said losses narrowed in the second quarter as revenue recovered from last year’s more restrictive measures to limit the spread of Covid-19, but market players are still taking their bets off the table. Its shares were down 2.5%.
to test a new story line. Even a lucky turn in videogames won’t free the streaming giant from the need to keep playing Hollywood’s game, though.
Netflix used its second-quarter report Tuesday afternoon to confirm previously reported plans to enter the videogame business. No timing was given, though the company said the offerings would be included in its current subscription plans at no additional cost. The company isn’t backing away from its work on movies and TV shows, but said in its letter to shareholders “since we are nearly a decade into our push into original programming, we think the time is right to learn more about how our members value games.”
That news comes as Netflix remains mired in somewhat of a post-pandemic slump. It added 1.5 million net new paying subscribers in the second quarter, which was a bit better than it had forecast but still its lowest level of growth in nearly a decade. It also projected 3.5 million net adds for the third quarter—about 29% less than what Wall Street was hoping for. That would bring the total number of new subscribers to about nine million for the first nine months of 2021. Netflix added more than 28 million paying subscribers in the same period last year.
A foray into games might make sense for a company with an intimate knowledge of the viewing habits of a user base that now numbers over 209 million. It is also a tough business to crack—even the mobile gaming market that Netflix says it expects to target initially. There are many participants, but most of the money is still made by long-established properties. Games like “Candy Crush” and “Clash of Clans” remain in the top-five grossing charts even after nearly a decade on the market.
Netflix will need to keep battling it out for video streaming eyeballs. The company expects its pace of new releases to pick up in the second half of this year; analysts from Wedbush count 42 original shows and movies expected for the third quarter alone. But the company still has its own track record to compete with: Last fall included popular shows such as “The Queen’s Gambit,” “The Crown” and “Bridgerton.” Netflix shares are down nearly 2% this year, lagging behind many internet and entertainment peers. Streaming investors hyper-focused on subscriber growth aren’t playing games.
shares are up 2.6%. Analysts at Citigroup, Deutsche Bank and Morgan Stanley have raised their target prices for the stock in recent days. T. Rowe said this week it managed $1.62 trillion in assets at the end of June.
IFIT Health & Fitness Inc. will acquire Sweat, an online fitness training platform, ahead of an initial public offering that is expected in the fall, according to people familiar with the matter.
IFIT is buying Sweat, which was co-founded by trainer
in 2015, for around $300 million, some of the people said. IFIT plans to keep Sweat, which is based in Australia, as a stand-alone brand and Ms. Itsines and Mr. Pearce as executives.
IFIT is beefing up its content offerings ahead of its anticipated IPO. The company, which owns NordicTrack, was recently valued in excess of $7 billion in its most recent round of funding in late 2020 and is expected to attain a valuation in excess of that in its IPO.
Should the company debut as planned later this year, it is expected to tap a market hungry for fast-growing companies in the busiest year for public offerings on record. IFIT’s closest competitor,
made its debut in late 2019, and while its stock price has tumbled this year after a recall of its treadmills, investors had raced into the stock. Even with the pullback, Peloton shares have more than quadrupled from their IPO price.
IFIT, formerly known as Icon Health & Fitness Inc., has been moving swiftly with its IPO plans and confidentially filed papers recently with the Securities and Exchange Commission, according to people familiar with the offering.
Entertainment has clearly indicated it is shopping around. When the company landed a deal on June 1 to sell about $231 million worth of shares to Mudrick Capital, Chief Executive
proclaimed that it is time for the largest theater operator in the U.S. to “go on the offense again.” He noted at the time that the company was in discussions with multiple landlords to take over some theaters formerly operated by ArcLight Cinemas and Pacific Theatres.
That deal may be near done. The Los Angeles Times reported Tuesday that AMC was nearing a deal for “key” Pacific theaters in the area. Two of the theaters were even listed on AMC’s site and ticketing app for part of the day before being taken down, the paper reported. They are unlikely to be the last, considering AMC’s acquisitive history and now bulging coffers. Chief Financial Officer
told a Credit Suisse investment conference this week that the company will end June “in the ballpark” of about $1.8 billion in cash, according to the broker’s report of the conference. AMC had about $308 million on its balance sheet at the end of 2020.
