There’s been much talk about Nintendo suddenly creating an enormous amount of value for itself with the release of Pokémon Go, perhaps one of the most successful game launches of all time.
Following Pokémon Go, Nintendo’s market valuation soared to more than $40 billion, passing Sony and quickly becoming one of the most valuable gaming companies in the world. This is a pretty amazing rise, but in the reference frame of the rest of the industry it could also signal a peculiar shift in mentality for how gaming companies are valued. Nintendo, compared to other publishers, is suddenly not being valued similarly against its revenue projections for the next year similar to other companies.
This is really fascinating. If you compare it to other publishers, Nintendo is trading way ahead of what its projections are for 2017 that it set before the release of Pokémon Go for the industry. Nintendo’s value doubled since the release of Pokémon Go, and, prior to that, it was trading at a position that was even weaker than some other publishers and game makers in the industry.
So, there are two ways to look at this: Nintendo, the publisher, and Nintendo, the hardware maker. Traditionally, Nintendo has fallen somewhere in between, with an array of very strong first-party and published content. That content helps Nintendo sell more hardware units. The Wii was a classic example of this — the entry-level content, whether for hardcore gamers (The Legend of Zelda: Twilight Princess) or casual gamers (Wii Sports) was more than enough to produce a very large initial install base.
For FY2017, Nintendo is projecting sales of ¥500 billion, or around $4.7 billion. Given its current $40 billion-ish market cap, that amounts to around we’ll say 8.6 times next year’s revenue. At that same revenue projection against its market cap prior to Pokémon Go, it would only be trading at something around 4 times next year’s revenue. This, alone, is kind of incredible.
Now let’s take a look at a couple of other publishers to put it in perspective:
Electronic Arts: $23 billion market cap, $4.9 billion projected next fiscal year’s revenue (~4.7x next year’s revenue)
Activision-Blizzard: $30.5 billion market cap, $6.275 billion projected next fiscal year’s revenue (~4.9x next year’s revenue)
For King.com, prior to Activision-Blizzard’s acquisition, let’s roll back the clock a bit to when it went public. In August 2014, the company revised its fiscal year’s guidance to $2.25 billion, and was trading at around $14 following its lowered guidance, giving it a $4.4 billion valuation (a little less than 2x next year’s revenue)
Take Two: $3.44 billion market cap, $1.5 billion-$1.6 billion projected next year’s fiscal revenue (~2.3x next year’s revenue)
Ubisoft: $4.22 billion market cap, $1.9 billion projected next fiscal year’s revenue (~2.2x next year’s revenue). (Note: this one’s not traded in the U.S.)
Sony: $38.5 billion market cap, $7.3 billion projected next fiscal year’s revenue (~5.3x next year’s revenue)
And so on, and so forth. To be sure, not all publishers are made equal, but this is just a little bit of perspective.
So we have something really kind of incredible happening here. Nintendo is being valued way ahead of two of the largest publishers in the industry, in addition to its probably closest comparable, Sony. There’s surely a hype factor built into the company now given Pokémon Go’s success, but this could also signal that investors are expecting a stellar outcome for Pokémon Go itself. In order to even bring that multiple back into the ballpark of other publishers (or even Sony), Pokémon Go would have to contribute a meaningful percentage of Nintendo’s current revenue for 2017 — and it doesn’t even own all of the game.
That wouldn’t be unprecedented. If you look at King.com’s performance at the height, and gave a little leeway that the lion’s share of its revenue came from Candy Crush Saga, it would be contributing a meaningful amount of revenue to what could be Nintendo’s next year’s revenue. But if Nintendo were to be priced logically at the level of, say, Sony or Activision-Blizzard, Pokémon Go barring other releases would have to deliver an eye-popping amount of revenue in the several billions of dollars to Nintendo alone — and that’s even after revenue being divvied up amongst the rest, like Niantic and Apple. Clearly, investors are expecting much more than just Pokémon Go.
Now looking at Nintendo, the game- and hardware-maker, things get even more interesting. If Nintendo stays at this current rate, it would appear that even a baked-in fear of cannibalization of hardware sales is getting mitigated by the future potential of its game development on smartphones. So you now have a company with incredibly strong first-party content, publishing on multiple platforms including its own hardware — which, even if potentially niche, still represents an additional business.
This means there’s also another factor likely being built into this rise: a diversification of revenue streams. Apple is also facing this dilemma — its smartphone sales are sagging, and it needs to find additional avenues for growth like services and new devices. Nintendo, with the success of Pokémon Go, is showing there’s a lot of pent-up demand that it can unlock as a whole new stream of revenue that could come from smartphones. If its hardware business starts sagging, whether from cannibalization or a weak launch/bad hardware, it can point investors to its strong software revenue and keep them happy.
Activision-Blizzard and EA both have a collection of brands that more than give them a heads up on the entirety of the game publishing market, whether that’s Madden or StarCraft. But it looks to be absolutely dwarfed by the sheer power of the brands and developmental capabilities of Nintendo — and its potential partners, like Niantic — that could be applied to smartphones. The potential for games like this, despite the possibility of hardware cannibalization, appears to be in the billions of revenue, not millions or hundreds of millions.
In addition to the game having, fundamentally, really great design, it just shows that there is such enormous overhead for this one Pokémon game alone — through partnerships, existing or future monetization — that it’s enough to really excite investors for the future of Nintendo’s presence on smartphones. The game hasn’t even completed its international rollout and is littered with bugs and server issues, and yet still it’s been enough to double the market value for Nintendo.
Nintendo is still shipping tons of consoles despite the Wii U being a disappointment compared to the PlayStation 4 and Xbox One. Consoles offer a completely different playing experience, and it’s not like they can’t coexist with game development on smartphones. The games will just have a different feel and experience — Pokémon Go really wouldn’t work on a 3DS, but it works great on a smartphone. Likewise, Mario Maker might not do well on a smartphone, but there are probably a bunch of very smart developers thinking hard about what a Mario experience would look like on a smartphone.
All this comes back to a new, revived story of growth. Nintendo for a long time has been a holdout in keeping its brands off smartphones, and it’s suffered as a consequence of that. The success of the Wii wasn’t followed up and it simply wasn’t getting its first-party content into enough hands, leading to a perception of decline of the overall brand. And if recent moves have shown us anything, investors love growth and are now salivating over the potential of Nintendo’s properties making their way into the hands of billions of smartphone owners.