TOKYO • Nintendo posted its worst drop in 26 years after it poured cold water on the notion that the explosive popularity of Pokemon Go would translate into steady profits. Unfortunately for investors, the worst may be yet to come.
The company is still valued at 109 times projected net income even after Monday's plunge, or more than six times the average for the Nikkei 225 Index. It has already said it does not expect Pokemon Go will yield enough profit to increase its earnings outlook for the fiscal year.
Nintendo, scheduled to report first-quarter results today, would have to deliver an annual net income of about 200 billion yen (S$2.6 billion) to justify its current market value based on the earnings multiples of Japan's blue chips.
But it is forecasting only 35 billion yen this year, and analysts are projecting the number will be about 30 billion yen.
The last time Nintendo showed it could earn the kind of income merited by its current market capitalisation was in 2009 when the Wii and DS game systems were both chart-topping hits and profit peaked at 279 billion yen.
"Dream on if you think they'll hit that again," said Mr Amir Anvarzadeh, head of Japanese equity sales at BGC Partners in Singapore.
It is also important to note that Pokemon Go made its debut after the latest quarter ended and will not have a measurable impact on the results.
Nintendo is projected to show a net loss of 8.9 billion yen for the period as a stronger yen took a bite out of earnings overseas.
When the company reports its results, the focus for investors will be whether the game's success will deliver enough lift to boost its profit forecast. Last Friday, hours after its Japan debut, Nintendo said its financial impact will be "limited" and that the annual outlook will not be adjusted, triggering Monday's share slide.
The challenge now will be convincing investors the success of Pokemon Go can be a revenue-generating model for as-yet-unreleased mobile games, especially those that feature its popular Super Mario and Zelda characters.
One reason the benefits from Pokemon Go are hard to quantify is the lack of clarity over how revenue is shared between the game's producers - Niantic, Pokemon and Nintendo.
San Francisco-based Niantic, the app's developer, collects proceeds from in-app purchases and pays about 30 per cent to Apple and Google for selling through their app stores. Nintendo is an investor in Niantic and Pokemon, while Google also has a stake in Niantic, which used to be part of the search giant.
All told, roughly 13 per cent of Pokemon Go sales should flow to Nintendo, according to an estimate by Mr David Gibson, analyst at Macquarie Securities in Tokyo.