Will Nintendo Continue to Soar Following Pokemon Go's Explosive Success?

By Markets Fool.com

Nintendo's(NASDAQOTH: NTDOY)stock jumped in recent weeks asthe popularity of its augmented-realitymobilegame Pokemon Gohas continued to soar (though it came back to Earth a bit after the company commented on the impact of the game on its earnings).

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In this clip from the Motley Fool Money radio show, Chris Hill, Simon Erickson, Ron Gross, and Jason Moser explain what the game is and why it's so incredibly popular, and point out a few of the most important concerns that investors shouldthinkabout in the midst of all this excitement.

Does the success ofPokemon Gowarrant Nintendo's $10 billion rise in market cap? How soon might we see competitive threats from other companies with beloved franchise characters? Listen in to find out the answers to these questions, and more.

A full transcript follows the video.

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This podcast was recorded on July 15, 2016.

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Chris Hill:Shares ofNintendo are up more than 80% sincelast Friday thanks toPokemonGo,a new game for mobile phones that isstaggeringly popular. Simon Erickson, there are a lot ofpieces to this story. Let's startwith the game itself. Why is this thingsuch a transcendent hit? When youlook at the data in terms of how many people have downloaded it,how many people are playing it,it's off the charts.

Simon Erickson:Fifteen million downloadsin less than two weeks, that's amazing. Andnow they're going to theU.K.Soyou know that number is going to be going farther and farther up. The game isfree to download. The appeal of this, really, is thatit's the first really big cast into the augmented-reality pond, whereyou're actually blending a game that's acolossal waste of time on your smartphone withthe actual real world--

Ron Gross:What a value judgement.

Jason Moser:Ireally appreciate the fact that you got that out there immediately. Notwasting any time.

Erickson:I had to throw that out there early on. But,it combines with the real world,you actually have to go out and follow aGoogleMaps programto actually catch thePokemon. It's no surprise that the game wasdeveloped by the companyNiantic, which was spun out of [Alphabet's]Google. That's the appeal of this.

Hill:Jason,you look at the market cap that has been added to Nintendoin just over a week -- north of $10 billion. Really? For a free game?!Igetthat it's popular, but I'm having a hard time wrapping my head around whether or not this mightpossibly be overvalued.

Moser:That'sa very, very good question,really. I think I tend toagree with you with that sentiment. No, I don't think this game alonejustifies that type of a bump in market cap. But,we see this type of behavior in the market all the time. There's atremendous impact this game has made in a very short period of time. Andthat's terrific, and Nintendo should benefit from that to some degree. But we often see a lot of thatoptimism reflected in stock prices where the stock price is really supposed to bereflecting what's coming next.

I think, really,that's probably what we're seeing, to a degree, here -- not only theoptimism of the successthat this game has seen in such a short time, but also, perhaps, thisassumption that maybe Nintendo has another ace up their sleeve, maybe something else is to come,maybe they'll do something else with this.I would counter that by sayingthatto Simon's point,we've stepped into this a new paradigm with augmented-reality games.This really opens the box, I think,for a lot of other companies out there that do this type of thing to try it, as well.I would expect morecompetition to come to the market from this,and that might not necessarily bode so well for Nintendo.

Gross:Yeah,I would agree with a lot of that. We tend to besomewhat cynical when we see big pops like this,but I think we have to give them credit for really, in a big way,introducing what appears to be a new way to game. We hadvirtual reality in the Oculus Rift, which is a much deeper technology, let's face it. ButI think we have to give them credit for what I see as the most rapidadoption of a game,or really anything, I can remember, maybe ever. I don't remember anythinghittingthe marketplace so fast and so widespread. SoI do think we have to give them credit for that.

Hill:AndSimon, the game itself is free, but within the game, you canspent money, you can make purchases within the app. Nintendo gets a cut of that.Applealso gets a cut of that -- they get a bigger cut than Nintendo does, actually.

Erickson:Which isthe fundamental change in the whole industry, Chris. This is the right move byNintendo. It used to be all about selling the consoles, you paid up front for those,you paid for the games on a per-game basis. But really, the world is changing to mobile gaming.Candy Crush, huge success. Ron,you were talking about, what's thelast big success?Candy Crush, and evenCandy Crush Soda, were two of the top-selling games in America.

It's all about mobile, it's all about these in-app purchases, and I think this is thecorrect move for Nintendo to get involved with that. Theonly thing I'm dubious about, Chris,is that when you look at this by the numbers, Nintendois now selling for 100 times trailing earnings, and 200 times forward-based earnings. They'regoing to have to need to get a really big hit out of this,even if they're only pulling 10% of the revenue from the in-game purchases, to make it worth their while.

Gross:And then,when you add in the risks we see... Forevery article you see talking about how amazing this is, there'sanother article talking about the risks ofpeople walking around with her eyes down,looking at their phone; people in their cars; there'seven been a couple robberies here and there. Somebody'sgoing to get hurt. People have. This is not without a riskas it relates to kids walking around town.

Erickson:I'm going to be watching for you, Ron,when youdownload the game.

Moser:Let's just take this to the next level, then. We know thatActivision Blizzardis the owner of a very populargame for kids out there,Skylanders. It'snot a very big leap to think that Activision Blizzard could justpull a couple of stringsand make a game like this withSkylandershappenimmediately. There are a lot of characters out there that I think the kids really like. Again, yeah, Ron, you're right -- hats off toNintendo for really finding something here. But, again,investing is all about looking forward,and we have to really be thinking about whatNintendo is going to do next with this.

Erickson:On that note, Chris,I think that augmented reality,this opens the door for more games to come in the future.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill has no position in any stocks mentioned. Jason Moser has no position in any stocks mentioned. Ron Gross owns shares of Alphabet (C shares). Simon Erickson has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.