A few weeks ago, I wrote about how Pokémon GO could be a $12 billion opportunity for Nintendo (OTCPK:NTDOY). My underlying thesis was based on Surveymonkey's estimate that the Pokémon GO's average revenue per daily user is $0.25, which translates to $6.5m per day in the US, or $200m per month. On an annual basis, this means $2.37b per year. If we also consider Japan and China that could generate twice the gaming revenue as the US, that would be close to $12 billion in revenue. Recent drop in Nintendo prices have raised some concerns that the stock has gone up too fast in such a short time. I agree and believe that the pullback is healthy. However, I also reckon that the Pokémon GO momentum is not stopping and for someone who has collected over 130 Pokémon so far, I believe that there are still a lot of potential for Pokémon GO in attracting advertising revenue.
What investors should be aware of is that there is more to Pokémon GO than just selling virtual coins. In my deep analysis on Gamestop (NYSE:GME) titled "Why GameStop Is A Hidden Value Play" I pointed out that Gamestop could be a hidden value play due to the popularity over mobile augmented reality games such as Pokémon GO where Gamestop's retail locations could transform into Pokestops. We have seen examples where Pokémon GO is helping pizza place and bars to get higher than usual traffic that led to better than expected sales. As for GameStop, sales from its 462 stores saw sales more than doubling after they became Pokémon gyms and improving merchandise sales.
What gives me confidence on more upside to Pokémon GO? Although I believe that in-game revenue will continue to be significant, I believe that advertising revenue from sponsored location where merchants pay developers to advertise inside the game could be the bigger driver in the future. This concept is nothing new because it has already been done in Japan. The launch of Pokémon GO in Japan also featured McDonald's as part of the sponsored location and commentary by McDonald's management in the conference call suggested that sponsored location has gotten off to a great start and this is a good sign that more merchants could pay Nintendo to become a Pokestop inside the game.
Evidence of this potential also recently emerged in Asia, particularly in Hong Kong where shopping malls and parks such as Sun Hung Kai Development, Swire Properties and Ocean Park are considering to cooperate with Pokémon GO so their projects can be featured in the game. In the case with Sun Hung Kai Development, they have already seen double-digit growth in traffic and an 8-10% growth in retail sales during the Pokémon GO event period. The mall operators have set up "Lure Modules" that makes it easier for players to find and catch Pokémon around the shopping centers and give players updates on the locations to keep them inside the mall so they can spend on small items such as food and beverage or spot a retail advertisement that they may have missed earlier.
According to Bloomberg, for brands specifically, Sa Sa, a Hong Kong-based cosmetic retailer, Bossini and Bonjour are said to be potential sponsors of Pokémon GO by sponsor place names, item names and point of interest to drive store traffic. Per Sunwah Kingsway estimates, there are about 1.5 million Pokémon GO players in Hong Kong and retail stores are expected to be beneficiaries of the surge in consumer traffic.
My point is that near-term correction on Nintendo shares does not imply a burst of bubble but rather a healthy pullback on a stock that doubled in a matter of weeks. What I want to highlight is that the advertising revenue from brands inside the game could be very promising for Nintendo.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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