Investor who’s been right about Nintendo stock predicts what’s next

Josh Kennedy of Sonian Capital bet on Nintendo at just the right time. Back in February, he told Yahoo Finance about his conviction long position on the stock. Just in the past two weeks since the launch of the addictive smartphone game “Pokémon Go,” shares have more than doubled.

When we spoke in February, Kennedy said he expected big things to come in the year ahead.

“They don’t have a mobile offering. They’ve taken steps to address this. They have a wonderful set of assets in terms of the stable of characters, the intellectual property they have. ‘Super Mario,’ ‘Legend of Zelda,’ ‘Pokémon’ … this is a huge advantage for Nintendo in terms of building a mobile audience.”

Nintendo was Sonian’s Capital’s largest position, over 10% of the portfolio, going into the launch of “Pokémon Go.” In a phone interview, Kennedy said his firm is already having the best month since its inception in 2007.

“It has been quite a week or two,” he told Yahoo Finance. “Nintendo was our biggest position, so we have certainly capitalized. Glad we got this right, but have to admit it feels pretty lucky, as well. I never thought ‘Pokémon Go’ would be such a global phenomenon.”

While the firm has trimmed the investment to control the size in the context of the overall portfolio, Kennedy says upside remains.

Nintendo could go even higher

Kennedy pointed to a number of reasons why Nintendo could surge even more.

“It’s hard to make a case for it on earnings right now — it’s going to look expensive on earnings,” Kennedy said. “But key is to look at the deals being done in mobile gaming.”

Activision (ATVI) bought King Digital — primarily for its “Candy Crush” game — for $6 billion in 2015. And Tencent acquired Supercell for $10 billion last month. Meanwhile, Nintendo has a market cap of about $35 billion. Kennedy says the company is really worth at least six times a Supercell purchase, given its strong portfolio.

Kennedy does say that some more upside will come from the “Pokémon Go” franchise itself. For one thing, the game has yet to launch in Japan, where McDonald’s (MCD) will sponsor it. Moreover, in-app purchases — including equipment to catch monsters — will boost earnings per share.

But he does think some of the excitement will wear off, and that there are limitations to how much the game could boost direct earnings per share. That’s because it’s free to play and because Apple (AAPL) and Google (GOOGL) each take a cut, along with the game’s creator, Niantic.

But, he added, Nintendo’s success and prospects are reminiscent of what Disney (DIS) has done with Marvel and Pixar characters.

“When it comes to monetizing characters, games are more profitable than movies and toys. But Nintendo is waking up to the power of its brands,” Kennedy said. And the company continues to develop its characters.

Nintendo is working with Universal Studios to open a theme park in Osaka, Japan before the 2020 Tokyo Summer Olympics. Meanwhile, the Hollywood film success of privately held Angry Birds could be a reference point for Nintendo movie deals ahead, he said.

“There’s a huge third-party marketing that hasn’t even been explored yet,” Kennedy said.

More importantly, Kennedy said, the “Pokémon” surge shows the company is serious about mobile and has strong brands.

“Most importantly, this phenomenon reminds people that Nintendo has these wonderful properties like ‘Pokémon’ that they can turn into really good products and that Nintendo is really good at reinventing the rules of what makes a video game fun. I think Nintendo is a really the most unique and attractive player in what is a really attractive space,” he said.

The Pokémon craze

Kennedy said that while he has viewed Nintendo as a strong value play ever since the end of 2015, the specific success of the “Pokémon Go” game is nothing that even he could have anticipated.

“I don’t think expectations for this game were actually that high,” he said.

The game‚ which was developed in collaboration with Niantic for the geo-based component, had a precedent called Ingress that hadn’t been that popular, he explained.

While the trailer for the game that was initially released on YouTube six months ago garnered 20 million views, Kennedy said it wasn’t seen as something that would be a big driver.

“The success of the game and the stock reaction reflects the strength of the characters and franchise,” Kennedy said.

Nintendo has invested heavily over the years in the stories behind its characters, Kennedy added. Many people first got to know those characters 20 years ago as kids, and now they’re 30-year-old smartphone owners who want to revisit the Pokémon of their youth.

“The plot of Pokémon is a subculture. You can actually act out the story. It’s what all these 30-year-old men that were 10-year-old boys wanted to do,” he said.

Kennedy added: “This is confirmation that what will work in mobile gaming is installed fan bases. Whatever format wins going forward, people are connected to the characters.”

What now?

Kennedy says that Nintendo will continue to have big news in the coming year, with four games rolling out by March 2017. The company will also be introducing a new console.

That said, Kennedy said that the stock will probably correct back to levels between before “Pokémon Go” and now.

“It if does correct, that’s a big opportunity,” Kennedy said. “They will continue to show how important a player they are.”

Nicole Sinclair is markets correspondent for Yahoo Finance.

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