American Depository Receipt shares of Nintendo on OTC Markets skyrocketed another 15% in early trading this morning after the Japanese game and console maker unveiled a mini version of its classic Nintendo Entertainment System. Today’s share price increase comes on top of the huge gains we saw thanks to investor euphoria about the success of Pokemon Go. It also erases Wednesday’s decline, which likely came as some investors took profits.
Interestingly, at least one analyst has a Sell rating on Nintendo, and Wall Street is considering just how much of an impact Pokemon Go will have on the company’s top line.
Pokemon Go’s impact will be small
In a report dated Jul 12, CLSA analyst Jay Defibaugh said he rates Nintendo’s Japan-listed shares as a Sell. He said it’s unclear how much of an economic benefit Pokemon Go’s success will have on the game and console maker because it’s not part of the company’s app game partnership with DeNA. As a result, there’s no direct positive “read-through” for that partnership.
He adds that the read-through for Pokemon Go isn’t the same as for Nintendo, although Nintendo does receive royalties from it. Further, he said management indicated to him that despite the royalties, the company doesn’t see much in the way of direct profits from Pokemon games. Instead, the company derives value from them through hardware sales and increased penetration rates of its consoles.
Other implications for Nintendo from Pokemon Go
In their own report also dated July 12, Goldman Sachs analysts Masaru Sugiyama and Yusuke Noguchi explained that any earnings contribution from Pokemon Go is diluted by the shareholder structure. Nintendo holds a 32% stake in the Pokemon Company, which owns the Pokemon intellectual property rights.
In the most bullish scenario, they estimate that Pokemon Go could boost Nintendo’s third quarter net profits by approximately 24%. This assumes that the app generates annual sales similar to what Monster Strike generated, which was ¥200 billion. They add that the key risk here is how many variables there are, including revenue share.
The Goldman team believes that Pokemon Go has raised investor expectations for in-app purchases for Nintendo’s future smartphone apps expected out in the fall, including Animal Crossing. They also believe the hugely popular game has raised expectations for what the company can do in terms of monetizing its intellectual property. They have a Neutral rating on Nintendo’s Japan-listed shares and instead prefer DeNA.
Nintendo’s rally was excessive… for some
Nomura analysts Junko Yamamura and Yoshitaka Nagao said in a July 11 report that they believed Nintendo’s share price rally was excessive when based only on profits from Pokemon Go because the game was mostly developed by Niantic Labs. They explain that any impact on Nintendo’s recurring profits “will be limited to 32% of net profits from the equity-method affiliate The Pokemon Company.” If Pokemon Go generates between ¥5 billion and ¥10 billion in monthly turnover, Nintendo’s parent may only see between ¥1 billion and ¥2 billion per year from the game.
On the flip side we have Jefferies analyst Atul Goyal, who said they don’t like Nintendo because of Pokemon Go. They emphasized the value of the company’s intellectual property, which they believe “can only be unlocked on mobile.” With Pokemon Go, the Japanese game and console maker kicked off its IP monetization in a big way. Goyal referred to the company’s “game development process” as “unmatched.” The analyst believes this game is only the beginning, noting that it surged to the top despite all the early server problems.
Indeed, with the announcement about the mini NES console going up for sale beginning November 11, it seems as if Nintendo may be a sleeping giant that’s beginning to wake up after years of lackluster results. The console will be priced at $60 and come with 30 classic arcade games built right into it. And then there are the rumors about the Nintendo NX console with virtual reality technology, which has not yet been unveiled.