The Pokémon Go Fad Makes Nintendo a ShortGLUU) and Zynga (ZNGA) have been range bound.
Over the last few weeks, new augmented reality game Pokémon Go has taken the world by storm. The game witnessed over 21 million downloads within the first week of its launch and despite server problems, users tend to spend a lot of time on the app.
The success of Pokémon Go has seen Nintendo’s (NTDOY) share price almost double adding over $15 billion to Nintendo’s valuation.
The rally makes no sense on a fundamental level. Nintendo’s market cap has jumped almost $16 billion in value, however the chances of Nintendo justifying this rise is next to zero. Granted, Pokémon Go is yet to launch in several countries and the hype may last for quite some time. But, in the long-term, shares of Nintendo are destined to fall as the hype fades away.
There is no way Nintendo can generate over $10 billion in in-app purchases to justify the rally. Although the game is reportedly generating over $1 million in revenue for now, there is still a long way to go for it to even reach the billion mark.
Clash of Clans has been the most successfully monetized mobile game as of now and Pokémon Go will have to be a much bigger success than it to justify the rally. Moreover, Nintendo is part-owner of Niantic, the company responsible for Pokémon Go. Meaning all the proceeds from Pokémon Go will be divided among the owners, which further reduces the already-slim chances of Nintendo justifying the rise.
Pokémon Go is a fad that is too hot to not cool down. Although the hype surrounding the game may last for a few more months, I think investors can safely consider shorting the stock at current levels. There is no way to justify the $15 billion+ rise in Nintendo’s market cap, and the stock will come crashing down once the fad goes away.
Published on Jul 20, 2016By Prudent Investor