The wisdom of AMC pursuing more acquisitions is debatable. The company entered the pandemic with a ratio of net debt to earnings before interest, taxes, depreciation and amortization of 5.7 times at the end of 2019—twice that of competitor Cinemark, according to data from S&P Global Market Intelligence. Much of that stemmed from three acquisitions totaling about $3.2 billion in 2016 to 2017. AMC as a result was flirting with bankruptcy before the explosion of interest from retail investors ballooned the stock, which is now up more than 2,700% for the year. Eric Handler of MKM says AMC should use the new bounty to pay down its debt load that now totals about $5.5 billion, adding in a June 8 report that the company’s past deals have “produced subpar returns.” Mr. Aron has said AMC intends to use some of its funds to pay down debt.
Still, the opportunities may be tempting for all the major players. The National Association of Theatre Owners, or NATO, estimates about 125 exhibitors have closed permanently due to the pandemic. Emagine Entertainment, a privately held chain of 208 screens based in Michigan, has picked up four sites from competitors out of bankruptcy, according to Chief Executive Anthony LaVerde, also speaking at the Credit Suisse conference. Cinemark has been conservative with M&A historically, but its CEO,
told the same conference that the company is “really open” to opportunistic deals in the current environment. He added, though, that “we’re not going to overpay for assets.”
Adding screens could theoretically boost the bargaining power of major theater operators with studios, at a time when shrinking release windows and soaring popularity of streaming services has muddled the long-term outlook for the industry. And the relatively strong performance of the few blockbuster-sized releases that have hit theaters so far this year has been an encouraging sign.
But it may take a lot of deals to have an impact. AMC, Cinemark and Cineworld’s Regal chain already control about 48% of U.S. screens combined, according to Wedbush analyst Alicia Reese. And most of the operators who have closed have fewer than 100 screens, according to NATO spokesman Patrick Corcoran. Ms. Reese says operators with between 50 and 250 screens would be most attractive to companies like AMC, Regal and Cinemark. But even adding 250 screens would boost each chain’s domestic market share by just one percentage point. Paying down debt may be safer, but it makes for a less exciting show.
Corrections & Amplifications The National Association of Theatre Owners was misspelled as National Association of Theater Owners in an earlier version of this article. Also, the last name of the group’s spokesman, Patrick Corcoran, was misspelled as Cochran. (Corrected on June 18)
Shares of Peloton are down 28% so far this year versus a 12% gain for the S&P. But if you think you have finally found an attractive entry point, you might want to douse yourself in some cold Gatorade.
WSJ Investing Challenge
A five-part course from WSJ columnists to introduce you to the basics of investing, delivered to your email inbox.
After a wild 434% run-up in its shares last year, Peloton’s Chief Executive
continued to stoke the fire, telling investors in September at the company’s analyst day he believed 100 million subscribers was a reasonable goal for the company, capturing half the number of gym goers world-wide.
The time horizon on that goal is a bit fuzzy. In a note this week, BMO Capital Markets analyst
points out that, in a presentation for the same investor day, Peloton pegged its own serviceable addressable market, or estimated number of households interested in purchasing current Peloton products at current prices, at just 15 million, something he feels Peloton’s most fervent fans have perhaps overlooked.
By Mr. Siegel’s math, Peloton’s current fully diluted market value implies investors already are giving the company credit today for capturing 16.5 million subscribers, or 110% of that addressable market size. Wall Street is forecasting Peloton will have roughly 2.3 million connected fitness subscribers as of June. But even at 5 million subscribers, to justify Peloton’s current market value investors are effectively betting those customers will be paying to sweat and bleed Peloton for the next 24 years, his estimates show.
Peloton fiends better pace themselves.
