The games people play
Despite the company posting quarterly profit that topped estimates, all anyone can talk about is how New York hedge fund Melvin Capital Management is shorting Nintendo, the purveyor of childhood nostalgia.
Last year, the Japanese gamemaker’s Switch system, which can be used at home or on the go, became one of the fastest-selling consoles in history. The firm’s annual profit rose 500%
(yes, you read correctly), after it sold just over 15 million of the consoles.
Then, in May this year, a sell-off began. No-one seemed to know exactly why; analysts and investors were equally baffled. Nintendo’s biggest bull on Wall Street, Jefferies’ Atul Goyal, blamed the drop on traders who rely on technical chart analysis to make investment decisions.
“What is shocking is that recently there has been a lot of good news related to Nintendo. Nevertheless, if chartists are giving a diametrically opposite view, we take this as an opportunity to reassess and review,” he said in a research note.
Part of the mystery has now been solved. The $3.5bn-under-management Melvin Capital hedge fund, founded by Gabriel Plotkin, has been steadily increasing its position, with the latest trade on July 26.
Regulatory filings show that Plotkin has accumulated a $400m short bet against Nintendo. His fund is short 1.2 million shares, or about 0.8% of Nin- As revivals go, Nintendo’s has been one of the more successful in corporate history. In fact, before the short-selling drama, the 130-year-old gaming giant was actually one of Japan’s hottest stocks, the memory of its Wii U console flop long forgotten.
In 2017, its share of the gaming market jumped 9% to 22%.
Of course, the question everyone’s asking is why Melvin Capital is shorting Nintendo, and for how long it will stick with its position. For now, there are no answers.
If this week’s trading update proves anything, though, it’s that the company is holding up pretty well. Operating profit was ¥30.5bn ($274m) in the
June quarter, compared with analysts’ average projection for ¥25.6bn. Nintendo maintained its full-year forecasts for profit, and hardware and software sales.
Fun fact: Nintendo’s original business model was centred around a handmade card game called Hanafuda. And if you’re wondering about the name, it’s widely believed to come from the Japanese “Nintendou”, roughly translated as “nin”, which means “entrusted”, and “ten-dou”, which means “heaven”. So, basically, it’s “leave luck to heaven”.
Goyal last week slashed his price target to ¥64,200 from ¥71,200, citing lower expectations for the number of Switch consoles the Kyoto-based firm will sell this year. Nintendo’s stock is currently at about ¥40,992. Still, Goyal maintained a strong “buy” rating on the stock.
It turns out his concerns aren’t totally unfounded. This week’s numbers show that the company sold 1.88 million Switch consoles in the June quarter, which was slightly lower than some market players had expected. Deutsche Bank had previously forecast 2.5 million sales, while Media Create put the figure closer to 2.1 million.
It’s far from game over for Nintendo. and more about how it maintains momentum.
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