Nintendo's Pokemon success suggests 30,000 yen target price, says Jefferies

Broker Jefferies reiterated its 'buy' rating on Nintendo even after the company's shares leapt 36% over two days on the back of excitement around the roll-out of the Pokémon Go smartphone game.

Jefferies first recommended Nintendo as a value and growth proposition, with the stock changing hands for a bargain 14,000 yen, below that of its King and Supercell acquisitions, while the rapid success of Pokemon Go indicates the Japanese giant could, in the mobile phones market, have found the new games platform it needed for its powerful portfolio of intellectual property, such as Mario Bros and Legend of Zelda.

Pokémon Go, which was launched in just a few countries on Friday but saw immediate global excitement, is "just the beginning" and the "tip of the iceberg", analyst Atul Goyal at the broker wrote, though the mobile app has surged to number-one rank in terms of downloads in less than a day.

"We have always believed Nintendo's IP is powerful and relevant for mobile-platform, but the speed with which this game has raced to top ranks is a tribute to Nintendo IPs popularity and "relevance" in the mobile world," Goyal said, despite some users facing delays and phone issues that have been attributed to server overload.

At current run-rate, he calculated Pokémon can generate circa $2bn in annual revenues, of which Nintendo will take a share from its 33% stake in the games makers Pokemon Company and Niantic, which have made the game downloadable for free but designed it to encourage players to spend money on in-game purchases as they try to catch a weird and wonderful menagerie of Pokémon monsters.

Combined with licensing and distribution fees, Jefferies estimates Nintendo can get 40-50% of the bottom line.

"But the really important questions are different," the analyst declares, such as how much can this game generate; where does Pokemon stack up against Nintendo's possibly even more powerful IP such as Mario; what are the risks of a PR nightmare from Pokemon related accidents; how much did users spend on an average to buy Nintendo products when its games were available on a desirable platform such as Nintendo DS/Wii; how much of that pent-up demand could roll over to Nintendo's mobile games?

With the release of Nintendo's next two games, Animal Crossing and Fire Emblem, in the autumn and launches of more powerful IP to come further ahead, Jefferies has a 30,000-yen price target on the shares based on cash resources and the estimated value of the corporation's IP on mobile.