Nintendo stock went for a wild ride this month after the launch of Pokemon GO, leaping and then falling not because of the game's actual profitability but because stockholders are skittish and prone to assumption. Photo via Bloomberg/Getty Images
On July 6, the day Pokemon GO started rolling out in the West, Nintendo shares were trading at ¥14,380 ($181). By July 19 that number had skyrocketed to ¥31,770 ($401), a tremendous leap that led to headlines everywhere about how the company had gotten its groove back. What pundits and impulsive investors didn't realise was that Nintendo was never seeing the bulk of revenue from Pokemon GO. For a few weeks Nintendo stayed silent about how big a cut they were getting, which led traders to assume it was Very Big and buy lots of Nintendo stock. This caused a massive spike in value.
Although Pikachu and crew will always be associated with House Mario, Pokemon actually belongs to a separate entity, The Pokemon Company. Nintendo owns about a third of The Pokemon Company. The rest belongs to two private Japanese companies, Game Freak and Creatures. Pokemon GO's developer, Niantic, is also a privately held company, although Nintendo reportedly holds a stake in it. Factor in the hefty cuts from Apple and Google on their respective app stores and you can see that Pokemon GO isn't making as much money for Nintendo as investors had assumed, despite its status as global phenomenon.
On Friday, Nintendo sent out a warning to stockholders explaining all this: "Because of this accounting scheme, the income reflected on the Company's consolidated business results is limited." Skittish investors started to sell immediately, and by the end of trading in Tokyo on Monday, shares had dropped to ¥23,320 ($295).
Nintendo's still way more valuable than it was at the beginning of July. But the stock market is a volatile thing, often influenced more by guesswork and assumption than it is by actual facts. Maybe more investors should have read the fine print?