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Hedge Fund that Bet Against Nintendo Takes a $25 Million Paper Loss

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

If you regularly keep up with the Wccftech.com finance column, you may remember reading an interesting story about an up and coming Wall Street hedge fund manager, Gabriel Plotkin, who steered his firm Melvin Capital into a $400 million short bet against Nintendo. By borrowing and selling $400 million worth of Nintendo shares (TYO:7974), Melvin Capital would then go and buy the stock back after a drop in price, netting a nice profit in return.

However, that plan has appeared to have backfired, at least for the time being. Nintendo reported a very strong quarter as we reported on just yesterday, and today Nintendo stock soared over 7 percent at its peak before relaxing slightly to 6.4 percent on the day.

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Melvin Capital suffers a potential $25 million dollar loss in a single day after Nintendo stock surges

Given that we know Plotkin's short position is roughly $400 million dollars, a 6.4% drop yields a roughly $25.6 million drop in value. This may not be a huge dent for a fund that manages over $7 billion in total assets, but it's still a tangible and very visible miscalculation for the fund. Given that short (bearish) positions account for 2.5% of Nintendo's total outstanding stock, Melvin Capital accounts for a third of the world's Nintendo bears, that is, a third of the total value bet against the company comes from the same hedge fund.

We must give the disclaimer that purchases and sales of stock are only made public after the fact, so Plotkin's position may very well have been lessened by some recent sales. However public trade information shows no such huge volumes traded ahead of the Kyoto-based gamemaker's earnings yesterday, so its very likely Melvin Capital did, in fact, take a $25+ million dollar paper loss.

Melvin Capital hasn't ever gone on record publicly stating why they seem to think Nintendo is so overvalued, however, peers in the financial analyst industry seem to think the Switch is running out of steam and have also cited Nintendo's slow and weak ramp of its online multiplayer platform.

Of somewhat interesting note Plotkin and other hedge fund managers have recently been very interested in microtransactions and companies taking advantage of them. Nintendo has received flack for not capitalizing on microtransactions while companies like Electronic Arts have made it their primary business model. Melvin Capital, has an almost $300 million long position in EA (NASDAQ:EA).

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Unfortunately for them, EA prices have slid almost 20% in the last week after a disappointing earnings statement. If Melvin Capital hadn't divested any shares ahead of earnings, their loss for this would be $60 million itself.