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Pokemon Go: Not a Game Changer for Investors

Jul 21, 2016

In this issue:
» SME IPOs cashing in on the frenzy
» One positive fallout of Brexit on emerging market stocks
» ...and more!
00:00
Rahul Shah, Co-Head of Research

Pokemon has taken the gaming world by storm once again. This is nearly 21 years after Nintendo released the first video game. And now Pokemon Go is the most popular smartphone game in history.

Pokemon's popularity isn't the only thing surging. Co-creator Nintendo's stock price has taken off like a rocket. The firm's market capitalisation has more than doubled in seven trading sessions flat. For perspective, Nintendo is now more valuable than its archrival, consumer electronics giant Sony Corp.

But is such a huge leap of faith in the future of Nintendo justified? Should investors corner as many shares as they can get no matter the price?

Imagine you are the CEO of a company. You're a significant player, but the industry is very competitive. Most years, you barely earn enough to cover all your costs (including the cost of capital).

Then one fine day, a revolutionary new equipment comes into the market. Its productivity is unlike anything the industry has seen before. It has the potential to cut your labour costs 50%. Your operations and finance team is already out with rosy projections. They tell you all you need to do is invest in a few of these beauties and your profits and return on capital will never be the same. They persuade you to take the plunge. But you might be in for a rude shock...

The new equipment could certainly help you rake in the money...for a year or two. No sooner than your competitors get a whiff, they too invest in the new equipment, all at once. And guess what - they cut their prices. They'd rather pass the savings onto the end users, who command a significant clout in the market. You're forced to follow suit, and it's back to square one.

Now, what we've just described, the first-mover advantage, is often confused with long-term competitive advantage. The first-mover advantage in the case of new equipment isn't a game changer if your competition can easily follow suit. Because eventually they will. The advantage is short-lived.

Long-term competitive advantage, on the other hand, creates an entry barrier. This barrier makes it difficult for the competitor to copy, which helps preserve the high profitability and return on capital the move brings about.

How does all this concern Pokemon Go? Well, the success of the game seems to stem more from a first-mover advantage than a long-term competitive advantage.

A big reason Pokemon Go is so successful is because it's the first big attempt at a concept known as augmented reality. While novel, the technology isn't out of bounds for competitors. Competition will surely arise, and all the rosy projections currently driving Nintendo shares could come to naught. And that's why we believe making a beeline for them, especially at current valuations, could be fraught with risks.

In fact, as per some back of the envelope calculations, Nintendo's share price jump only makes sense if the app is downloaded by every second person on planet Earth.

With any new advancement, we suggest you always assess whether the benefit is a first-mover or a long-term advantage.

Do you think Pokemon Go is simply a fad and a first-mover advantage that will bring no real long-term benefits to its creators? Let us know your comments or share your views in the Equitymaster Club.

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------------------------------
02:35

Just yesterday as part of the premium edition of The 5 Minute WrapUp, we wrote to you about the sharp rise in Indian markets over the last few months. This, despite Brexit referendum ending with a negative outcome. So, what gives?

A recent survey of global fund managers by Bank of America Merrill Lynch gives a clue. It points out that two thirds of such investors expect additional monetary easing from the Bank of Japan. Further, 39% of fund managers expect a major central bank to announce a policy of 'helicopter money' over the next year or so.

But that's not all that is driving the markets. It seems Brexit has had another effect too. It has driven such investors away from European stocks and towards US and emerging market stocks. Today's chart of the day illustrates how this trend has played out over the last year.

Brexit Drives Global Fund Managers towards Emerging Markets


03:35

Talking of rising markets, a very predictable side-effect of such markets is back - an increasingly buoyant initial public offering (IPO) market. But as per a report in daily Business Line, this is not restricted to only large mainstream IPOs. Share sales of smaller companies on the dedicated SME (Small and Medium Enterprises) segments of stock exchanges are also seeing a lot of action.

All the companies that have listed here since April - 13 in all - have been oversubscribed. Further, eight of these are now above their IPO price. Rising markets are an IPO's best friend indeed.

03:56

You've heard about Sensex 40,000 from us.

We have been writing about it very regularly in The 5 Minute Wrapup and Research Digest.

We did not pull that number out of a hat. Rather it came after constantly tracking the long term performance of hundreds of listed companies over all these years. Our research has revealed some key reasons the 70% earnings upside in Sensex can be for real.

Investing in the best businesses before their earnings surge becomes evident in financial performance gives an edge both in terms of margin of safety and return potential.

Make no mistake. Just like stock prices, corporate profits are never linear. There will be temporary hiccups on the way up. But the most robust businesses and safest stocks will outshine their past track record in the years to come.

The StockSelect team has released their special report - Sensex 40,000: 4 Stocks to Profit from the Coming Stock Market Wave.

These are businesses that not only offer comfort in terms of fundamentals and management quality, but are also the ones that we believe will capture the earnings growth opportunity faster than others. And the upside in their earnings potential is so visible that most macro headwinds will hardly impact them.

04:26

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04:46

In the meanwhile, stock markets were trading on the weaker side today. At the time of writing, the BSE Sensex was trading lower by 90 points with power and banking stock leading the declines.

04:50 Today's investment mantra

"Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

Today's Premium Edition.

Does GST Influence Your Stock Picking?

GST is just a reform and is unlikely to change bad or average business fundamentals to good.
Read On...Get Access

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