Nintendo Co., Ltd (ADR) (NTDOY) Tumbles on Too Much Pokemon Go Hype

In what should come as a surprise to no one, Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) warned investors Monday that the Pokemon Go craze will actually make a limited contribution to profits, causing Nintendo stock to tumble 18% in Tokyo trading. (America’s over-the-counter NTDOY shares were down a more mellow 4% in Monday’s premarket action.)

zagg ntdoyThis is what happens when exuberance outpaces reality.

It’s not that Pokemon Go isn’t a runaway hit — it its. It’s that investors bid up Nintendo stock before doing any kind of sober analysis of what the contributions would actually mean to the bottom line.

In other words, a runaway hit doesn’t justify a runaway share price. After doubling in a matter of weeks, NTDOY simply got ahead itself.

This sky’s the limit thinking overlooked a critical reality about Nintendo’s relationship with its business partners. Pokemon Go was developed by Pokemon Co., a company in which NTDOY holds a 32% stake. Niantic Inc. — in which Nintendo holds an undisclosed stake — is the owner owner of Pokemon Co. (To complicate matters further, Pokemon Co. also owns an undisclosed stake in Niantic.)

NTDOY Stock Will Do Well to Cool Off

The bottom line is that Nintendo is not the sole beneficiary of Pokemon Go’s success — but there’s more.

The other news weighing on NTDOY shares was the company’s announcement that any earnings from its Pokemon Go Plus wearable device has already been baked into its current-year forecast.

None of this is to say that Pokemon Go can’t be a major driver of Nintendo stock in the years ahead. It’s just that investors need to make a more realistic analysis of what the budding franchise can sustainably contribute to the bottom line once the hype has worn off. Pokemon Go has been the best thing to happen to Nintendo in a long, long time. The company hasn’t been this relevant — and NTDOY stock hasn’t been this promising — in years.

But like any investment, that doesn’t mean Nintendo stock is worth a stake at any price.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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