Streaming service fuboTV (FUBO -0.59%) has been an absolute rollercoaster of emotion for shareholders over the past year, trading as high as $35 per share and as low as about $4, close to where it currently stands.
The company has shown an ability to rapidly pick up customers, which gives fuboTV hope for long-term success. However, the business is wildly unprofitable, likely explaining the stock's struggles.
It could be a rewarding investment if the business works out, but strong subscriber growth alone doesn't make an investment thesis. Here is why investors should be very cautious toward fuboTV.
The good news: sports exposure and subscriber growth
The streaming company competes in a vast ocean of rivas, including Netflix and so many other media companies that have launched a service over the past couple of years. Notably, fuboTV focuses on live sports, a somewhat undercovered niche within streaming -- and that has helped it stand out to consumers.
At the end of 2021, fuboTV had 1.1 million global subscribers (1.3 million if you factor in its recent acquisition of Molotov), a 106% year-over-year increase. It is picking up customers at a swift pace, which is promising, and could speak to the quality of the product.
Currently, fuboTV is working to bring sports betting to its platform, further intertwining sports into the user experience and generating additional revenue besides ads and subscription fees.
But hemorrhaging cash is the bad news
Ads and sports betting are critical to fuboTV's long-term success. The company doesn't make its content; it licenses channels from media companies, and essentially makes no money on its subscription fees. The streaming landscape is so competitive that it must offer its platform at the lowest possible price.
Unfortunately, fuboTV is still a tiny platform compared to most of its competitors (Netflix has more than 200 million subscribers), and unprofitable subscription revenue still makes up most of the business. The company did $638 million in revenue in 2021, and 88% was from subscriptions with the rest coming primarily from ads.
The company's total expenses were a whopping 148% of revenue in 2021, causing a ton of cash burn. Net cash lost in operating activities totaled $192 million.
Timing can be everything
Rapidly growing companies burning cash are common, but fuboTV could soon find itself in a tight situation. It currently has about $374 million in cash and equivalents on the balance sheet, but could burn through a chunk of that over the next 12 months.
Expenses as a percentage of revenue have improved somewhat from 187% in 2019 to 147% in 2021. I don't think this dramatically improves in 2022 with sports betting just getting off the ground, so fuboTV is likely to burn a lot of its cash once again.
An equity raise is the most likely option to raise more funds, which is when a company creates new shares of stock. It can sell those shares to raise cash, but the new shares dilute existing shareholders.
When a stock is expensive -- for example, when FuboTV traded at $35 per share -- a company can raise a lot of money without issuing tons of new shares. However, the stock now trades at just $4, meaning it would need to issue many new shares to raise a meaningful amount of cash.
This is not a good situation for investors because of the likely dilution. Investors could consider waiting to see how much cash fuboTV burns over the next few quarters before buying shares. Don't be afraid to be patient; fuboTV is still small, worth less than $1 billion in market cap, so there is plenty of room for long-term upside if the company succeeds.