Investors became enamored with this virtual multichannel programming distributor (MVPD) after the company posted strong earnings growth on its first earnings release in November, in which it also raised guidance for the fourth quarter. The company also mentioned plans to eventually get into online sports betting. It acquired fantasy sports software company Balto Sports in early December.
Fubo's stock absolutely skyrocketed as analysts continued to raise their target prices, with Needham's Laura Martin raising her target to a street-high $60 on Dec. 22. However, the very next day, LightShed's Rich Greenfield defied the crowd, saying fubo "may be the most compelling short we have ever identified in our career as analysts" and giving the stock an $8 target.
So who's right? With Fubo having soared as high as $62 but now trading at $39 as of this writing, what should investors do with the stock?
The case for $60
Fubo's growth numbers look impressive. Last quarter, the company grew its subscriber count 58% to 455,000, with average revenue per user increasing 14% year-over-year. It also showed total adjusted revenue growth of 71% to $61.2 million. Average MAU hours streamed increased 20% to 121 hours per month. Importantly, advertising revenue increased even more, up 153% to $7.5 million.
The cost side seems to be improving as well, with the company logging a positive adjusted (non-GAAP) contribution margin of 16.5% and a decline in subscriber acquisition costs (SAC).
Martin based her $60 target on several factors, including:
- That fuboTV is taking share from its competitors
- Short covering
- Lowered SAC thanks to its Hisense partnership
- Upside from sports betting
- Over-the-top (OTT) expansion
- Connected TV (CTV) upside
Basically, from the looks of it, fubo looks like an excellent growth stock firing on all cylinders and benefiting from the rise of streaming, right?
Not so fast, says Greenfield.
More money, more problems
After fuboTV's epic run this year, it's probably a good idea for all investors to understand the bear case as well. And boy, does Greenfield do a good job of laying out several red flags.
First, fuboTV isn't really differentiated from its peers YouTubeTV or Hulu Live. In fact, though it bills itself as the "sports" vMVPD, it carries fewer channels, especially since it dropped the Turner networks that hold MLB playoff games, the NBA, and even March Madness. All of the vMVPDs have also dropped regional sports networks due to cost. Sports content is really expensive. The only way these channels can scale is by adding more non-sports content. Originally billed as a sports-centric vMVPD, fubo now provides an array of entertainment options similar to the others.
Greenfield believes that the MVPD bloated bundle will shrink, eventually ending up at around 45 million subs for the industry overall, down from 66 million today. He also thinks only half of those subscribing to cable bundles will transfer to OTT streaming vMVPDs. That should only leave about 23 million vMVPD subs in the U.S. Meanwhile, fubo still has to compete with Youtube, Hulu, and Sling, which account for about 90% of the vMVPD bundles today, or 10 million out of the current 11.5 million subs.
That subscriber figure should double over five years or so. But since fubo doesn't really have a differentiated product, it will be hard to steal enough market share for fubo to really get winner-take-all growth and economics. What's more, even if fubo doubles its market share and grows four times over versus two times over for vMVPDS, that would only get to 2 million subs.
The other problem is that these vMVPDs don't really make money. In fact, Greenfield expects fubo's subscription business will be a "zero gross margin" business even at maturity. I'm not sure if he meant zero gross margin or zero operating margin, but today, even after its great quarter, fubo is a breakeven gross margin business on a GAAP basis. Subscriber-related expenses alone slightly exceeded total revenue last quarter, even with ad revenue included. With the rest of its operating expenses, fubo lost $127 million last quarter alone.
In any case, sports-related distributors always have to pay high prices for sports content, and many of those content owners force distributors to also carry other non-sports channels. It's a notoriously low-margin business, and I'm not sure why fubo would be any different.
Can ad revenue and sports betting make up the difference?
That leaves advertising, which could make up the difference. However, ad revenue only made up 12.3% of total revenue last quarter. Fubo would have to greatly increase ad revenue going forward.
Greenfield suggests that fubo makes about $7 per sub per month, compared with larger, more technologically savvy competitors that earn $10. Some think fubo can eventually get to $20, but Greenfield thinks that's a big stretch, especially as more sports go to broadcast or the direct-to-consumer route, such as with stand-alone ESPN. But assuming fubo hits $20 per month on two million subs, that would make about $960 million in ad revenue per year. That would be higher-margin than subscriptions, but it wouldn't all fall to the bottom line since fubo would also have to pay some connected TV ad gatekeepers such as Magnite (MGNI -2.13%) and Roku (ROKU -0.99%). It will also take many years to get to those subscriber levels and ad ARPU, if fubo gets there at all.
Additionally, sports betting is a "fantasy," according to Greenfield. Greenfield noted that recently acquired Balto doesn't have a betting product, any revenue, or even a website. Additionally, many who watch fubo in geographies that allow betting already have a sports betting app. It will be hard to build a product that stands out in a crowded field.
And the kicker
If that's not enough, there also may be a good chance investors aren't contemplating a correct share count for fubo. For instance, some investing websites list the share count at 67.5 million. However, when one looks at the company's quarterly filing, there are actually a lot of options, warrants, and preferred shares that, when converted, would add another 92 million shares to the share count, putting the real share count in the high-150 million range. Greenfield himself uses a 158 million number -- more than twice the share count listed on many websites.
That means fubo's real market cap is about 6.2 billion, not the 2.6 billion listed on many investing websites today.
Be careful with fubo
All in all, Greenfield's numbers-supported objections make more sense to me than Needham's more generalized bull thesis. Certain companies, such as The Trade Desk (TTD -0.97%) or Roku (ROKU -0.99%), make money from the general rise in streaming no matter which channel is the winner. Fubo, on the other hand, just seems like another product in a much lower-margin business of vMVPDs without any proprietary content.
If fubo can differentiate in order to take more market share than Greenfield thinks, better monetize its users, and keep costs down, it could be worth the current price someday. But it appears to be a long shot. Those thinking that fubo is the next Trade Desk or the next Roku need to understand it's a much different product with inferior economics. It shouldn't necessarily be grouped with those other two.