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Nintendo leaps 25% on Pokemon Go but the hurdle to killer profits is high

Nintendo shares in Japan surged on hopes that the new Pokémon Go app would give the company's mobile gaming business a serious boost.

The stock closed up 24.52 percent on Monday at 20,260 yen ($199.70) per share; this followed Friday's gains of some 8.9 percent. Reuters reported that the company had added $7.5 billion to its market value in the past two sessions, while volume on Monday was at an October 2015 high.

David Gibson, an analyst with Macquarie Capital Securities in Japan, told CNBC's "Street Signs" that Friday's rally in Nintendo stock was all about the app's chart-topping performance in the U.S., while Monday's rally was "all about anticipating a very strong launch in Japan any day now."

The app was rolled out on July 6 and is currently available in the U.S., where it's dominating the list of top free apps on the App Store, as well as in Australia and New Zealand. It is expected to be released in Japan soon.

Pokémon Go uses augmented reality technology to allow users to catch virtual Pokémon characters in the gamers' real-life surroundings using their smartphone screens, as well as battle other Pokémon characters.

While the game appeared to have hit a mainly positive note among users, analysts had a more nuanced view of what this would mean for Nintendo's earnings.

Mia Nagasaka, an equity analyst with Morgan Stanley MUFG Securities, said in a note that for Pokémon Go to have a meaningful impact Nintendo's profits, the game needed to hit a minimum of 15 billion to 20 billion yen ($140 million to $196 million) turnover per month.

Currently, the game is freely available for download on the App Store and on Google Play but offers in-app purchases for additional items and power-ups.

Nagasaka added that the estimated daily turnover for Pokémon Go on the first day was around 400 million to 500 million yen ($3.9 million to $4.9 million), so in order to give Nintendo a serious leg up earnings-wise, the app needed to be consistently at the top position for sales on app stores.

Citing external data from SensorTower, Nagasaka explained the total monthly turnover from U.S. iOS and Android platforms for popular apps were near that turnover range. For example, she said, Game of War was the top app in June and brought in about 400 million to 500 million yen a day, with an estimated monthly turnover of 14 billion yen.

The number two app for June, Mobile Strike, had an estimated 10 billion yen monthly turnover, after bringing in about 300 million to 400 million yen daily.

"If [Pokémon Go] holds on to the top spot for sales, like other top-ranking titles, we would assume that monthly turnover reaches 10 billion yen or higher, but given particular characteristics of apps, at this point, we cannot comment with high certainty on [its] sustainability," she added.

Macquarie's Gibson and Aya Haruyama, however, previously said in a note that Pokémon Go had better-than-expected monetization opportunities.

"As users build their Pokémon inventory, spending money becomes needed to store, train, hatch and battle," Gibson and Haruyama said, adding that in-app spending in Australia, for example, was being driven by the large number of users rather than fewer but bigger spenders.

The game was jointly developed by game developing company Niantic and the Pokémon Company, with Nintendo as a partner.

Nintendo's foray into the lucrative mobile gaming space came earlier this year, with the release of its first mobile app, Miitomo, which racked up a million users in three days.

Over the past few years, the company has been hurt by the rise of smartphones because many gamers switched away from Nintendo consoles to cheaper, and often free, mobile alternatives.

Nintendo's resistance to mobile gaming was in part to protect its legacy console business, but the storied gaming company yielded in March 2015, striking a a partnership with mobile firm DeNA to push into smartphone apps and games.

Reports said the company has promised four more smartphone games in the financial year to end-March 2017 and has said it expected mobile gaming to help boost annual operating profit by a third to 45 billion yen. Nintendo also plans to release its next console globally in March 2017, according to reports.

Morgan Stanley MUFG Securities analyst Nagasaka said it was likely the Pokémon Company, in which Nintendo owns a minority stake, was operating under an independent strategy from Nintendo in the app business. The Pokémon Company was already running apps before Nintendo's foray into the space.

"Hence, we do not think success of Pokémon Go relates directly to the collaborative apps with DeNA, or Nintendo's core business strategy," she said.

Unexpected hiccup

Meanwhile, the game may have repercussions neither Nintendo nor analysts' foresaw. NBC reported that four people had been arrested in Missouri for multiple armed robberies in which they appeared to have used the app to lure potential victims.

NBC reported the suspects added "beacons" to a "PokéStop," allowing them to attract Pokemon Go players to a specific area.

"If you use this app (or other similar type apps) or have children that do we ask you to please use caution when alerting strangers of your future location," police said, according to the NBC report.

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