SHARE YOUR THOUGHTS
Did the pandemic change your view on owning a Peloton? Join the conversation below.
slid as much as 12% on Tuesday after short seller Hindenburg Research said that the sports-betting firm’s gambling-technology subsidiary SBTech operates in countries where gambling is banned and said it is positioned for DraftKings shares to fall.
Hindenburg published a report early Tuesday that said DraftKings’ gambling-technology subsidiary SBTech makes about half of its revenue in countries where gambling is banned. According to the report, SBTech created a new entity for what Hindenburg says are its black-market operations ahead of last year’s merger with DraftKings and a blank-check company that took the combination public. DraftKings shares slid in early trading, then recovered. They were recently down about 5%.
“SBTech does not operate in any illegal markets,” a DraftKings spokesman said in a statement. “We conducted a thorough review of their business practices and we were comfortable with the findings.”
New York-based Hindenburg said it based its report on conversations with former employees, regulatory filings and assessments of illegal international gaming websites. It claimed SBTech poses a risk to DraftKings because SBTech accounted for roughly 25% of the firm’s overall sales at the time of the 2020 SPAC merger and brought its technology to the combined company.
The Wall Street Journal hasn’t been able to verify independently the accusations in Hindenburg’s report. DraftKings CEO
has said publicly that SBTech gives the company a technological advantage and provides better user experiences.
Boston-based DraftKings, which is considered a leader in the sports betting industry, has partnerships with major sports leagues including the NFL, NBA and PGA Tour. As the market expands, operators like DraftKings and FanDuel are in heated competition for customers, spending big on advertising and technology.
Sports betting has boomed since the Supreme Court in 2018 cleared the way for states beyond Nevada to legalize wagers on sporting events. Now, 30 states and the District of Columbia have legalized sports gambling. Boston-based DraftKings had a market value of about $20 billion entering Tuesday’s trading session. It is unprofitable and had sales of about $615 million in 2020.
Tuesday’s share-price drop is the latest triggered by Hindenburg and founder Nathan Anderson. The firm publishes financial research and often bets against shares of companies it deems overvalued. DraftKings shares are down about 30% in the past three months.
SHARE YOUR THOUGHTS
Do you think Hindenburg Research is making the right bet on DraftKings? Why or why not? Join the conversation below.
Hindenburg’s Mr. Anderson and a reporter for The Wall Street Journal are among the more than 20 defendants in a lawsuit brought by private-equity firm Catalyst Capital Group and Callidus Capital Corp. alleging a short selling conspiracy related to a 2017 article about Catalyst. A Journal representative has said the news organization is confident in the fairness and accuracy of its reporting. Mr. Anderson has said Hindenburg stands by its research.
DraftKings’ share decline comes a day after electric-truck startup
said its chief executive and chief financial officer resigned after a board committee found disclosures about preorders for its truck to be inaccurate, partially confirming claims from a March Hindenburg report. Lordstown’s CEO previously declined to comment to The Journal, and efforts to reach the CFO were unsuccessful.
Hindenburg has also targeted two other notable companies that have gone public by merging with special-purpose acquisition companies—electric-vehicle firm
Regulators are investigating both companies as well as Lordstown. Like Lordstown, Nikola also partially confirmed Hindenburg’s allegations after initially saying they were untrue. Clover has called the claims false. Hindenburg didn’t take a short position in Clover.
Also called a blank-check company, a SPAC is a shell company that lists on a stock exchange with the sole intent of merging with a private firm to take it public. The private company then gets the SPAC’s spot in the stock market. SPAC mergers let companies make projections about their business, which wouldn’t be allowed in a traditional initial public offering. They also often offer startups a quicker way to raise large sums from investors who are excited about future technologies.
Hindenburg’s latest report could also have implications for SPACs, which have become a popular way for startups to raise money and access public markets in the 2020 and 2021 in part due to the lofty valuations of companies like DraftKings. A SPAC backed by former film and media executives
took the company public. The SPAC team declined to comment. The executives have also taken mobile gaming firm
DraftKings and other popular companies linked to SPACs have become trendy with ordinary investors in recent months. Some professionals like Hindenburg, meanwhile, have been betting that shares of many companies that merged with blank-check firms will fall, putting the sector at the center of the recent tension between day traders and pros on Wall Street.
