Nintendo (TYO:7974) Stock Riding the Pokemon Gravy Train

Adrian Ip
Posted Jul 11, 2016
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Nintendo, from an investor’s perspective has been something of a mixed bag over the years. From the heady heights of its pre-2008 financial crisis heyday at over 70,000 Yen, it was the darling of the gaming world having scored huge successes in the shape of the innovative (if graphically lacking) Wii console and DS portable. This led to two stellar years from an earnings perspective in 2007, 2008 before reality sank in and earnings quality began its slow but inexorable decline. Losses in 2012, 2013 and 2014 saw a lot of shareholder value eroded. The launch of the Wii U in the meantime has done little to stem the tide as Sony and Microsoft have both stolen the once market leaders’ lunch money.

2015 saw a slight reversal of fortunes as the company again had black ink as opposed to red at the bottom of the earnings statement, although this was credited to a depreciating Yen more than any real reversal in the fortunes of the company. The last two trading days however have been nothing short of spectacular.

The Crisis In Corporate Japan

Corporate Governance in Japan has been something of a standing joke in the business world for years with the downsides being prominently evident in the Olympus fiasco in 2011 when nobody in the country seemed to care that the biggest accounting scandal in its history had just occurred except for some foreign fund managers who happened to have shares. Until 2014, Japan had no requirement for external directors on its boards and even when the rules were first introduced in 2014, they were advisory only in nature.

Many blamed this for Japanese business’ terrible performance over the years with the rule change being prompted by a poor 2012 when the TOPIX 500 averaged a 7% return for the year vs over 15% for US and European equivalents. London listed companies are required to have at least half of their board (including Chair) of directors made up of external directors rather than internal company people, same in New York. Japan however has no such rules.

Against this backdrop, Nintendo, along with many other corporates in Japan have struggled to innovate, particularly given the lack of boardroom scrutiny and shareholder activism which is significantly more prevalent in the west.

Nintendo (TYO:7974) Makes Changes

Earlier this year, Nintendo announced that it was restructuring its board to try and boost its corporate governance structure and strengthen its capabilities in reacting to appropriate market conditions and the voices of its shareholders.

Well, despite this only occurring this year, it seems that the company has been thinking about how to reverse its declining fortunes for a while, particularly given the expensive failure that was the Wii U. The company has branched out from its traditional strongholds of home consoles and portable consoles and has started to leverage existing brand lines in new ways.

Pokemon: The Revival

Cue Pokemon Go. Nintendo (TYO:7974) launched the game last week (developed and published by Niantic of ex-Google and Ingress fame) to the relief of the investment community which had been pressuring it to make a move into other platforms besides its own hardware. Nintendo is a rich company but its assets on the balance sheet have been shrinking basically since 2009. This is obviously not a situation that can continue ad infinitum.

Well, thankfully for investors, Nintendo has a freemium game out now on both iOS and Android. Guess what else? It’s a hit. Within 24 hours of launch, Pokemon Go topped the US App Store’s top grossing and free charts and early reviews have been positive. Nintendo has even had to pause the global release of the game as its servers were having trouble coping with demand.

This has somewhat unsurprisingly led to a buying frenzy on Nintendo stock (TYO:7974) which on Friday pushed the share price up by almost 10%.

The big surprise is that today, the shares continued their jump and rose another 24.5% in one trading day! Nintendo closed at 20,260 Yen, still a long way off its historical peaks, but given that the pendulum has now well and truly swung in favour of bringing its popular content to platforms other than its own, one wonders whether it will now discover the form of former home console competitor Sega (TYO:6460) and rediscover itself as a gaming software house and publisher.

The writing isn’t on the wall yet, Nintendo of course has the upcoming NX console which it will be hoping is a better commercial success than the Wii U, but times are certainly interesting for the one time gaming stalwart of my youth.

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