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Why is the Pokemon Go Bounce Over for Nintendo Stock?
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In just few days of the launch of “Pokemon Go” on Jul 5, the game managed to make a mark among smartphone users with record-breaking downloads on Apple’s (AAPL - Free Report) App Store and Alphabet’s (GOOGL - Free Report) Google Play Store. The instant success of this new augmented-reality mobile game drove the shares of Nintendo Co. Ltd. (NTDOY - Free Report) over two-folds in just nine trading sessions after its launch.
Rally Loses Steam
The rally fizzled out soon due to investor concerns over the sustainability of the game’s success as well as the limited scope of profitability for Nintendo. At yesterday’s closing price of $27.02, the stock had eroded almost half of its gains.
Nintendo had earlier revealed that revenues from Pokemon Go will yield only limited profitability for the company, given that it owns just over 30% of the Pokemon Company. In our opinion, if the game’s earnings turn out to be insignificant for Nintendo in the forthcoming quarters, shares of the company may fall to pre-Pokemon Go levels soon.
Investors are also worried about the sustainability of the game’s popularity seeing that it has already started witnessing declines in daily downloads and daily active users. This trend was highlighted by Julia Boorstin in the Aug 23 "Squawk Alley" show on CNBC.
Boorstin revealed that the app’s daily downloads and daily active users have declined as much as 70% and 35% from their respective peaks. It should be noted that the Pokemon Go app’s daily active users had initially exceeded those of social media apps like Facebook’s WhatsApp and Instagram.
Valuation in Question
On the valuation front too, Nintendo hasn’t fared very well. The recent price increase and meteoric rise in market cap have raised a lot of questions regarding the valuation of the company.
The company has a forward PE ratio of approximately 85.3x, which compares unfavorably with the industry standard of 21.1x. Moreover, in the last reported quarter, Nintendo delivered dismal results with both the top line and the bottom line missing estimates by a wide margin. Although it’s true that contributions from Pokemon were not included in this quarter’s results, we believe Nintendo’s share of the sales may not have made much of a difference.
Furthermore, the company has a VGM Grade of ‘F’ as per our latest style score system. The VGM Score rates each stock on its combined weighted styles, helping us identify those with the most attractive value, best growth and most promising momentum across the board.
Stocks with a VGM Score of ‘A’ or ‘B’ and a Zacks Rank of #1 (Strong Buy) or #2 (Buy), yield better returns, on an average, than the individual components (i.e. Value, Growth and Momentum scores), as it considers three times as many items that are correlated to future stock returns.
The combination of all three Styles that go into the VGM Score make it one of the most comprehensive and best performing indicators to use with the Zacks Rank.
So, with a VGM Grade of ‘F’ and a Zacks Rank #5 (Strong Sell), Nintendo does not look attractive on valuation front.
Bottom Line
Clearly, the impetus in Pokemon Go has dwindled over a short period of time.
Of late, Nintendo has been witnessing weakness in its core business as it struggles to solidify its presence in the mobile gaming space. Although the company had high hopes from its first smartphone game, its limited scope of profitability has now become a concern.
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Why is the Pokemon Go Bounce Over for Nintendo Stock?
In just few days of the launch of “Pokemon Go” on Jul 5, the game managed to make a mark among smartphone users with record-breaking downloads on Apple’s (AAPL - Free Report) App Store and Alphabet’s (GOOGL - Free Report) Google Play Store. The instant success of this new augmented-reality mobile game drove the shares of Nintendo Co. Ltd. (NTDOY - Free Report) over two-folds in just nine trading sessions after its launch.
Rally Loses Steam
The rally fizzled out soon due to investor concerns over the sustainability of the game’s success as well as the limited scope of profitability for Nintendo. At yesterday’s closing price of $27.02, the stock had eroded almost half of its gains.
NINTENDO LTD Price
NINTENDO LTD Price | NINTENDO LTD Quote
Nintendo had earlier revealed that revenues from Pokemon Go will yield only limited profitability for the company, given that it owns just over 30% of the Pokemon Company. In our opinion, if the game’s earnings turn out to be insignificant for Nintendo in the forthcoming quarters, shares of the company may fall to pre-Pokemon Go levels soon.
Investors are also worried about the sustainability of the game’s popularity seeing that it has already started witnessing declines in daily downloads and daily active users. This trend was highlighted by Julia Boorstin in the Aug 23 "Squawk Alley" show on CNBC.
Boorstin revealed that the app’s daily downloads and daily active users have declined as much as 70% and 35% from their respective peaks. It should be noted that the Pokemon Go app’s daily active users had initially exceeded those of social media apps like Facebook’s WhatsApp and Instagram.
Valuation in Question
On the valuation front too, Nintendo hasn’t fared very well. The recent price increase and meteoric rise in market cap have raised a lot of questions regarding the valuation of the company.
The company has a forward PE ratio of approximately 85.3x, which compares unfavorably with the industry standard of 21.1x. Moreover, in the last reported quarter, Nintendo delivered dismal results with both the top line and the bottom line missing estimates by a wide margin. Although it’s true that contributions from Pokemon were not included in this quarter’s results, we believe Nintendo’s share of the sales may not have made much of a difference.
Furthermore, the company has a VGM Grade of ‘F’ as per our latest style score system. The VGM Score rates each stock on its combined weighted styles, helping us identify those with the most attractive value, best growth and most promising momentum across the board.
Stocks with a VGM Score of ‘A’ or ‘B’ and a Zacks Rank of #1 (Strong Buy) or #2 (Buy), yield better returns, on an average, than the individual components (i.e. Value, Growth and Momentum scores), as it considers three times as many items that are correlated to future stock returns.
The combination of all three Styles that go into the VGM Score make it one of the most comprehensive and best performing indicators to use with the Zacks Rank.
So, with a VGM Grade of ‘F’ and a Zacks Rank #5 (Strong Sell), Nintendo does not look attractive on valuation front.
Bottom Line
Clearly, the impetus in Pokemon Go has dwindled over a short period of time.
Of late, Nintendo has been witnessing weakness in its core business as it struggles to solidify its presence in the mobile gaming space. Although the company had high hopes from its first smartphone game, its limited scope of profitability has now become a concern.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>