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Gotta Sell Em All

Hundreds of thousands of people around the globe are swept up in “Pokemon Go” fever. This new Nintendo offering powerfully combines nostalgia with augmented reality to create a game that is highly attractive to twenty-somethings.

Naturally, any activity that generates high and instantaneous interest will catch an investor’s eye. The success of the “Candy Crush” game drove King Entertainment’s shares skyward, before a takeover offer eventuated. The Nintendo chart shows that many investor’s learnt from this experience:The Tokyo listed stock ramped higher as investors caught up with the Pokemon go buzz. Note the successive gaps over the previous five trading days as the share price leapt 40%+.

However, this spike is more aggressive than King Entertainment’s jump:

Further, Nintendo is in a different situation. King Entertainment was a struggling software company that released a transforming hit game. Nintendo has an established and reasonably mature business, albeit with terrific scale where sales are high. And Nintendo is worth more than five times the price paid for KE, making it harder to acquire.

All this raises concerns about the recent rally. Nintendo is trading on around 140 x last year’s earnings. Although Pokemon Go is free to download, revenue streams associated with advertising and in-app purchases will boost earnings – but they need to rocket higher to justify current share prices.

I suspect a more likely scenario is the share price will come back to earth as investors work through the real revenue implications – and as the initial burst of enthusiasm for the game fades. For investors holding the stock this may look like a very attractive sell level.

For traders, this is an unstable price that may wing around before finding a balance level. Entry strategies are crucial, as a good entry will allow a trader to maintain a short through the volatility.


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