Short Sellers Are Probably Right About Nintendo

Nintendo (NTDOY) has been seeing a consistent drop in its revenue from the last six years, mainly due to the failure of its Wii series as compared to Microsoft’s Xbox model and Sony’s PlayStations models. Recently, Niantic launched a new game titled Pokémon Go which is a free-to-play location-based augmented reality mobile game for iOS as well as Android devices. As most of you know, Pokémon Go uses GPS and camera on compatible devices, and permits players to capture, battle, and train virtual Pokémons, who appear on device screens as like in the real world.

Just after the launch of Pokémon Go, Nintendo’s stock price surged around 100 percent.
However, at the same time, the impulsive spike in the company’s shares should not come as total shock. The company’s liquidity or dearth thereof almost definitely clarifies the recent rally.

The aggressive spike of stock is a natural response any time demand surges for an item in trivial supply. The rally is more closely related with the trading structure of its shares rather than its fundamentals, and that possibly does not promise well for the stock in the long-term. Several fundamental analyses additionally suggest that Nintendo might not get a financial windfall.

Most significantly, Nintendo has missed a great opportunity, as the company did not publish Pokémon Go. The game does not use the integrated Nintendo Account System launched with Miitomo. It would have been a great opportunity to gain tens of millions of sign-ups.

It is not likely that the company will be able to come up with this lightening again because Pokémon Go is a game that was introduced at the perfect moment and spread with a haste and intensity that no one anticipated. Furthermore, it can be certainly said that the company’s own mobile games possibly would not relish this level of victory.

The rise in Nintendo’s shares can’t be justified by Pokémon Go, which is probably the reason why short sellers have started circling around the stock. Short interest in Nintendo has grown massively over the last few weeks, and I, for one, have to agree with the short sellers on this one. Given Nintendo’s valuation, I think the stock makes for a much better short than a buy.

While many investors may be hoping that the launch of Pokémon Go in other countries will further fuel the rally, I think Nintendo has peaked for the short term and is a sell, if not a short, at this point in time.
Published on Jul 27, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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