2023-05-11 05:10:04 ET
Summary
- fuboTV reported earnings on May 4, and its stock rose 78% in three days.
- Fubo has two potential growth drivers: advertising ARPU and an underpenetrated streaming service market.
- Despite impressive growth and progress towards its goals in Q1, Fubo's stock may experience a 50% downside due to declining book value.
Recap
fuboTV Inc. (FUBO) reported earnings on May 4. Its stock went up 78% in 3 business days. At a glance, the company showed a narrowing in losses and believed that it no longer needed to tap into the capital market for funding until 2025. The stock's recent rebound from a P/B ratio below 1 to 1.17x has made us consider it a trade regarding bankruptcy risk. We are interested in investigating this further.
Growth Drivers
Fubo has two potential growth drivers: (1) advertising ARPU and (2) an under-penetrated streaming service market.
(1) Advertising ARPU upside
Fubo employed a strategy that relied on content to attract customers, which resulted in higher traffic acquisition costs. However, this approach also allowed for a higher potential for advertising ARPU particularly since Fubo targeted sports fans who were willing to pay $74 per month for sports subscriptions.
In Q1, Fubo's subscription ARPU was $72.96 and its advertising ARPU was $5.52. Comparatively, Roku's ARPU was $41 in Q4 2022. Since Fubo's customers are sports fans, advertisers are more likely to pay higher fees to reach them, which means Fubo has the potential to increase its ARPU to $41 or even higher.
Unfortunately, despite increasing its spending to attract subscribers, Fubo failed to increase its advertising ARPU in the past five consecutive quarters. In fact, the company's Q1 2023 earnings report showed that its advertising ARPU was $5.52, a decline of 21% from a year ago.
Fubo's ARPU (FUBO, LEL Investment)
(2) Under-penetrated streaming service market
By focusing on the underserved TV streaming service market, Fubo has the chance to grow its subscriber base. J.D. Power found that Fubo had a cost advantage over traditional cable and satellite video service providers. Furthermore, Netflix estimated that there was significant untapped potential in the U.S. TV market, with only 34% penetration and a market worth $74.6 billion untapped . Even capturing just 1% of this market could potentially add 870k new subscribers for Fubo. This projection can be overestimated, as Fubo had seen a deceleration in subscriber growth for five consecutive quarters, and only added 266k subscribers in Q1 2023 compared to last year. Nevertheless, by seizing this opportunity, we estimated Fubo could have potentially increased advertising revenues by $106 million in the long term.
Fubo's subscriber growth (FUBO, LEL Investment)
How far can it go?
In Q1, Fubo focused on cutting costs, reducing its general and administrative expenses by 50% and keeping other expenses flat compared to the previous year. Assuming it can maintain this pace of cost-cutting for the rest of 2023, the company can save up to $116 million in expenses. Additionally, if Fubo can maintain its Q1 subscriber growth rate, it could increase advertising revenue by $32 million in 2023. This would result in a reduction of operating cash outflow by approximately $150 million, bringing it down to -$166 million compared to 2022's cash flow. The company had a cash balance of $358 million. This supports its argument that the company no longer needs to tap the market until 2025.
Q1 income statement (FUBO)
Annual cash flow (FUBO)
Annual income statement (FUBO)
And we believe that's it.
What Fubo didn't say is that it has no plan after 2025 since its business model still did not work. It failed to break even on its subscription business, and its advertising business grew very slowly. That's not a secret, then, since its stock dropped from $60 to penny stock.
Then, how should investors think of this one?
We believe that the market won't buy Fubo's story unless it can increase its advertising ARPU for at least two straight quarters. Fubo's book value may drop to $300 million by the end of 2023 if it spends cash at a rate of -160 million per year. This suggested a 50% decline from the present level.
Fubo's at-market program is sketchy for us
Through its at-market offering, the company raised $106 million in the first quarter without giving investors much information, including its purpose. It is clear that the $100 million fund will not be adequate to support the company's expansion strategy. If the company maintains its cost-cutting cadence in Q1, its advertising income must increase by 300% to make the company break even, which means it must triple its subscriber number while maintaining the same advertising ARPU.
On August 4, 2022 , the Company entered into an at-the-market sales agreement (the "Sales Agreement") with Evercore Group L.L.C., Citigroup Global Markets Inc., Morgan Stanley & Co. LLC and Needham & Company, LLC, as sales agents (each, a “manager” and together, the “managers”) pursuant to which the Company may, from time to time, sell shares of its common stock, having an aggregate offering price of up to $350.0 million through the managers.
