2023-04-10 13:25:14 ET
Summary
- Because of the cash burn rate, fuboTV will likely to need to raise cash in the near future.
- The question will be how they do it. That will be very important for the future of the company.
- Plus it is a challenging situation when you do not own the content and are dependent on the right holders.
Thesis
I like to look at companies that were once hyped and then fell sharply, because sometimes when the sentiment for a stock changes, the drastic overvaluation turns into a drastic undervaluation. And the depressed sentiment sometimes turns into wonderful buying opportunities. But fuboTV ( FUBO ) is not an undervalued stock right now in my view. The company is definitely in a difficult situation, due to a mixture of not enough cash and increased borrowing costs, coupled with a poor balance sheet and below-average execution.
Analysis
At first glance, the FY22 and Q4 22 results look quite good. They broke the 1 billion sales barrier and beat analyst estimates. However, fuboTV's problems do not stem from the revenue growth and ARPU metrics that management likes to show. Looking only at user numbers and revenues, fuboTV is increasing these figures and will probably do so again in 2023, and likely at a nice growth rate.
Shareholder Dilution
One big issue is shareholder dilution. The weighted average number of shares outstanding was 137,498,077 in 2021 and 182,472,069 in 2022. To raise cash they sold 50,620,577 new shares at an average price of $5.90 to raise $292.1m after commission and expenses.
Due to the low share price, this offer represented almost 1/3 of the shares outstanding at the time. And at the moment the share price is $1.10, which is even further below last year's level. So if they need to raise new cash, which is quite likely in 2023 or 2024, they could issue between 100 and 200 million shares, or even more, depending on the demand for cash.
I believe it is therefore quite likely that the total number of shares outstanding will double or more in 2023/2024, resulting in massive shareholder dilution.
On the positive side, however, they do not have the same SBC problems as other technology companies, as their SBC has remained flat over the past few years.
Cash And Debt
With an accumulated deficit of $1,558m as of 31 December 2022, fubo has lost quite a bit of money in recent years. And the road to profitability is still a long one. In the last earnings call , they guided to a hopefully positive FCF in 2025.
So, as a result, they need to have enough cash to bridge the time until then, or find ways to get new money. But with only $343m in cash, this is no easy task as they burn cash rather quickly. However, they said in the Q4 earnings call that the cash should be sufficient for the next 12 months.
Instead of issuing new shares, they could try to raise cash by borrowing, but with higher interest rates and tougher requirements, this could be difficult. The current environment is tough for companies that are losing money and need to raise new money.
I mean, there are a lot of companies right now that are losing money to gain market share, but they are not at negative gross margins . And technology companies in particular tend to have strong gross margins even when they are losing money. So it looks to me like fuboTV has some issues with their cost structures. So for me personally, technology companies with negative gross margins are a red flag.
Content
At the 25th Annual Needham Conference , fuboTV said it was the lowest cost provider of local sports in the US. This is a positive aspect as they are trying to replace cable TV and provide people with their favorite shows and sports. One problem, however, is that content providers may stop licensing their content to fuboTV or raise prices, which could lead to margin problems. It is difficult when you are dependent on someone else because you are not the content owner.
And on another note, some streaming rights are really valuable and companies pay absurd amounts of money to get those rights, so why should those companies share those rights with fuboTV? The streaming rights are a competitive advantage for the owner, and sharing them might be the wrong decision.
With Molotov Sports in France they are trying to enter the European market, but I think it will be hard to compete with DAZN as they already have 15 million paying premium subscribers , which is much more than fubo has. DAZN clearly dominates the key European markets of Spain, Italy and Germany.
Conclusion
So all in all, I would not build a position in fuboTV. At the moment there are too many risks and things that could possibly happen in the future. Of course, as with any company, there is a chance that they could turn around and be a massive winner in a few years, but right now it is too much of a gamble for me. I do not see a clear path to profitability and the possibility of immense shareholder dilution and negative gross margins leads me to the conclusion to stay on the sidelines and wait until I can see if they improve or not.
I would recommend existing shareholders to check whether they still believe that fuboTV's story is intact. At the moment, it seems it is more or less a gamble as to whether they can turn the company around, or whether someone will buy them out, or whether the debt burden will be too much.
For further details see:
fuboTV: You'd Have To Be Betting On A Turnaround