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Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY): What Happens Now?

Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY): What Happens Now?
Written by
Chris Sandburg
Published on
July 26, 2016
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Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) lost 10% of its market capitalization on Monday, and a further 3% after hours. The company gained more than 111% from the beginning of July to monthly highs on July 18, but has since corrected as the real impact of the catalyst has become a little clearer. So, what happens now?The gains came on the back of the market response to Pokémon Go, the smartphone application that allows players to walk around towns and cities collecting virtual creatures on their devices. The game has been downloaded an estimated 75 million times across Android and iOS platforms since launch, and these numbers are expected to be just the beginning. It’s live in just one third of addressable markets, and doesn’t look to be slowing in popularity or media coverage.It's free to download, but generates revenues from in-app sales, which are necessary to expand access to certain elements of the game. Analysts suggest it's generating around $1.7 million a day in revenues as things stand, just from the iOS portion of its users. For the full user base, estimates are as high at $3-3.5 million a day.Nintendo owns 32% of The Pokémon Company but the thing is, its not going to make much money from this stake. The only real earnings derived from this position are going to be in the form of undisclosed royalties and development revenues that The Pokémon Company earns from Niantic Labs, the company that developed and owns the Pokémon Go game. Basically, the billions of dollars that Nintendo has seen added to its market capitalization have come as the result of investors not realizing, or ignoring, the fact that Nintendo doesn’t own the game. It's a strange situation, and an example of hype translating to an overbought stock.Niantic is now thought to be worth $3 billion, and Nintendo has an undisclosed share in that company, as does Alphabet Inc (NASDAQ:GOOGL) (it was originally spun out of Alphabet), but not big enough that it's going to have any material impact on earnings for either company, and nowhere near big enough to justify Nintendo's early July gains.You can almost imagine Nintendo executives sitting at HQ panicking about having to burst the bubble when they tell markets they don't own the game. They just did, and it just burst. Here’s how they worded it:

"This mobile game application is developed and distributed by Niantic, Inc. The Pokémon Company, which is an affiliated company of Nintendo Co., Ltd. (the “Company”), holds the ownership rights to Pokémon. The Pokémon Company is going to receive a licensing fee as well as compensation for collaboration in the development and operations of the application. The Company owns 32% of the voting power of The Pokémon Company. The Pokémon Company is the Company’s affiliated company, accounted for by using the equity method. Because of this accounting scheme, the income reflected on the Company’s consolidated business results is limited."

So what now?Well, there is plenty of potential for Nintendo to benefit from the renewed popularity of Pokémon, and it's expecting to do just that with a satellite product designed to alert players to Pokémon location without having to activate the application on their phones. Further, this is just the beginning. There's the potential for other revived Nintendo franchises in this format.Right now, however, this potential doesn’t look to be worth the circa $25 billion added on to the company's market cap on the back of the hype. It all depends on where the current correction bottoms out. There are some analysts arguing that this correction is a buy opportunity, and that markets have overreacted to Nintendo's announcement on the sell side. That's a reasonable conclusion, but there's also the potential for the company to lose a bit more value as it heads into its upcoming earnings release.We're swinging for the latter, near term.Stay with us for NTDOY updates by signing up to our newsletter below!Disclosure: We have no position in NTDOY and have not been compensated for this article.

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