Nintendo – Poke in the eye.

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Apple and Google are the real & investible beneficiaries of Pokemon Go. 

• Pokemon Go has nearly doubled Nintendo’s market capitalisation in the space of 8 days but I fear that it has all the hallmarks of a craze.
• Hence, I worry that its appeal will soon die down meaning that it will fail to deliver the revenue and profits that the share price of Nintendo is now discounting.
• Pokemon Go has come from nowhere to top the charts for both the Apple App Store and Google Play in every country where it has been launched and has become a global phenomenon in just 8 days.
• Although it is free, Niantic has brilliantly capitalised on the desire to capture the virtual creatures and claim geographic territory, making the game the highest grossing app in every country where it has launched.
• Consequently, the spreadsheet jockeys are already predicting that this could generate in excess $4bn in revenues per year and see a whole host of follow up products that will keep the revenues rolling.
• This is where I get nervous because Pokemon Go has all the hallmarks of a craze (remember Crocs) of which most people will soon tire meaning that it could quickly disappear from the charts as fast as it has appeared.
• Clash of Clans and Candy Crush have topped the app store charts for years and have built up a very solid and long lasting following which makes them far more dependable assets.
• However, even if I am wrong, and Pokemon Go dominates the charts for a long period of time, how this benefits Nintendo is much less clear.
• Nintendo does not own this game but owns a 33% stake in the Pokemon company which licensed the rights to Niantic in which I estimate that Nintendo owns a maximum of around 10%.
• This means that Nintendo will only receive a fraction of revenues that the app generates.
• If I assume that Pokemon Go generates $4bn in revenues, then Niantic will receive 70% of this or $2.8bn.
• I estimate that Nintendo might receive $300m in the best instance which, as royalties and dividends, would all flow the bottom line.
• The problem is that Nintendo’s market capitalisation already increased by $17.4bn valuing this profit stream at 58x.
• This is way higher than Facebook where I am far more confident that profits will continue growing than I am with Pokemon Go.
• Furthermore, the real beneficiaries here are Apple and Google.
• Apple and Google will both receive 30% of all Pokemon Go revenues ($1.2bn in this example) as commission for selling it through their stores, again almost all of which, will fall to the bottom line.
• These profit streams are both much greater and are being valued at a tiny fraction of what they are at Nintendo and so any investor wanting to load up on this fad should do so through these two companies.
• Of the two, I prefer Apple as I continue to think that Aphabet’s shares are assuming that all remains well with Android which I fear is not the case.