Nintendo (NTDOY, Financial) hasn’t given shareholders a lot to cheer about lately. Three decades ago, the Japanese consumer electronics giant was at the forefront of the global revolution in virtual gaming. Nintendo singlehandedly redefined popular culture and the way in which young people view technology and the world around them.
But fast-forward to 2016, and the innovative creators of timeless classics like Mario and The Legend of Zelda have been cast aside as mere footnotes in the rapidly evolving history video gaming. What on earth happened?
In short, Nintendo became a beast of complacency. Lackluster R&D and reactionary management enabled emerging competitors like Sony (SNE, Financial) and Microsoft (MSFT, Financial) to rise up and steal a humongous market share away from the company virtually overnight.
Shares in Nintendo have been locked in a proverbial freefall ever since the 2007 launch of Sony’s PlayStation 3 – and to be honest, the company hasn’t given investors a single reason to believe things may actually turn around.
Don’t get me wrong: CEO Tatsumi Kimishima and his team have been shedding assets and working tirelessly to return the company to profit. Things have been getting a little better. But in February, the CEO was left desperately begging investors to sit tight after reporting a 36% plunge in quarterly profit.
Plenty of analysts were already preparing Nintendo’s eulogy – and you could hardly blame them. The company’s demise has definitely seemed like a long time coming.
But as of last week, it looks like we’re going to need to cancel that funeral.
In the last three days alone, shares in Nintendo have soared by over 53%. The company’s market value has jumped by a whopping $11 billion, and Nintendo is on the tip of everybody’s tongues. Why? One very simple, yet very engaging, smartphone app.
Like everything else it’s done in the past 10 years, Nintendo has been a bit slow to the party in terms of mobile technology. The company only introduced its first-ever mobile app in March – and, to be honest, nobody seemed to like it very much.
By contrast, last week’s Pokémon GO very well may be one of the fastest-rising apps in history. Capitalizing on the company’s rapidly decaying Pokémon brand, the app masterfully produced an augmented reality in which players can find and catch adorable monsters by viewing and engaging with them through smartphone cameras. The app has already got more users than Twitter, and an influx of publicity is sure to bolster those numbers further in the coming weeks.
Although the app is free, optional in-game purchases are already bringing in around $1.6 million worth of daily revenue on American Apple decides alone. Although this number will rise and fall dramatically in the weeks to come, it’s safe to say Nintendo is on to a winner here.
But what does the viral nature of Pokémon GO mean for Nintendo’s long-term financial sustainability?
The truth is, one insanely popular app won’t be enough to catapult Nintendo back to the forefront of digital gaming. Its competitors have come too far in the last decade, and there’s no way Kimishima and his team could possibly catch up. That being said, Pokémon GO very well may mark a new era of growth for its creators.
Assuming Nintendo can maintain even a relatively modest rate of user retention in the wake of this month's Pokémon buzz, further updates and stable in-game sales will ensure the company effortlessly whizzes past its depressing fourth quarter net income. And bearing in mind that Nintendo's most recent fiscal year represented a 25% leap in income to begin with, that means the company is undeniably on par for reasonable growth across the remainder of 2016.
Moving on to the spring of 2017, developers are also expected to unveil the company’s next big flagship product, the Nintendo NX. That will definitely incur huge costs, and it’s difficult to say based upon past hardware releases whether Nintendo’s new mystery item will actually prove to be a hit. Only time will tell.
But there's plenty of room for optimism here.
Smartphone penetration is still rapidly increasing across the globe, and users will be spending far more time on apps than they can afford to spend on more traditional games consoles. Kimishima appears to have finally recognized this seismic shift in consumer behavior and has subsequently promised investors that the company will start placing more emphasis on mobile in the months to come. Even modest replications of Nintendo's most recent smartphone success should make a world of difference to the company's bottom line.
That being said, value investors would probably do well to sit tight and wait until all of this Pokémon GO buzz dies down before hopping on the bandwagon. It only stands to reason that share prices will drop again as publicity fizzles out in the weeks to come. Yet so long as Nintendo can learn from this success and follow through on its pledge to invest more heavily in mobile apps, there’s no reason to believe the company isn’t destined for great things in the years to come.
Nintendo will never reclaim its former crown as the king of digital gaming – but it should eventually reclaim its status as a smart buy.
Disclosure: I do not own shares relating to any of the companies included in this article.
Start a free seven-day trial of Premium Membership to GuruFocus.