Some analysts say SPACs enrich their creators at the expense of other investors by giving the blank-check executives deeply discounted shares, a point that Hindenburg mentioned in its report.
Futures tied to the S&P 500 ticked up less than 0.1%. The broad market gauge has climbed for three consecutive weeks. Nasdaq-100 futures added 0.3%, pointing to a moderate rise in technology stocks at the opening bell.
Bitcoin jumped 6.6% from its level at 5 p.m. ET Friday to trade around $39,300, according to CoinDesk. Elon Musk tweeted Sunday that
was continuing its wild ride, adding 29% ahead of the bell. The Denmark-based biopharmaceutical company’s shares rocketed higher last week only to give up most of the gains. The company said it was unaware of the reason for the volatility.
shares gained 2.4%. Analysts at Raymond James lifted their rating on the stock, pointing to recent menu price hikes.
The Nasdaq Biotechnology Index rose 6% last week, after the FDA gave the green light to Biogen’s Alzheimer’s drug Aduhelm on Monday.
About 83% of recorded-music revenue in the U.S. last year came from streaming, compared with less than 7% in 2010, when paid downloads and CD sales still drove the bulk of the industry’s revenue, according to data from the Recording Industry Association of America.
On this day in 2000, the SEC, the FBI, and the U.S. Attorney for the Southern District of New York cracked down on more than 100 alleged mobsters and their cronies, claiming that the mafia—in cahoots with brokers, investment bankers, a money manager, and a retired New York City cop—manipulated the prices of 19 stocks, defrauding thousands of investors out of an estimated $50 million.
Chart of the Day
Tesla and other companies that hold the notoriously volatile cryptocurrency often must record impairment charges when its value falls.
Last week, the new chairman of the Securities and Exchange Commission,
said he has asked SEC staff to explore changes to the rules governing how investors’ orders are handled. The review will include a practice known as payment for order flow, in which brokerages send many of their customers’ orders to trading firms in exchange for cash payments. Virtu’s stock sold off sharply after Mr. Gensler’s remarks.
WSJ Investing Challenge
A five-part course from WSJ columnists to introduce you to the basics of investing, delivered to your email inbox.
Payment for order flow has existed for decades and has come under scrutiny before. But it received fresh attention after the wild volatility in GameStop shares in January. At one congressional hearing in February,
Rep. Sean Casten
(D., Ill.) referred to Robinhood Markets Inc.’s practice of sending orders to high-speed traders as “a conduit to feed fish to sharks.”
Firms such as Robinhood and Virtu say payment for order flow is misunderstood. They say small investors benefit from the practice because it results in better prices than they would get at public exchanges like the New York Stock Exchange and the
Collectively, that saves investors billions of dollars a year, industry data show.
Payment for order flow has also made it possible for brokerages to provide zero-commission trading. If the practice were banned, it is unclear whether brokerages like Robinhood could still let investors trade stocks and options without charging commissions.
Virtu Chief Executive
has been one of the most vocal defenders of payment for order flow. In March, upset by comments that CNBC “Squawk Box” host
Andrew Ross Sorkin
made about how high-speed traders profited from investors’ orders, Mr. Cifu tweeted his phone number at Mr. Sorkin and said: “Let me know when you want to learn how markets work.” Soon afterward, the CEO went on the show to discuss payment for order flow with Mr. Sorkin.
In an interview, Mr. Cifu warned that banning the practice and requiring that individual investors’ orders be sent to exchanges would harm small investors. “Retail investors would get a much, much worse experience,” he told The Wall Street Journal.
Firms like Virtu, known in the trading business as wholesalers, make money from investors by filling their orders throughout the day and collecting a small spread between the buying and selling price of each stock. Under SEC rules, they can’t fill the trades at prices worse than the best available price on exchanges—a benchmark known as the national best bid or offer, or NBBO.
