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

Nintendo's (NTDOY -0.41%) stock jumped in recent weeks as the popularity of its augmented-reality mobile game Pokemon Go has continued to soar (though it came back to Earth a bit after the company commented on the impact of the game on its earnings).

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 should think about in the midst of all this excitement.  
 
Does the success of Pokemon Go warrant 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.

This podcast was recorded on July 15, 2016.

Chris Hill: Shares of Nintendo are up more than 80% since last Friday thanks to Pokemon Go, a new game for mobile phones that is staggeringly popular. Simon Erickson, there are a lot of pieces to this story. Let's start with the game itself. Why is this thing such a transcendent hit? When you look 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 downloads in less than two weeks, that's amazing. And now they're going to the U.K. So you know that number is going to be going farther and farther up. The game is free to download. The appeal of this, really, is that it's the first really big cast into the augmented-reality pond, where you're actually blending a game that's a colossal waste of time on your smartphone with the actual real world -- 
 
Ron Gross: What a value judgement. 
 
Jason Moser: I really appreciate the fact that you got that out there immediately. Not wasting 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 a Google Maps program to actually catch the Pokemon. It's no surprise that the game was developed by the company Niantic, 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 Nintendo in just over a week -- north of $10 billion. Really? For a free game?! I get that it's popular, but I'm having a hard time wrapping my head around whether or not this might possibly be overvalued. 
 
Moser: That's a very, very good question, really. I think I tend to agree with you with that sentiment. No, I don't think this game alone justifies that type of a bump in market cap. But, we see this type of behavior in the market all the time. There's a tremendous impact this game has made in a very short period of time. And that's terrific, and Nintendo should benefit from that to some degree. But we often see a lot of that optimism reflected in stock prices where the stock price is really supposed to be reflecting what's coming next. 
 
I think, really, that's probably what we're seeing, to a degree, here -- not only the optimism of the success that this game has seen in such a short time, but also, perhaps, this assumption 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 saying that to 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 more competition 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 be somewhat 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 had virtual reality in the Oculus Rift, which is a much deeper technology, let's face it. But I think we have to give them credit for what I see as the most rapid adoption of a game, or really anything, I can remember, maybe ever. I don't remember anything hitting the marketplace so fast and so widespread. So I do think we have to give them credit for that. 
 
Hill: And Simon, the game itself is free, but within the game, you can spent money, you can make purchases within the app. Nintendo gets a cut of that. Apple also gets a cut of that -- they get a bigger cut than Nintendo does, actually. 
 
Erickson: Which is the fundamental change in the whole industry, Chris. This is the right move by Nintendo. 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 the last big success? Candy Crush, and even Candy 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 the correct move for Nintendo to get involved with that. The only thing I'm dubious about, Chris, is that when you look at this by the numbers, Nintendo is now selling for 100 times trailing earnings, and 200 times forward-based earnings. They're going 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... For every article you see talking about how amazing this is, there's another article talking about the risks of people walking around with her eyes down, looking at their phone; people in their cars; there's even been a couple robberies here and there. Somebody's going to get hurt. People have. This is not without a risk as it relates to kids walking around town. 
 
Erickson: I'm going to be watching for you, Ron, when you download the game. 
 
Moser: Let's just take this to the next level, then. We know that Activision Blizzard is the owner of a very popular game for kids out there, Skylanders. It's not a very big leap to think that Activision Blizzard could just pull a couple of strings and make a game like this with Skylanders happen immediately. There are a lot of characters out there that I think the kids really like. Again, yeah, Ron, you're right -- hats off to Nintendo for really finding something here. But, again, investing is all about looking forward, and we have to really be thinking about what Nintendo 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.