scheduled for release at a price of ¥3,500 (US$35) in late July. If we assume a wholesale price at 50%, gross margin at 30%, and sales of 50 million units, we estimate a potential gross profit contribution of ¥20-30 billion. We expect the operating profit contribution to be close to that amount as well (our operating profit estimates are ¥51 billion in FY2016 and ¥79 billion in FY2017).
Based on a revenue-sharing scheme between it and Niantic, (3) Pokemon Company’s OPM for this app is around 60%, and (4) Nintendo will book 32% of Pokemon Company’s NP as equity-method income. The profitability of the app for Pokemon Company depends on factors such as the revenue-sharing breakdown between the two companies and the costs that will be borne by Pokemon Company. Note: Pokemon Company is an equity-method affiliate of Nintendo (32% equity stake; Game Freak and Creatures also have equity stakes in the company). Nintendo, Google, and Pokemon Company have invested $20mn into Niantic, and plan to raise this up to $30mn. A breakdown of shareholders for Niantic has not been disclosed, but we think Nintendo’s stake is not high enough for it to qualify as an equity-method affiliate.
What is the release schedule for Pokemon GO? Launch in Japan and other regions are planned but no specific release dates have been announced. It is our understanding that Pokemon GO places an especially heavy burden on servers, and launches in other regions will likely be put off until the problems can be resolved.