Because individuals tend to make small trades, wholesalers can trade against them knowing the individuals aren’t likely to push stock prices up or down, the way that institutional investors can move a stock through heavy buying or selling. That allows wholesalers to make more consistent profits when filling small investors’ orders than when trading on exchanges—a benefit they are willing to pay brokers for, in the form of payment for order flow.
Meanwhile, small investors can benefit from the arrangement by getting prices better than the NBBO, often by just a fraction of a penny a share.
The resulting savings to the investor are known as “price improvement.” In a report released on Thursday, Virtu said standard analyses underestimate the degree to which small investors benefit from having their orders filled by wholesalers.
Using a broader measure of price improvement than the one usually used, Virtu said it saved investors just over $3 billion on their stock trades in 2020. By comparison, data disclosed by wholesalers under SEC reporting rules shows Virtu provided around $950 million worth of price improvement last year.
SHARE YOUR THOUGHTS
Is the stock market rigged against small investors? Why or why not? Join the conversation below.
The difference was largely because of how Virtu calculated the savings when an investor does a trade in a larger size than what’s publicly displayed on exchanges. For instance, suppose that 200 shares of
are available on exchanges at the national-best-offer price, and an investor buys 500 shares of the stock from Virtu at a slightly lower price.
In that scenario, Virtu’s methodology counts the savings based on how much it would cost to buy all 500 shares using price quotes on exchanges—not just at the national best offer, a price at which only 200 shares are being quoted, but at the higher prices where the remaining 300 shares would be filled.
Critics were unconvinced by Virtu’s analysis, calling it self-serving. Payment for order flow is fundamentally flawed because it poses a conflict of interest for brokers, said
executive director of Healthy Markets Association, a trade group for institutional investors.
“There’s a simple question that every investor needs to ask, and that’s whether their broker is trying to get them the best prices or maximize their own profits,” Mr. Gellasch said.
Virtu is the second-largest wholesaler in the U.S. stock market by volume, handling between 25% to 30% of individual investors’ equities order flow, and it paid more than $300 million for order flow last year, according to Bloomberg Intelligence.
Other major wholesalers include Citadel Securities, which has the largest market share, and Susquehanna International Group LLP. Virtu doesn’t break out how much it makes from trading against small investors, but the meme-stock frenzy has helped lift the company’s stock 15% year-to-date.
Mr. Cifu acknowledged that payment for order flow poses a conflict of interest for brokerages, but he said the conflict was already being managed through SEC rules. The regulator requires brokerages to publicly disclose their payment-for-order-flow practices. Brokerages also have a duty to seek best execution for their customers, and some have been fined for failing to fulfill that obligation when routing orders.
The SEC’s review will eventually confirm that the stock market works well for small investors, Mr. Cifu predicted.
“I am so confident in the value that we, Citadel and Susquehanna in partnership with these retail brokers have provided to the ecosystem,” he said, “that any right-minded person looking at this and looking at the data will conclude, ‘Man, this is a great trading system. This is the envy of the world.’”
More on Payment for Order Flow
Recent WSJ articles on the trading practice, selected by the editors
boomeranged this month on Mudrick Capital Management LP, the latest hedge fund to fall victim to swarming day traders.
Mudrick’s flagship fund lost 10% in just a few days as a jump in AMC’s stock price unexpectedly triggered changes in the value of derivatives the fund held as part of a complex trading strategy, people familiar with the matter said.
The setback comes months after a group of traders organizing on social media helped send the price of
and other stocks soaring in January, well beyond many investors’ views of underlying fundamentals.
The development prompted many hedge funds to slash their exposure to meme stocks. Mudrick Capital’s losses highlight how risky retaining significant exposure to such companies can be—even backfiring on a hedge-fund manager who was mostly in sync with the bullishness of individual investors.
the firm’s founder, had been trading AMC stock, options and bonds for months, surfing a surge of enthusiasm for the theater chain among individual investors. But he also sold call options, derivative contracts meant to hedge the fund’s exposure to AMC should the stock price founder. Those derivative contracts, which gave its buyers the right to buy AMC stock from Mudrick at roughly $40 in the future, ballooned into liabilities when a resurgence of Reddit-fueled buying recently pushed AMC’s stock to new records, the people said.
