“Dad, slow down!” my eldest daughter screams at me as we drive past a park. “There’s a thinga-ma-bobber Pokething I gotta catch!” I slow the car down and rue the day I wasn’t smart enough to buy Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) ahead of the game’s release, and then immediately sell it. Of course, that’s always how it works, right? We know just when to buy and sell Nintendo stock, and can foresee it crashing after skyrocketing.
The story of Pokemon GO and Nintendo stock serves as a classic cautionary tale for all investors. On July 6, Nintendo stock was at $17.63. That was the release date for Pokemon GO.
As soon as it was released, you could not have been alive without hearing about Pokemon GO every day, multiple times per day. Then came the stories of people falling off cliffs, getting mugged, being kidnapped by aliens and finding dead bodies while playing the game.
By July 11, you still could have climbed into NTDOY at $27. The hype was in full swing at that point. A week later, NTDOY topped out at $37 — an incredible increase of 110% in two weeks.
The Truth Behind Nintendo stock
Then reality hit. The hype had not worn off, but investors suddenly started doing research, and Nintendo made a few sobering announcements.
“Um … well … Nintendo stock only owns a 33% stake in The Pokemon Company. Um … well … Nintendo stock only owns a 13% stake in Pokemon GO.”
Suddenly, investors flipped out and started selling. Then it got worse. NTDOY reported worse-than-expected earnings for Q2 (before Pokemon GO was released), and that Pokemon Go would not even help their bottom line! Oh, and some gamer accessories are also being delayed.
NTDOY stock is now down to $29.
What a lesson. If you scrambled to buy during the hype, you are unhappy right now. The question is, what should you do if you bought in anytime during the last two weeks? For that, we have to examine where Nintendo stock is now and where it’s going.
For starters, Nintendo stock’s revenue fell by 31% year-over-year; a 1.149 billion yen operating income became a 5.13 billion yen operating loss. Ordinary income cratered from a 14.3 billion yen profit to … ouch … a 38.7 billion yen loss. (It’s about 105 yen to the dollar).
With only about US$10 million of cash on hand, the balance sheet is nothing special.
NTDOY is projecting net income per share of 291 yen per share, or about US$2.78 per share. NTDOY stock is valued at 9 to 10x earnings, with a $31 billion market cap. Remember, this means the market says earnings should grow 9% to 10% annually to justify that valuation.
The last five years do not show a rosy picture for net income; 2015 was the best year with about a $400 million profit. During that year, NTDOY stock never traded above $26, or a $24 billion market cap, or 60x earnings. There’s no way that valuation was justified.
That’s the problem with valuing a company with erratic results. A 10x multiple is not entirely unreasonable here, but with so little clarity about the future, I can’t see justifying paying $26 per share here.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.