fuboTV (NYSE: FUBO) caught the attention of investors, likely due to its consumer-facing product and the fact that the stock jumped several times, creating tremendous appeal from a short-term gain perspective.
Maybe you can time the market or exactly when a stock of memes is going to explode on the moon, but I can’t. Call me old fashioned, but I still rely on finding undervalued companies with strong revenue growth, high gross margins, and the ability to generate positive cash flow.
Given FUBO’s almost 80% price drop this year, I wanted to see if this company ticked any of the boxes that constitute a great long-term investment opportunity.
Analysis of Q2 results
FUBO announced Q2 on August 4. Revenues grew 70% year-on-year, but it fell short of expectations. In addition, the third quarter revenue outlook and full year guidance were lower than expected.
FUBO’s difficulty in generating operating profits is not unique. Over the years, I’ve analyzed DirecTV and other streaming platforms. Content owners hold most of the leverage, especially at a time when distribution platforms are far more abundant than in decades past.
We see evidence of this on the subscriber expense line. Total revenues increased by 70%, from $114M to almost $200M. However, spending on subscriptions – which are content rights from media companies like Disney (DIS) for ESPN – has increased by 80%!
This puts FUBO in a difficult situation. The company will never achieve high gross margins in the subscription market, as the hurdle to move from FUBO to a competitor like Google’s YouTube TV (GOOG, GOOGL) is far less than traditional cable/satellite providers to another era.
Therefore, FUBO will always operate with very slim margins on the subscription side of the business. This is why other revenue streams will make or break FUBO in the long run.
The fact that Y/Y advertising revenue increased by 32% to more than $22 million is encouraging for investors. This is ultimately where some of the positive gross profits will come from, as the subscriber business has no pricing power.
FUBO has also recently announced that it will not develop a sports betting offer on its own. A decision the company should have made in the first place – given that many casinos outsource sports betting operations to a third party like William Hill or DraftKings (DKNG).
Ultimately, partnering with a major vendor will reduce time to market and significantly reduce costs. FUBO would be wise to act quickly, as the start of the NFL season is only weeks away. However, integrating a sportsbook seamlessly with a partner is probably difficult, and I consider this a missed opportunity.
Additionally, sports betting already has relationships with sports leagues, ESPN, and other major media outlets. It may be complicated, or downright not contractually possible to partner with FUBO.
In short, FUBO will never achieve high gross margins solely from subscribers. Advertising and sports betting will need to evolve for FUBO to achieve more than a low multiple on sales. Given the company’s lack of experience and cash flow, I wouldn’t expect miracles anytime soon.
It’s no mystery that FUBO needs to raise funds. The company’s chief financial officer said so at a shareholder event this week.
When we finally decide to raise capital, we plan to maintain optionality and we will use the most efficient means possible.
John Janedis, CFO of FUBO
Examining the company’s cash flow points to bleak prospects. FUBO should raise funds probably by the end of the fourth quarter.
|Cash consumption TTM||($323M)|
Ideally, FUBO would be carried away by a short squeeze in meme stocks, as the 30% short interest could create a spike in FUBO stocks; something that has materialized before. A follow-up offer at a higher price would be ideal for existing shareholders.
I want to be clear, though. I would never recommend buying a stock from a fundamental standpoint based on the fact that the company strength be able to raise funds due to a short press.
Fundraising fueled by a short squeeze is a short-term remedy to a bigger problem with FUBO’s business model. However, this happens with some regularity in these markets that should be noted in the realm of possibilities.
Without a short squeeze/trailer offer, FUBO will be at the mercy of the markets. Companies with negative margins, cash flow and no superior competitive advantage could see debt markets closed or with high borrowing costs. A capital raise on a stock trading below $10 is also risky.
Ultimately, the risk is far too high to hold this stock before knowing where the next fundraiser is coming from.
FUBO announced third-quarter guidance of between $200 million and $205 million, up about 29% from the midpoint. For the full year, revenue is expected to be between $910 million and $930 million, representing growth of approximately 45%.
Looking out is difficult given the macro environment, but also FUBO in particular with the advertising and sports betting industry essentially in its infancy. However, analysts estimate $1.23 billion in revenue in 2023, a growth of around 30%.
With a valuation in the $1 billion range, FUBO is obviously not overvalued from a revenue standpoint. However, it is difficult to widen this multiple given the state of the fundamentals.
Moreover, one would imagine FUBO to be an acquisition target given the dramatic drop in prices, however, it is difficult to think about the potential buyer.
Certainly, a sportsbook like DraftKings or MGM (MGM) could entertain by having an integrated media and betting platform. However, FUBO’s only proprietary asset is the streaming software, so the acquirer should see value in it. Additionally, a sportsbook could alienate existing relationships with leagues and other media networks if it purchased FUBO.
Finally, a media company has little need for FUBO because it already has the technology stack and its own direct-to-consumer offering.
The fundamentals paint a picture of a company with no real competitive advantage and little pricing power. Switching to advertising will help a bit, but it won’t save the business. The idea of sports betting is interesting, but the fragmented market and the need for a partner complicate the situation.
A long-term investor would be wise to wait to see the impact of the next fundraising on stocks. A short squeeze event should be sold as the company will do the same in order to raise funds. The outlook for 2023 alone is not enough to drive stocks higher, which means investors are at the mercy of the hype. I would avoid FUBO.