Nintendo’s Pokemon Go-fueled stock rise just came to an abrupt halt

Too much?
Too much?
Image: Reuters
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Nintendo’s 10-day stock surge came to an abrupt halt today (July 20) after reports surfaced that the company’s overloaded servers were not ready for a Japan launch, and investors and analysts questioned its long-term valuation.

Share prices today opened at 29,170 Japanese yen (about $275), an 8.18% decline from the day before, and then continued to fall during the day, closing 4.86% down from the starting price.

The drop put an end to Nintendo’s over 100% stock rally since July 6.  There are several likely causes for the slowdown.

First, Pokemon Go’s release in Japan has faced unexpected delays. Reports suggested it would be launched today, but after emails from McDonald’s, one of the game’s Japanese sponsors, leaked about the release, it was cancelled. The companies behind Pokemon Go feared the hype would overload the game, TechCrunch reported, citing an anonymous company source.

No concrete release date has been announced, but there are some reports it could be as soon as tomorrow.

Why would the stock be so severely affected by a one-day delay?
Japan is an important market for Pokemon Go, and not just because it is the cuddly characters native land. Japan was for many years the top market for mobile game revenues, until China surpassed it last year.

Japan has gaming might because its residents spend more on games. In 2013, for example, Japanese gamers spent an average of $6.34 on each game they downloaded, compared to $2.52 in the US and $1.13 in China.

It’s quite likely that Japan will be Pokemon Go’s most lucrative market.

But investors wondering whether publisher Niantic’s ability to launch the game there quickly might have pulled out of the stock early.

Another possibility is investors and analysts think it has reached a peak, after Nintendo’s market value jumped over $39 billion.

On July 18, Deutsche Bank changed its rating on the company from “buy” to “hold,” as analysts questioned the company’s valuation against competitors like Activision, which have greater market share in video games. UBS published a research report on July 19 downgrading Nintendo to a “Sell” rating, and questioning whether the company’s massive market cap was justified.

Daniel Ahmad, a games industry analyst from the UK, believes investors are selling ahead of Nintendo’s next earnings report, which happens next week. If the company reveals bad news and investors bail, more of the gains made during Pokemon frenzy could disappear.