Biggest Nintendo Bear Says Worst Is Over on Pokemon Outlook

  • SMBC’s Maeda sees Pokemon Go contributing 20 to 30 billion yen
  • Upgrades his price target, which was the lowest among analysts

Product Delay Weighs on Nintendo's Shares

The worldwide success of Pokémon Go is finally making a believer out of Nintendo Co.’s most bearish analyst.

SMBC Nikko Securities Inc.’s Eiji Maeda had an underperform rating on the company’s stock and the lowest price target among 15 Nintendo analysts tracked by Bloomberg. But in a report published Thursday, he says the worst is over for the Kyoto-based company, after shares tumbled this week by the most in 27 years. Maeda upgraded his outlook to neutral and raised his price target, citing the prospects for higher profits from Pokémon Go and upcoming titles.

Despite his estimate that only seven percent of Pokemon Go’s sales go to Nintendo, he expects the hit game to begin delivering 20 billion to 30 billion yen ($191-$287 million) to the company’s bottom line this fiscal year. Maeda also cited the launch of the NX console, which should begin generating returns after it debuts early next year. He raised his price target to 21,500 yen from 14,500 yen, compared with Friday’s close at 21,505 yen.

Still, he pared his optimism, saying he wants to see whether upcoming smartphone games can recreate the success of Pokemon Go. “While positives appear to have played out for a while now that the Pokémon GO smartphone game boom has been priced in, we believe negatives have also been aired,” Maeda wrote in the July 28 report. “We expect the market’s focus to shift from Pokémon GO to the Animal Crossing and Fire Emblem smartphone games that are due for release in autumn 2016 and the next-generation NX console that is due to go on sale in March 2017.”

Nintendo’s stock reversed losses this morning and rose 2 percent on Friday.

Analysts at the world’s biggest investment banks have struggled to keep up with the wild gyrations in Nintendo’s shares as the Pokemon Go craze has taken hold. Several analysts cut their price targets before the game’s debut in early July, only to reverse course days later as the stock surged. Two banks set price targets at more than 40,000 yen or almost double the current level.

Despite today’s gain, Nintendo shares dropped 24 percent for the week, the worst weekly performance since September 1989. Investors dumped the stock after the company last week said financial impact from Pokemon Go will be "limited,” then this week posted a quarterly loss that was wider than expected and delayed the release of an accessory for the game.

Still, selling pressure appears to be abating. Short positions in Nintendo dropped to 4.7 percent of its free-float stock as of Wednesday, according to the latest data from research firm IHS Markit. That’s the first decline since July 18, although still well above the 1.3 percent it averaged during the first half of the year.

While some short-sellers may be closing their positions, Maeda’s rating indicates it may be too early to buy. Instead, he says it may be best to wait and see until Nintendo reveals details of its upcoming mobile games -- with the first two expected in autumn -- and the NX console next year.

“While expectations for Nintendo are high given its track record in creating global hits, we think it is premature to price in excessive expectations while details of the prospective products have not been disclosed,” he wrote in the report.

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