An attendee plays a video game on a Nintendo Co. Switch game console during an unveiling event in Tokyo. (Photographer: Kiyoshi Ota/Bloomberg)

Revealed: The Trader Who Made a Massive Short Bet Against Nintendo

(Bloomberg) -- There’s a new villain in the world of Nintendo Co.

Gabriel Plotkin, head of New York hedge fund Melvin Capital Management, has accumulated a $400 million short bet against the Japanese game maker, according to regulatory filings. The former star trader at SAC Capital Advisors accounted for as much as 7 percent of Nintendo’s daily volume in recent weeks, contributing to stock declines since May that have stunned analysts.

Investors have been baffled by the sudden swoon and Plotkin’s position may add to their concerns. 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. Shares fell as much as 27 percent from their peak in May.

“With Nintendo, there were too many longs and now they’ve exited and started shorting the stock as well,” said Atul Goyal, an analyst at Jefferies Group.“The flows have changed.”

Plotkin’s fund was short 1.2 million shares, or about 0.8 percent of Nintendo’s outstanding stock, according to the latest filing with the Tokyo Stock Exchange. It’s the largest such trade against the company since at least 2013, according to Bloomberg data. The hedge fund has been steadily increasing its position, with the latest trade on July 26, ahead of Nintendo’s quarterly earnings announcement on Tuesday.

Plotkin started his firm in December 2014 with the blessing and financial support from Steven A. Cohen, the controversial founder of SAC Capital. In 2015, Plotkin’s first full year in business, Melvin Capital returned 47 percent, putting him at No. 2 on Bloomberg’s global ranking of the top 50 hedge funds with more than $1 billion in assets. It has maintained that strong pace in recent years through bullish bets on Amazon.com Inc. and Netflix Inc.

Melvin Capital, which has about $7 billion in assets, would not explain its thesis for shorting Nintendo, with Plotkin and Chief Operating Officer David Kurd declining multiple requests for comment. The hedge fund employs a "bottom-up, fundamental" process for identifying stocks to buy and short, according to U.S. regulatory filings. It focuses on consumer companies and owned about 70 stocks including Electronic Arts Inc. and Twitter Inc., according to the latest filing in May.

The downward pressure on Nintendo shares has sowed confusion among executives, investors and analysts. The Switch became one of the fastest-selling consoles in history after its release last year, quintupling the company’s annual operating profit. Many analysts were bewildered when shares began dropping sharply in May, leading to the biggest gap in a decade between brokerage targets and the actual stock price. Goyal called the declines “shocking” at the time.

Nintendo shares closed at 37,540 yen Monday, down 8.9 percent for the year.

The chaos peaked in June during the Electronic Entertainment Expo (E3), when shares plunged 11 percent in two days. Analysts pinned it on a poor lineup of Switch titles at the show, but Nintendo executives hit back, blaming analysts for being short-sighted. Regulatory filings show Plotkin increased his short position on both days after E3 and continued short-selling in the following weeks. Melvin Capital accounted for 6.1 percent of volume on June 22 and 7 percent on July 17, according to the filings.

Not all investors are selling, with Nintendo’s largest shareholder Capital Group has used the market rout as an opportunity to increase its position. Shares rallied -- briefly -- after it disclosed the purchases.

It’s not clear how long Plotkin will stick with his short position. Hedge funds tend to make brief bets, in part because borrowing shares for shorting can be expensive over longer periods. On average, Melvin Capital has held stocks for about 8 months, according to all filings since 2014 analyzed by Bloomberg. The analysis did not include stocks it may have bought and then sold in the same quarter and also excluded options. The fund does not disclose how long it holds it short positions for.

Nintendo will report first quarter earnings on Tuesday after the market close. Analysts estimate revenue will rise 21 percent from a year earlier, while operating profit will jump 58 percent.

©2018 Bloomberg L.P.