During the three months ended March 31, 2023, the Company received net proceeds of approximately $106.1 million (after deducting $2.5 million in commissions and expenses) from sales of 71,444,729 shares of its common stock, at a weighted average gross sales price of $1.52 per share pursuant to the Sales Agreement. As of March 31, 2023, there was $198.7 million shares of common stock remaining available for sale under the Sales Agreement.
There is no need to execute the equity raise if the management wants to demonstrate its confidence in cost-cutting initiatives.
Its equity raise may just show its true colors.
Fundamentals are not changing
The above analysis mainly considers the short-term market view. Our long-term fundamental analysis is based on two factors:
(1) Fail to meet the needs of consumers
According to the data , the sports fan market for TV streaming is quite large. However, despite launching in 2019, the company only managed to attract 1.3 million subscribers. While the company initially experienced high subscriber growth rates, this has decelerated over the past couple of quarters, and its market share in the US remains small. It appears that the company's failure to cater to the needs of sports fans may be the reason for this. Bundling channels is not a new concept, but most fans prefer to subscribe to specific sports channels they love rather than all of them. Fubo's all-in-one service only caters to a small percentage of sports fans, which may explain its lack of success. Additionally, it is worth noting that cable companies and Amazon Prime have not attempted this approach either, suggesting that there may not be much potential for it.
Additionally, not many fans would enjoy paying a bundle for numerous channels just to view advertisements. We think this is another factor preventing Fubo from increasing its ad revenue per user. Fubo's advertising business upside potential is limited if it cannot grow its client base and advertising ARPU.
Estimated sport fans base ( Topend Sports )
(2) Lack of a loyal customer base
Seasonality suggests a low-loyalty consumer base
Fubo typically sees the total number of subscribers on its platform decline from Q4 of the previous year until Q2 of the following year. This seasonality pattern suggested that part of Fubo TV's consumer base lacked long-term commitment and loyalty to the platform.
This can cost Fubo money in terms of keeping customers. Retention plays an important role in calculating the customer lifetime value for subscription businesses. Therefore, despite Fubo's best efforts to increase earnings from its subscription business, its gross margin was consistently negative.
Risks
Gross margin expansion plan
Fubo had a couple of cost-reduction initiatives that saw some early success. The company aimed to reduce the cost of entry for users and create attractive user economics. They focused on reducing content costs and improving SRE KPI by striking deals for volume discounts.
Despite these efforts, we question its long-term profitability prospects, as its customer base is still relatively small. The company's bargaining power with content providers could still be very limited.
Valuation
For this quarter, the selling point behind the surge in its stock price was its ability to guarantee no bankruptcy risks until 2025. However, the recent surge in its stock price, which is now trading above its book value, has rendered this catalyst ineffective. Despite this, Fubo has not made any significant changes to its business model. The company relies on its advertising business as its primary source of profits, but unfortunately, the business performed worse in the last quarter.
In light of this, we anticipate that the previously advantageous bankruptcy narrative may now become a hindrance for Fubo's stock. This is because investors will gradually realize that despite the cost-cutting measures, the company's book value will continue to decline. As a result, we forecast a 50% downside for the stock, as we expect it to experience a further decrease in book value.
Key Takeaways from Q1 2023 Earnings:
In Q1 of 2023, fuboTV Inc., experienced impressive growth and progress towards its goals.
- The company showed a 34% increase in total revenue, driven by significant growth in North America, where revenue increased by 34%.
- Fubo raised $117.2 million in net proceeds from its at-the-market program, and the company had a cash balance of $364.8 million, which it believed was sufficient to fund its operating plan until the company achieved positive cash flow in 2025.
- Fubo was also ranked number one in customer satisfaction among live TV streaming providers by JD Power.
- The company raised prices on its channel plans in early Q1, with negligible churn impact, and it expected to achieve 27% YoY growth at the midpoint for its full-year 2023 subscribers and revenue projections.
Summary
Following the announcement of Q1 earnings, many small caps rose. We attribute these to the Fed's choice to postpone further rate increases. A large number of small-cap equities were heavily shorted due to bankruptcy fears. Fubo, in our opinion, is one of them. The increase in stock value following the earnings report is simply a result of the market reassessing the level of bankruptcy risk associated with the company. Its equity raise appears to be a short-term catalyst for stock rather than a long-term strategic move. In our opinion, if the company doesn't demonstrate an increase in advertising ARPU and the potential of its advertising business, the stock could decline by another 50% by the end of 2023. We give FUBO stock a SELL rating.
For further details see:
fuboTV's Equity Raise May Show Its True Color