Pokemon Go, the popular augmented reality game that has taken the world by surprise, has helped Nintendo double its share price. But on Monday, Nintendo Co., Ltd (TYO:7974) was down 18% after the company warned that this popular mobile game will have limited impact on its earnings, reports Reuters.
Why such a warning from Nintendo?
Since the release of Pokemon Go in the U.S. and other major markets earlier this month, Nintendo’s share price has doubled. The growing popularity of the game has attracted investors to buy Nintendo shares in recent weeks, but the recent warning has caused the rising confidence of investors in Nintendo to wane.
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A question that arises here is why Nintendo issued such a warning. The company holds a 32% stake in Niantic, which developed and distributed Pokemon Go. This 32% stake implies a smaller profit than what some investors might have expected because of the rising popularity of the game. The Pokemon Company holds an undisclosed stake in Niantic – a privately held company – and also controls the licensing and merchandising for Pokemon. Nintendo holds a 32% in The Pokemon Company also.
For Nintendo, Monday’s decline is the biggest since October 1990. Nevertheless, the stock is still up more than 60% to what it was prior to the launch of Pokemon Go on July 5. However, Nintendo’s warning has shaved off about $6 billion from its market capitalization. The company will report its earnings for the April-June period on Wednesday. It must be noted that Pokemon Go was released after this period.
Market overreacted to Pokemon Go warnings
Pokemon Go is Nintendo’s first attempt at mobile gaming, though an indirect one since it didn’t actually develop the game. With the launch of the game in Japan last week and Hong Kong Monday, many believe the market’s reaction to Nintendo’s statement to be overly harsh, considering the potential for future games, spin-offs and other merchandise. And let’s not forget that sales from other features like Pokemon Go Plus, which alerts players about a Pokemon near them, could prove to be a big catalyst ahead.
Macquarie Securities Group Senior Analyst David Gibson told Reuters the market has overreacted.
“I believe that Pokemon GO will be material in the company’s earnings given the current trends for the game.”
Also new features like trading, which have yet to debut, will help players catch all 151 Pokemon, said Niantic CEO John Hanke last week at Comic-Con in San Diego.
Bayview Asset Management portfolio manager Yasuo Sakuma still believes Nintendo’s shares are cheap considering the potential for the company to gain from other robust franchises as it penetrates further into mobile gaming.
“Nintendo is well-placed to boost its earnings with its other characters, such as Super Mario and Zelda and their potential is unknown,” he said.