"Hedge Fund Founder Takes $400 Million Short Bet Against Nintendo"


#1

As I understand it (and please correct me if I’m wrong for those who know different), a Short Bet is like betting on the horses - you throw down money that says horse X will do Y. If you’re right and horse X did Y you get paid, if you’re not and horse X did Z then the bookie gets paid.

In this case a hedge fund manger has bet against Nintendo stock to the tune of $400 million which means he believes Nintendo’s stock is going to tank lower than it has ever been - the difference between his bet and the current stock value is actually of interest as well because its one of the largest gaps between actual value and short bet in the the few decades of this kind of trading.

Original article.

The head of New York hedge fund Melvin Capital Management is making a $400 million short bet against Nintendo, according to Bloomberg.

Gabriel Plotkin’s fund was short 1.2 million shares, or about 0.8% of Nintendo’s outstanding stock, according to the latest filing with the Tokyo Stock Exchange. Bloomberg said it’s the largest such trade against the company since at least 2013.

“Investors have been baffled by the sudden swoon and Plotkin’s position may add to their concerns,” Bloomberg’s Yuji Nakamura said. “The stock’s poor performance has dominated coverage in the financial and gaming press, and discussions on social media, raising questions about whether long-term shareholders are losing faith in the outlook for the Switch game console.”

Unless I’m reading it incorrectly and I have completely overestimated how well Nintendo seem to be doing, they don’t seem to be in dire straights. From the article:

Nintendo had an impressive 2017 financially thanks to the launch of the Switch. It sold an estimated 17.79 million units, beating its own prediction of 15 million. The company believes it can sell 20 million more this financial year. Operating profit reportedly rose by 505% to 178 billion yen and revenue was up 116% to 1.06 trillion yen.

The article goes on to mention the drop Nintendo had after the recent E3:

But, the company inexplicably suffered its biggest two-day drop since December 2016 in June during E3, Bloomberg reported. Some analysts blamed it on a poor Switch lineup. Nintendo refuted those claims. Shares have now fallen as much as 27% from their peak in May. Bloomberg said Plotkin increased his short position on both days after E3 and continued short-selling in the following weeks.

Nintendo shares closed at 37,540 yen Monday, down 8.9% for the year. The company will release its first quarter earnings report on Tuesday after the market closes.

From what I’ve read the stock drop was in response to Nintendo pushing back two of their first party games and then not announcing any new first party releases, only third party stuff. I’m not that heavily invested in Nintendo to comment on how true that is but it sounds possible given that Ninty fans show pretty staunch, almost rabid support for them.

On a side note, I found out about this from a mate who I’d just gotten to watch ‘The Big Short’ which is an excellent film about the American housing/global economic crisis based on actual events that I recommend you all watch because its great and pretty funny, here’s a clip:


#2

I get confused about how much of Short Selling could be described as insider trading.

I mean, basically it means the hedgefund is borrowing shares valued at today’s price and selling them at today’s price… but then buying them at a future dates lower price which they are predicting to happen because of future announcements or problems.

It’s how the rich get richer.


#3

Short selling is a fairly simple concept: you borrow a stock, sell the stock, and then buy the stock back to return it to the lender. Short sellers place a bet that the stock they sell will drop in price.

Dont quite understand this


#4

I get that shorting means betting against stocks but I don’t actually understand how the money is made aside from the actual bet - I don’t get why the stock changes hands and is sold, re-bought and then resold back to the original owner unless that part is to make the whole thing not insider trading as @Jester has said.

I know it makes people obscene amounts of money when it works though.

I like Ninty and some of what they do (though I do have some problems with some of what they do/what they’ve done) and wouldn’t want to see them tank - I also can’t understand how they would tank given the talk about the Aladdin’s cave of money they’re sat on.


#5

I think the crucial idea is that you’re selling a stock that you’ve promised to return to someone else (in that weird, nebulous way that stocks work). You’ll still have to fulfill that promise, but you believe that the money you’ve received for selling the stock will be enough to both buy the stock back later and make some profit, because the value has gone down in the meanwhile.

If you lose the bet, the share prices go up and you have to buy stocks at a higher price than you sold them in order to fulfill the promise.


#6

Further to that, I believe the difference between legal short-selling and insider trading is the difference between thinking, through intuition and publicly available knowledge, that a stock will go down in price as opposed to knowing it because you’re connected to the company that’s being valued in some way that gives you more information than everyone else.

In the latter case, whoever you initially sold the stock to has been treated unfairly, because you sold them a stock that you KNEW wasn’t worth what you were selling it for and they couldn’t possibly have known without the same insider connections.

I may not be providing any new insights to anyone, but hey, I enjoy a good finance blather :smiley:


#7

frrom what i under stand of how Nintendo are doing is during the Wii generation they made all of the money like stupid money, then the WiiU was a failure but due to the insane profits they had on the Wii they were fine. Whilst this was happening they had the DS, DSlite, DSi, DSiXL and then the 3DS brands come out and did rely well especially compared to sony who flopped hard with the vita. Then the Switch that launched with a flag ship title that always helps ( zelda ) and mario followed up that Christmas and since then the BIG first party titles have been sparse aside from some remakes of WiiU games and very good 3rd party games. But it has another massive first party game coming soon with smash bros ultimate and that always sells well for them.

I won’t even pretend to understand the finance world to comment on that. but from some one who has every nintendo system since the snes they are doing fine plus they have a new metroid game on the way and a new fire emblem. Also alot of indi devs are bring stuff to the switch so there is alot of interest in there on that side of things


#8

This is what I don’t get, aside from the dip with the WiiU, Ninty don’t at all look like they are in any sort of trouble to make this dude think betting against them is a good idea.

I would have preferred they went with the beefier chip, but the choice to build the Switch around what is essentially a tablet was a bloody good idea (R&D can’t possibly have been even close to PS/XB and their target market will be fairly comfortable and familiar with tablet-like devices) and I can only commend how open they’re being with Indie and 3rd party like you mention - the E3 disappointment will vanish when Smash, Metroid and Star Fox is released like you’ve pointed out so unless this guy knows something that isn’t obvious or public, I’m stuck.


#9

the thing with E3 and Nintendo is that they don’t care about E3.

They do Nintendo direct streams though out the year has one last week with news about the new smash bro game. a poor E3 for Nintendo doesn’t mean much compared to Microsoft and a slightly lesser extent Sony ( the have there on Con then run).

Also it’s worth pointing out Nintendo are now selling cardboard and it’s a big hit so there is that.


#10

That makes this story/this guy’s motives seem even more strange/mysterious: What other company can successfully sell cardboard accessories for their console?!

I’d really love to know what this guy thinks he knows.

Edit: And yeah, I’ve not looked at it like that before but looking back, E3 just isn’t the priority for Ninty like it is for the other two. E3 is life or death to some extent for MS/Sony but Ninty just don’t need it like they do.


#11

also worth remembering it’s only competition in the Asian markets is sony as MS do shit over there


#12

To be fair, you’ve got to keep in mind that while he could just be wrong, investors are taking a broader look than we would as just interested gamers.

For example, if he forsees supply difficulties due to material shortfalls at the contracted producer of one of their hardware components, that could be a problem that would impact their share prices in the short to medium future and that we wouldn’t necessarily anticipate.

Or it could be something like having a lot of liquid assets offshore but due to recent global economic trends their actual value is being impacted (say, because the yen is being strengthened compared to other major market currencies) but they’re unable to repatriate them without incurring heavy tax losses.

That kind of stuff. Boring, but important.