Nintendo’s share price went berserk in the week following the release of Pokémon Go.
It has almost doubled since the game was released in just a handful of countries, including the UK, the US and Australia. This is despite Nintendo owning just 33% of the Pokémon Company and an estimated 5-10% stake in the game’s developer, Niantic.
The game’s revenue comes from in-app purchases of various credits that help users build strength, develop their Pokémon, and beat other players. And remember, Apple and Google typically take a 30% cut of in-game spend.
So is the share price rise justified?
Deutsche Bank, in its weekend potted summary of analysis, did a back-of-the-napkin calculation, basing some of its assumptions on behaviour of the last major global smartphone game phenomenon, Candy Crush. (Remember that?)
Assume the game lasts ten years and profits fall one-tenth annually. Using a five per cent cost of capital, Nintendo must generate $US3.3bn of earnings this year. That requires $US14bn of in-app revenue if Nintendo receives one-third of the revenue through its stakes in the Pokemon Company and the game’s developer, Niantic, at a 70 per cent profit margin. With Apple and Android taking their 30 per cent cut, players must therefore spend $US21bn. If five per cent of players actually pay (the same as Candy Crush) and they spend $100 each, Nintendo’s share price jump only makes sense if the app is downloaded by every second person on planet Earth.
That would be about 3.5 billion Pokémon Go players. Pokémon Go might already by bigger than Tinder, but that level of market reach is still a long way off.