2023-05-03 13:45:11 ET
Summary
- fuboTV reports Q1'23 earnings prior to the market open on May 5.
- The sports streaming platform faces the challenge of running out of cash before turning cash flow positive in 2025.
- FUBO stock has no appeal until fuboTV solves the dire financial picture of slowing growth and large losses.
The video streaming market had a brutal last year and fuboTV (FUBO) was the disaster of the group. The company faces a very questionable future until the management solves the cash burn issue while sports streaming isn’t driving enough growth. My investment thesis remains bearish on the stock heading into Q1'23 earnings, even with fuboTV trading at only $1 now.
Source: Finviz
Rule Of 40
In order for the stock to rally, fuboTV has to either generate a profit or provide a reasonable path to profits. The problem facing shareholders is that the company now has neither to report when releasing Q1'23 earnings before the market opens on May 5.
fuboTV offers an appealing streaming service focused on live sports events, but sports rights are now extremely expensive leaving limited margin for the distribution service without premium services to sell on top of the sports shows. On top of this, most viewers come to video streaming in order to save money.
Analysts forecast the following numbers for Q1’23:
- Consensus EPS of ($0.38)
- Consensus Revenue of $303 million, up 25.4%
fuboTV provided the following guidance for 2023:
The consensus revenue estimates for Q1 are generally at the midpoint of the corporate targets of $300.5 to $306.5 million. fuboTV ended 2022 with 1.12 million North American subs, so the forecast is for limited growth in Q1 follows by the addition of ~370K sub for the rest of the year.
The problem here is that the Rule of 40 dictates the FuboTV doesn’t have the growth metrics to warrant an investment. The rule combines the sales growth rate with the profit margin rate to derive whether a company is growing fast enough to leverage the growth rate into future profits to reward shareholders.
The Rule of 40 is typically applied to SaaS software companies to derive the efficiency of the business, but fuboTV highlights how the business model remains flawed considering software companies have far higher gross margin targets. The company does offer a subscription or recurring revenue model similar to how software companies operate providing the legitimate basis to look at this model.
The company only has 25% sales growth while the profit margin based on the adjusted EBITDA losses is now negative 24%. fuboTV has a rating of 1 suggesting huge changes needed in the business.
In essence, fuboTV has a flat Rule of 40 calculation with the profit margin loss nearly matching the revenue growth. Even worse, the company exited the sports gambling business generally seen as the future catalyst for profits providing the incentive to invest in the business beyond a video streaming platform focused on expensive sports rights.
Management needs to provide an outlet for fuboTV to benefit from a customer base focused on sports. The indication is that the company will ultimately align the platform with a gambling service and provide premium services to interact with the viewership, but success in this area is far from guaranteed.
Cutting Cash Burn
fuboTV ended 2022 with a cash balance of $337 million. The company burned $290 million from operations last year following $172 million burned during 2021.
While the company promises a path to cut the cash burn during 2023, investors don't believe this is the case with the Q4'22 adjusted EBITDA loss of $75 million. The loss was actually larger than the $74 million burned during Q4'21.
fuboTV only generally excludes stock-based compassion and depreciation/amortization charges from the adjusted EBITDA target. For this reason, the financial metric normally approaches cash burn levels.
Based on the current cash balance, fuboTV has to dramatically cut to the cash burn rate to prevent the company from ending 2023 with needing a very dilutive capital raise with the stock at only $1. Even during the Q4'22 earnings report, management repeated the goal of not being cash flow positive until 2025, which just isn't quick enough as cash balances dwindle.
The Bally RSN deal with monthly prices at $16 to $19 and the recent MLB.TV deal at $25 a month again highlights the concerns that fuboTV is both forced into charging high prices for regional sports stations while not generating much of a gross margin on the service. A business model focused on repackaging expensive sports rights has limited appeal in this stock market. Not to mention, subscribers paying these high recurring fees might have limited appetite for any future premium services where fuboTV could generate a solid margin.
Takeaway
The key investor takeaway is that investors are still waiting for the next step here. fuboTV must add on premium services related to sports streaming in order to change the troubling cash burn rate and low margins of a streaming distribution platform.
The stock isn't a good bet here with the path to cash flow positive too far away and the sales growth slowing. Once the company changes this equation, investors can take another look at owning fuboTV. For now though, the company has no margin of safety.
For further details see:
fuboTV: Not A Good Bet Heading Into Q1