Pokemon Go has proved a surprise smash hit for Nintendo (OTCPK:NTDOY), but the surge seen in its shares has attracted plenty of scepticism, with short sellers piling in.
Augmented reality has long been mooted as a future growth driver for the video games industry, but a breakthrough hit demonstrating the technology's commercial potential proved fleeting prior to last week's launch of the Pokemon Go. The viral hit, which is on track to overtake Twitter (NYSE:TWTR) in terms of daily users, has propelled Nintendo's shares to over twice their pre-launch levels as investors piled in to get a piece of the action. The unexpected success, and its impact on Nintendo's shares, have left plenty of doubters, however, as short interest in the company's shares has more than tripled in the last 10 days.
Current demand to borrow Nintendo's domestically listed shares now stands at 2.5% of shares outstanding, which matches the recent 12-month highs seen in the tail end of last year. Nintendo's ADR line of shares has also seen an even bigger jump in shorting activity with demand to borrow now three and a half times the levels seen a week ago. While both listings have proved popular with short sellers, the majority of short positions by value are found in the Japanese listing, which sees $840m of loans out to short sellers against $42m in the ADR listing.
GameStop sees covering
Another stock impacted by the recent volatility has been GameStop (NYSE:GME), which has been one of the first companies to capitalise on the game's ability to corral users looking to visit its augmented reality "stops". GameStop's CEO was quick to tout the impact of the increased footfall on its sales, which sent its shares up sharply on Monday. The latest surge added to a recent bounce in GameStop shares which are now up by 22% in the last month. Unlike Nintendo, GameStop's recent surge has not seen any material increase in its already high short interest given the demand to borrow GME's shares is down by 20% in the last month to 18% of shares outstanding.
GameStop's current short interest is in fact the lowest in two and a half years and now stands at less than a third of the levels seen at the start of the year when a massive 50% of its shares were out on loan.
Nintendo's short interest isolated
The covering seen in GameStop's shares is echoed by the rest of the video games sector as the shorting activity among the constituents of the recently launched PureFunds Video Game Tech ETF (NYSEARCA:GAMR), which invests in Nintendo and GameStop, now lies at a new yearly low.
The current average demand to borrow shares of the ETF's constituents is 2.8% of shares outstanding, a fifth less than at the start of the year. The covering has been pretty universal as three quarters of the constituents that saw any significant shorting activity have seen demand to borrow fall in recent weeks.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.