Ever since the hit new mobile game Pokemon Go burst onto the scene earlier this month, investors have been trying to figure out how to profit off of the blockbuster app. Shares of Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) spiked more than 100% this month, but new research shows that Apple Inc. (NASDAQ:AAPL) and its stock may have even more to gain from Pokemon Go in coming months than NTDOY.
NTDOY’s Stake In Pokemon Go Is Complicated
Clearly, the market has assigned a huge amount of Pokemon Go value to Nintendo stock. In fact, the company added $21 billion to its market cap in a matter of days following the launch of the game. Unfortunately for NTDOY shareholders, the company only holds a small stake in Pokemon Go.
Macquarie estimates that Nintendo owns roughly a 10% direct stake in the game. However, NTDOY also owns a 33% stake in the The Pokemon Company, which will lay claim to about 30% of the game’s take.
All together, that means Nintendo has a roughly 20% stake in the game’s revenue.
AAPL Has an Even Larger Pokemon GO Stake
Apple and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), on the other hand, get roughly 30% of in-app purchases, and the lion’s share of these profits will go to AAPL. As of July 18, AppInstitute reported that Pokemon Go has nearly twice as many U.S. downloads on iOS as it does on Android.
If you couple those numbers with the fact that iPhone users have historically been much more generous when it comes to in-app purchases, AAPL will see a lot more Pokemon Go cash flow than GOOGL will.
How Much Pokemon GO Upside Will AAPL and NTDOY See?
It’s still extremely early in the game to be making accurate long-term projections for Pokemon Go. Much of the game’s ultimate financial success will be measured by how long it can maintain its popularity. However, Needham analyst Laura Martin recently took a crack at the impact the game could have on NTDOY and AAPL’s bottom lines:
“Assuming 20% penetration at maturity with revenue to AAPL of $0.05/person/day suggests extra revenue to AAPL from Pokemon Go of $3 billion over the next 12-24 months, depending on consumer adoption timing.”
Sensor Tower reported on July 11 that Pokemon Go was generating roughly $1.6 million in revenue per day on iOS in the U.S. Early estimates of conversion rates (the percentage of users actually spending money on the game) come in at around 20%.
As of July 18, the game had 21 million active users in the U.S. across all devices, and it is officially launching in Europe, Canada and Japan this week.
Using the previous gold standard in mobile gaming, Candy Crush, as a comparison, Pokemon GO could be a huge money-maker. Candy Crush delivered $1.1 billion in revenue in 2013 and $1.3 billion in revenue in 2014. But here’s the kicker: Candy Crush’s conversion rate was only 2%, one-tenth the U.S. conversion rate of Pokemon GO so far.
Using Macquarie’s 30% stake estimate for AAPL, that means Pokemon Go could generate $10 billion in total revenue for Apple in the next two years. That’s more than four times as much as Candy Crush during its peak years.
Nintendo’s 20% take suggests $2 billion in revenue upside for the company.
The Problem for AAPL and NTDOY
Here’s the problem for NTDOY shareholders: The stock’s meteoric rise since the launch of the game has upped its market cap by more than $20 billion, so the windfall is baked in, then re-baked and nuked in the microwave. Of course, improved features, advertising and updates to the game could could potentially drive profits higher in the future. But using Candy Crush’s $2.4 billion two-year revenue as a comparison, a $20 billion increase in market cap seems a bit overzealous to say the least. Perhaps this is one of the reasons NTDOY has started to cool off over the past few days.
Apple, on the other hand, has gained only about $2 billion in market cap since the launch of the game and could see a continued earnings tailwind in the future. The biggest problem for AAPL shareholders is that Apple generated roughly $231 billion in sales in 2015. An extra $3 billion, while nice, likely won’t do much too move the needle significantly for AAPL stock.
For now, AAPL shareholders should enjoy the boost from Pokemon GO, but it’s likely not enough on its own to justify buying the stock.
For NTDOY shareholders, it’s probably a good idea to take profits on your position now while expectations for the game remain extremely high.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.