In case you’ve been living under a rock this week, Pokemon Go has been a huge hit for Nintendo Co. Ltd (OTCMKTS:NTDOY) and its shareholders.
That’s why it may come as a surprise that I have three good reasons to sell NTDOY stock immediately.
NTDOY Stock Now Has Sky-High Expectations
NTDOY stock has spiked an incredible 50% since July 1, presumably entirely based on the popularity of Pokemon Go. So why sell now when the game was only recently released?
The easy money has already been made.
The reason for the huge spike in share price is because the market was not anticipating Pokemon Go’s massive success. Now it is. If you happened to own Nintendo stock ahead of the big move, now is the perfect time to cash in on some impressive gains.
If you missed the move, buying a stock that is up 50% in a matter of weeks is a dangerous move.
How high are expectations? It’s impressive that Pokemon Go daily turnover on the first day of its launch was 400 million to 500 million yen. But Morgan Stanley analyst Mia Nagasaka says the app will have to hit a minimum of 15 billion to 20 billion yen per month for an extended period of time to have a “meaningful” impact on NTDOY’s earnings.
“Given particular characteristics of apps, at this point, we cannot comment with high certainty on [its] sustainability,” Nagasaka added.
NTDOY Only Gets a Fraction of Pokemon Go’s Profits
Based on the way that Pokemon Go’s success has been reported in the media, casual observers may believe that the lion’s share of the app’s profits go to NTDOY. In reality, the profit sharing is a bit more complicated. Pokemon Go was actually jointly developed by Nintendo, Niantic and Pokemon Company.
“It is unclear exactly what their economic interest is in the game, but we presume that out of every 100 units earned at the app store, 30 would go to Apple, 30 to Niantic, 30 to Pokemon and 10 to Nintendo. Hence, we don’t think Nintendo will earn much directly from the game,” Macquarie analyst David Gibson wrote earlier this week.
In addition to Macquarie’s estimated 10 percent take, Nintendo also owns a 33% stake in The Pokemon Company. That brings NTDOY’s total potential take on the game up to 20%. That’s certainly a sizable share, but it’s far smaller than Apple Inc.‘s (AAPL) potential 30% share.
By comparison, AAPL stock is up 1.8% since June 1.
NTDOY May Soon Face Lawsuits and Negative PR
Clearly, most users have responded positively to Pokemon Go. Unfortunately, the game has already been tied to criminal activity and potential lawsuits. The New York Post has reported on the number of players that have injured themselves walking around playing the game without paying attention to their surroundings.
Rolling an ankle is one thing, but one teenager has already reportedly been hit by a car while playing the game.
In addition to the dangers of player inattention, criminals are also using the game to lure victims to secluded locations to rob and/or potentially assault them.
Attorney Max Kennerly is advising players to send an email to termsofservice@niantclabs.com within 30 days of downloading the game in order to maintain the right to litigate any dispute with Niantic, Nintendo or other parties.
It may only be a matter of time before the game results in a player death. The PR repercussions and potential legal settlements and fines NTDOY could face might end up a nightmare for shareholders.
Takeaway
There’s no question Pokemon Go has been a huge early success for Nintendo and a major shot in the arm for NTDOY shareholders. However, with the stock already up more than 50%, the risk of owning Nintendo stock now far outweighs any remaining potential upside.
As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.
