2023-06-13 11:24:41 ET
Summary
- The fuboTV Inc. share price jumped over 50% in May, leading investors to believe the company has enough capital to achieve its 2025 goal of positive cash flows.
- fuboTV's advertising business, which is its primary asset, is barely growing, and the potential profit margins of its core streaming business remain uncertain.
- fuboTV is rapidly acquiring new paying customers, indicating a healthy business and bullish sentiment.
- fuboTV's revenue growth rates for 2023 are promising, but the core business remains unprofitable, raising concerns about its financial sustainability and the profitability of its advertising business.
Investment Thesis
fuboTV Inc. (FUBO) saw its share price jump more than 50% in the month of May. Investors believe that fuboTV now has enough capital to get its highly coveted 2025 milestone, where fuboTV declares the business will reach positive cash flows.
For my part, I remain neutral on the name. In essence, the crown jewel of the business is its advertising business. And that's barely growing. Furthermore, regarding the kind of profit margins its core streaming business might eventually fetch, I am still unsure.
It's entirely possible that fuboTV's future best-case net profit margins could hover around 1% to 3%. In that event, investors are being asked to pay around 14x forward (hypothetical) earnings. Simply put, there are just too many heroic assumptions needed here.
Why fuboTV? Why Now?
fuboTV is primarily U.S.-based. but also expanding outside the U.S., live streaming platform. fuboTV provides subscribers access to live sporting events.
fuboTV has over time changed its key strategy from seeking to be a betting platform, to a company that is now for the most part striving to acquire subscribers through its sports offering and monetize its audience through subscriptions and digital advertising.
The main reason why I keep my hold rating on this name and do not put a sell rating on this stock is that fuboTV continues to very rapidly acquire new customers. That is, new paying customers . And any time a business is rapidly acquiring paying customers, this describes a healthy business. And that is clearly bullish.
Revenue Growth Rates are Still Alluring
Another reason to be bullish on fuboTV is that its revenue growth rates are still pointing towards fast growth for 2023. Even as many streaming platforms have struggled to report anything higher than 20% CAGR this year, fuboTV's guidance points to a company that could well report 30% CAGR.
For example, take Netflix (NFLX), its guidance for the upcoming quarter points to approximately mid-single digits. And Disney+ ( DIS ) isn't faring so much better, either.
In essence, to deliver consequential top line growth in the post-pandemic world is extremely challenging, and fuboTV is succeeding here, even as naysayers deemed it impossible (or close to).
Next, let's unpack the bear case.
Profitability Profile is a Problem
The problem with fuboTV, as I learned the hard way, is that its core business is simply too unprofitable.
fuboTV doesn't provide investors with its core gross profit profile. It did, however, state that the business became gross profit profitable in Q1 2023. But fell short of providing a tangible figure. Nevertheless, we must work with what we have.
At the present run rate, I suspect that fuboTV will burn approximately $200 million in free cash flow this year.
The good news is that fuboTV managed to raise $117 million in cash by diluting shares. fuboTV asserts that this is enough cash raised, which brings the cash on its balance sheet to slightly over $360 million.
fuboTV has consistently maintained that by 2025 it will be cash flow positive. Here's a quote from fuboTV's CEO David Gandler at a recent conference describing fuboTV's prospects to reduce its cash burn,
So again, you have cost levers, you have marketing lever, you have the advertising piece and pricing power, and you've seen that work out.
So I think that we don't have to pull all those levers, we can pull some of them. Retention improvements, all of these things, I think, will lead to -- and then renegotiating some of these deals. In some cases, there could be more content drops. So -- and also the discovery of the fast channels on the platform, that has also led to increased ad inventory. So there's just too many levers here for us not to be able to get there.
With that context in mind, we now get to the core bearish argument:
As you can see above, fuboTV's total shares outstanding stands at 292 million. That's up 58% y/y from 185 million in the same period a year ago. So my question is, if for whatever reason, fuboTV isn't able to improve its core costs as much as it desires, would investors be willing to stomach another significant capital raise?
Because it appears to me that the only aspect of fuboTV that could ever be meaningfully profitable would be its advertising business. And if we consider the best ad business in the world, for instance, Meta Platforms (META), its operating margins are very approximately 40%.
And given that fuboTV's advertising revenues are on a path towards about $110 million in 2023, even with Meta-like operating margins, this would mean about $45 million of operating profits.
This means that despite minimal growth in its advertising business, investors are being asked to pay more than 12x forward operating earnings for fuboTV's advertising business. And this assumes that fuboTV's advertising business is as profitable as Meta's.
If for example, fuboTV's advertising business has operating margins similar to other adtech players, that would mean that its advertising margins would be about half that level at around 20%. And then, suddenly, the multiple that investors are paying for fuboTV's minimal growth advertising business just significantly increased.
The Bottom Line
Investors are optimistic about fuboTV Inc.'s potential for positive cash flow by 2025, but concerns arise about the profitability of its core business and profit margins.
The company focuses on acquiring subscribers through sports offerings and monetizing through subscriptions and digital advertising. Its rapid customer acquisition is seen as a positive sign.
Revenue growth rates are promising compared to other streaming platforms. However, the core business remains unprofitable, projected to burn $200 million in free cash flow this year. Further capital raises may be needed. Also, the profitability of fuboTV's advertising business is uncertain, and investors are paying a high multiple for minimal growth and uncertain profitability.
For further details see:
fuboTV: Share Price Surge And Cash Flow Milestones