Warren Buffet…Mark Zuckerberg…Elon Musk…Pikachu. One of these things is not like the others…right? Not so fast. Each of these individuals has created significant value for shareholders of certain companies making Pikachu and Pokémon more like Warren Buffet than anyone ever thought imaginable.
Just how much value has the Pokémon GO app created in two weeks? A lot would be a massive understatement.
Nintendo’s market capitalization more than doubled at one point from about $20 billion to more than $40 billion in the weeks following the game’s release (it has since decreased somewhat). And Nintendo only owns an (undisclosed) percentage of Niantic Inc., the privately held developer and distributor of the game. Although Nintendo also owns a 32% stake in Pokémon Co. (which controls the merchandising of Pokémon characters) and Pokémon Co. owns a piece of Niantic as well.
How does one game create so much value? If you step back to valuation 101, you will remember that value is often determined as the present value of all future cash flows generated by an asset or business. So, investors must believe that Pokémon GO is going to create additional cash flows to Nintendo of more than $20 billion (in today’s dollars). How is that possible? Consider the potential revenue sources:
- In-game purchases – While it is probably too early to know how much cash in-game purchases will generate over the long-term, there have been reports of it generating $1.6 million a day. While that’s certainly not anything to sneeze at, it sure does not seem to be worth $20 billion.
- Accessories – You have probably read all the stories about accidents caused by Pokémon GO players running into people/cars/etc. while their heads are buried in their phones. Well, there are already plans to create devices that allow for game play without the need for constant phone gazing. I have not seen any estimates of potential revenue from this source, but it is hard to imagine it being worth $20 billion.
- Merchandising – Major pop-culture trends create an opportunity to sell related merchandise. While potentially lucrative, this does not seem to be a $20 billion opportunity.
- Advertising – Now here is where most people expect Pokémon GO to generate the most revenue. Niantic’s CEO has stated that the game will make money by charging retailers for the right to become sponsored Pokémon GO locations, which could drive significant business to these retailers. That, along with other, more traditional in-game advertising opportunities, could create massive revenue streams. One website did an analysis that estimated potential advertising revenue for Pokémon GO could be as much as $16 billion a year. Now, that estimate may be overly optimistic and obviously does not consider the costs that will be incurred to generate that revenue. However, when you start talking those kinds of numbers, you can see how Nintendo can add $20 billion of market value in less than two weeks, even with just a partial ownership interest in the game.
So, before you get upset the next time a teenager playing Pokémon GO runs into you, remind yourself that, if you are lucky, this teenager may be helping to grow your stock portfolio and fund your retirement. Dark cloud, silver lining?
Contact us if you need assistance with the valuation of your business (Pokémon GO or non-Pokémon GO related) and visit our Business Advisors page to learn more about the other business advisory services that we offer.