Who Stands to Find Profit in Pokémon?

Pokémon Go is taking the world (and the markets) by storm. As the app has more daily active users than Twitter and a higher daily engagement rate than Facebook, Snapchat, and Instagram, investors are seeking to capitalize on the app’s success and determine whether the recent surge in valuation is sustainable. The game is a major booster for Nintendo, a company which was thought to be falling behind in the competitive landscape as more gamers are shifting towards mobile devices.

For the uninitiated, Pokémon Go rewards users for exploring their neighborhoods, capturing colorful characters called Pokémon at real-world locations (typically landmarks, local points of interest, or pieces of artwork) with the help of their smartphones. These locations were originally established by the game’s co-developer, Niantic, in their 2013 augmented reality game Ingress.

Let’s take a look at how this craze could impact the markets.

The Drivers and Consequences of Pokémon Go's Success

The chart below highlights Nintendo’s stock price alongside FactSet StreetAccount news alerts related to the company. Notice how the high concentration of stories in the last couple of weeks align with the major price jumps.

More generally, searching for “Pokémon” in FactSet News returns a number of interesting hits, including articles highlighting other companies and stocks that might be impacted by the rise of Pokémon Go. Needham published a report indicating the app may add $3 Billion to Apple’s revenue through the App Store, and McDonald’s Japan stock shot up about 10% on news that it would be distributing Pokémon toys with Happy Meals. 

ETFs and indices of which Nintendo is a constituent stock offer opportunities to gain exposure to Pokémon Go. For example, the iShares MSCI Japan ETF (1.27%), Vanguard FTSE Japan UCITS ETF (1.05%), and the PowerShares S&P International Developed Momentum Portfolio (1.62%) all contain quite a bit of Nintendo stock. We used FactSet’s reference report to help us identify where this was the case.

The Nintendo/Pokémon Ownership Web 

Pokémon Go was developed by The Pokémon Company and Niantic. The Pokémon Company is an equity affiliate of Nintendo, which owns a 32% stake. Niantic is a spinoff of Alphabet and currently VC-backed by Nintendo, The Pokémon Company, and Google, among others. Game Freak and Creatures own the remaining stake in The Pokémon Company, but Nintendo owns 10% of Creatures.

Related: Falling Apple Pulls Down Tech Sector

A deeper look at Niantic shows that its PE/VC Investors report lists Nintendo and The Pokémon Company as two of the Series A1 investors.

Despite the major stock price bump Nintendo has experienced (at one point, it was up about 93% from the game’s July 6 release), the prevailing opinion in the equity research world is that it is unlikely — at least partially due to this particular equity affiliate structure — that Pokémon Go will have a major impact on Nintendo’s bottom line.

Augmented Reality Investment

On top of its ramifications for Nintendo, the Pokémon Go phenomenon signals a larger trend in the private equity/venture capital space: rising investment in augmented reality technology.

Augmented reality is a technology which overlays digital images on the real world via some device. Pokemon Go may be the catalyst needed to get other companies in to the augmented reality pool, and augmented reality development could constitute new investment opportunities as a result.

For example, Google, KKR, Alibaba, and others have invested about $1.4 Billion in Magic Leap, a company building a headset that projects images into users’ eyes so the digital world appears to interact with real life. Microsoft is developing a similar display headset called the HoloLens. 

By screening in FactSet for PE/VC investments in portfolio companies whose business descriptions contain the keywords “augmented reality,” we were able to find 247 private investment rounds in 114 companies by almost 600 different investors since the beginning of 2010. Major names in PE/VC appear on the list, including Sun Capital and Babson Capital Management.

Whether the Pokémon Go craze is a flash-in-the-pan or here to stay, its potential impact on Nintendo’s standing and capacity to bring augmented reality into the mainstream may make it worth a look for investors.