As part of the broader AMC strategy, executives at Mudrick Capital were in talks with AMC to buy additional shares from the company in late May. On June 1, AMC disclosed that Mudrick Capital had agreed to buy $230 million of new stock directly from the company at $27.12 apiece, a premium over where it was then trading.
Mudrick immediately sold the stock at a profit, a quick flip that was reported by Bloomberg News and that sparked backlash on social media.
“Mudrick didn’t stab AMC in the back…They shot themselves in the foot,” read one post on Reddit’s Wall Street Bets forum on June 1. Other posts around that time referenced Mudrick as “losers,” “scum bags” and “a large waving pile of s—t with no future.” Members of the forum urged each other to buy and hold.
Inside Mudrick, executives were growing apprehensive as the AMC rally gained steam. The firm’s risk committee met on the evening of June 1 after the stock closed at $32 and decided to exit all debt and derivative positions the following day.
It was a day too late.
AMC’s stock price blew past $40 in a matter of hours June 2, hitting an intraday high of $72.62. Call option prices soared amid a frenzy of trading that Mudrick Capital contributed to and by the end of the week, the winning trade had turned into a bust. Mudrick Capital made a 5% return on the debt it sold but after accounting for its options trade, the fund took a net loss of about 5.4% on AMC.
Mr. Mudrick’s fund is still up about 12% for the year, one of the people said. Meanwhile, investors who bought AMC stock at the start of the year and held on have gained about 2000%.
The impact of social media-fueled day traders has become a defining market development this year, costing top hedge funds billions of dollars in losses, sparking a congressional hearing and drawing scrutiny from the U.S. Securities and Exchange Commission. More hedge funds now track individual investors’ sentiment on social media and pay greater attention to companies with smaller market values whose stock price may be more susceptible to the enthusiasms of individual investors.
Mr. Mudrick specializes in distressed debt investing, often lending to troubled companies at high interest rates or swapping their existing debt for equity in bankruptcy court. Mudrick manages about $3.5 billion in investments firmwide and holds large, illiquid stakes in E-cigarette maker NJOY Holdings Inc. and satellite communications company
from such exchanges. The flagship fund reported returns of about 17% annually from 2018 to 2020, according to data from HSBC Alternative Investment Group.
But distressed investing opportunities have grown harder to find as easy money from the Federal Reserve has given even struggling companies open access to debt markets. Mr. Mudrick has explored other strategies, launching several SPACS and, in the case of AMC, ultimately buying stock in block trades.
Mr. Mudrick initially applied his typical playbook to AMC, buying bonds for as little as 20 cents on the dollar, lending the company $100 million in December and swapping some bonds into new shares. Theater attendance, already under pressure, had disappeared almost entirely amid Covid-19 pandemic lockdowns, and AMC stock traded as low as $2. He reasoned that consumers would regain their appetite for big-screen entertainment this year as more Americans got vaccinated.
Day traders took their first run at AMC in late January, urging each other on with the social-media rallying cry of #SaveAMC and briefly lifting the stock to around $20. AMC’s rising equity value boosted debt prices—one bond Mudrick Capital owned doubled within a week—quickly rewarding Mr. Mudrick’s bullishness. AMC capitalized on its surging stock price to raise nearly $1 billion in new financing in late January, enabling it to ward off a previously expected bankruptcy filing.
Around that time, Mr. Mudrick sold call options on AMC stock, producing immediate income to offset potential losses if the theater chain did face problems. The derivatives gave buyers the option to buy AMC shares from Mudrick Capital for about $40—viewed as a seeming improbability when the stock was trading below $10.
Mr. Mudrick remained in contact with AMC Chief Executive
about providing additional funding, leading to his recent share purchase. But he kept the derivative contracts outstanding as an insurance policy, one of the people familiar with the matter said.
—Alexander Gladstone and Soma Biswas contributed to this article.