How Pokemon Go Is Like the Stock Market

In the week that Pokemon Go burst into the national consciousness, I downloaded the game and opened an account, mainly to better understand what all the fuss was about—but also to have a little fun. 

I created an avatar that looked a bit like me (though there was no option for gray hair). 

And when the game asked me to choose a name for character, I chose Charles MacKay, who I mentioned here last week as the author, way back in 1841, of the classic book, Extraordinary Popular Delusions and the Madness of Crowds. 

Appropriate, n’est-ce pas? 

MacKay, who looks in this engraving as though he could use a little fun chasing cartoon monsters, was one of the first to describe and categorize the kinds of crowd behavior that we continue to see every day. 

From sports fans, to members of political parties, to game players to investors, we are all subject to crowd behavior.

Why did I download Pokemon Go? Because everyone else was doing it. 

Why did investors buy Apple (AAPL) and push the stock to record highs in 2015? Because everyone else was doing it. 

And why did investors sell solar stocks in 2015 and push the entire group to new lows? Because everyone else was doing it.

We are social animals and being part of like-minded groups generally makes us feel good. Not only that, but recognizing major trends early, and acting on them, can improve your investment returns substantially! 

So, now that Pokemon Go is such a hit, might it be a good idea to buy stock in Nintendo (NTDOY), the company behind the game? 

To answer that, first I look at the chart. 

The long-term chart of NTDOY shows the video game console company’s stock declining from a high of 78 back in 2007 to a low of 11 in early 2013, a huge decline of 86%. The reason for the wipeout: while as the world moved toward mobile games like Candy Crush and Flappy Bird and Nintendo sat on the sidelines—fearful of cannibalizing its valuable franchises (reinforcing the tenet that trends tend to go further and last longer than people expect). 

There was a brief flurry of buying in March 2015 when the company announced that it would get off the sidelines and get into the mobile gaming business, using its still-valuable animated characters. 

And then reality struck when Nintendo launched Pokemon Go on July 6, just 19 days ago. 

The chart shows the stock’s high-volume surge from 18 to 38 (a gain of 111%) in eight trading days as word of the Pokemon Go frenzy spread. And it shows the current correction, which started just last Tuesday. 

But overall, the chart is strong and I like that. Most simply, it says that the uptrend will continue. 

To investors looking to buy the stock, therefore, one question is, “Where might this correction bottom?” 

Well, I think right here looks pretty good. First because the stock has given back a little more than 50% of its original advance (that 50% is a rough yardstick I like to use) and second because the stock is now at the top of its original gap up. 

Then I look at the fundamentals. 

Nintendo had revenues of $4.2 billion in the fiscal year that ended March 31, down 11% from the year before (and down from $18.6 billion in 2009!), and earned $0.13 per share, down from $0.37 the year before. Analysts are projecting similar earnings for the current year (some no doubt have yet to updated their estimates), and earnings of $0.47 per share in 2018. 

But those estimates are pretty fuzzy now that Pokemon Go has become the most active mobile game in the United States ever. With 21 million active users (and growing), it’s eclipsed Candy Crush Saga’s peak of 20 million. 

Today, trading at nearly double its price of a month ago, the stock has a market cap of $37 billion and a P/E ratio of 260—which is not cheap by anybody’s definition. 

But Nintendo owns 33% of the Pokemon franchise and will receive 30% of revenue from the game, and if those revenues climb to a couple of billion dollars a year—and margins improve—the stock could be viewed as a good value today.

It all depends on what happens in the months and years ahead, or, as we at Cabot like to call it, the unforeseeable and the incalculable. 

Here’s what I do know, though. 

Nintendo has already changed the world at least twice before (I’m counting the Gameboy and the Wii but you can do your own counting).

And now with Pokemon Go, it’s produced the world’s first successful augmented reality game. 

Odds are that this is not a flash in the pan. Odds are that usage will broaden, and, more important that the company will find other uses for its augmented reality technology, perhaps licensing it to companies that are not “simply” making games but making useful apps for navigation, real estate information, videoconferencing, surveillance, access control, and more.

The sky’s the limit! And that’s the real reason that I’m optimistic for the future of both Nintendo and augmented reality. The fact is, even with a PokeStop located right outside my office …

… I know I won’t be playing this game much longer.

But I am very excited about the future of augmented reality in general, and if other people are also excited, that may not only validate the stock’s recent strength but also justify an initial investment in the days ahead, especially if you can get in near the bottom of this correction.

If you do, however, you’re on your own. To date, no Cabot analyst has recommended Nintendo, simply because it hasn’t met their criteria—yet. So what I recommend, particularly if you’re interested in hot growth stocks like Nintendo, is that you become a regular reader of Mike Cintolo’s Cabot Top Ten Trader, which every week presents 10 growth stocks with high-potential charts, just itching to break out to new highs. Past big winners in Cabot Top Ten Trader include Apple (AAPL), Netflix (NFLX) and Chipotle (CMG)—to name a few, all of which were recommended early in their growth phases.

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