Nintendo's surge on China entry prospects has not deterred short bets by hedge funds

Nintendo Co. shares have surged this year thanks to a stellar games line-up and potential entry into China. But the hedge funds betting against the company aren’t going away.

Nintendo’s stock has rallied 27 per cent this year, the best start since 2015. Still, short sales, or bets the stock will fall, are more than double their level a year ago. Hedge funds even added to those positions last Friday – the day Nintendo shares rallied 15 per cent as China gave a nod to Switch game sales in the country.

The clash raises the stakes for Thursday, when rookie President Shuntaro Furukawa will unveil financial results for the last financial year and guidance for the coming one. With short sellers betting against him and analysts expecting more growth, Furukawa faces pressure to meet estimates while avoiding last year’s mistake of overselling his prospects.

“Nintendo understands better than anyone how critical it is to maintain the current momentum,” said Takao Suzuki, an analyst at Daiwa Securities Group Inc. “Although there’s uncertainty over the new hardware and the China launch, we should expect guidance for Switch shipments to keep growing. An outlook for negative growth would be a disaster.”

Short interest rose to 1.8 per cent of outstanding shares on Friday, from 1.7 per cent the prior day, according to IHS Markit. That compares with 0.7 per cent a year ago, before hedge funds including Melvin Capital Management began aggressively shorting the stock.

“The people who are short are disappointed the platform did not do better last year, when it was supposed to put up some really big numbers,” said Amir Anvarzadeh, a market strategist at Asymmetric Advisors Pte, which advises hedge funds. “Nintendo will continue to release beautiful quirky games like Labo virtual reality, but we just don’t think the Switch will expand Nintendo’s market share in gaming.”