Top Stories
Top Stories

Game on: Nintendo stock soars on mobile move

Kevin Winter | Getty Images

Shares in Nintendo powered up in Tokyo Wednesday on the news that the gaming company is making its blockbuster games available on smartphones.

"Finally, Nintendo has turned a corner and embraced a huge strategic shift," said Atul Goyal, analyst at global investment bank Jefferies, in a note published on Wednesday.

"[Nintendo's game characters] Mario, Zelda, Pokemon and Donkey Kong on smartphones and tablets will expand its market and profit pool dramatically," he said.

The Japanese console company, which once dominated the gaming market with Wii and DS console titles such as "Diddy Kong Racing" and "Legend of Zelda", Nintendo announced on Tuesday after market close that it had agreed with DeNA, a mobile game platform operator, to put Super Mario and other game characters on to smartphones by the end of this year.

Bids on the stock flooded in and the stock rose by the 21 percent limit, the daily limit set by the Tokyo Stock Exchange, to 17,080 yen ($140.83) on Wednesday – still a long way off the all-time 73,200 yen high it reached in November 2007.

"The news is positive" said Nomura analyst Junko Yamamura. "In view of the company's ample supply of intellectual property…the mobile games business will leverage Nintendo's content," she also said in her note published on Wednesday.

Blow away profits and banging praise

The move to mobile phone games is particularly welcome because Nintendo has failed to come up with a new hit console and has been running operating losses for three years in a row.

In the fiscal year 2015 that will end in March 2016, analysts expect the company to scrape in a profit, but only just: the median operating profit forecast is 29.18 billion yen on sales of 555 billion yen, or an operating profit margin of only one percent, according to Thomson Reuters data.

'Start shorting Nintendo,' says this expert

Game console hardware are loss-leaders and the profit margin on the software, games, is between 20 to 30 percent, compared to between 40 and 50 percent for mobile phone games, according to Nomura's Yamamura.

The operating margin on Nintendo's first two mobile phone games will be 45 percent, on sales of 30 billion yen a year – 60 percent of which will go to Nintendo, estimates Yamamura.

Dreamy prices

The move to mobile was the much awaited catalyst and analysts to upgrade their price targets on Wednesday.

The longer-term growth potential of the mobile business prompted Nomura's Yamamura to nearly quadruple its forecast for Nintendo's operating profit to 37.8 billion yen, and upgrade her price target to 15,700 yen from 11,700 yen.

Some are even more bullish.

Jefferies' Goyal more than doubled his price target, to 30,000 yen form 12,400 yen, and is even more bullish going forward: "If Nintendo executes well, there is potential for earnings before interest, taxes, depreciation and amortization of just under $10 billion and the stock to reclaim its 2007 highs of 73,000 yen," he said.

Nonetheless, Nintentdo still faces a series of challenges: the mobile games' launch is still a long way off and there is little indication on when the new console, the NX, will come to market.

But with hopes running high that the 126 year-old company could be turning a corner, the share price may stay in dreamy territory, Nomura's Yamamura said.

And that is giving others different ideas.

"The 19,500 yen level would be good time to start shorting Nintendo," BGC Securities' Japan Equity sales director Amir Anvarzadeh told CNBC on Wednesday.