Sports-focused fuboTV (FUBO +0.00%) is a streaming alternative to the cable TV bundle. The company is increasing revenue and subscribers at a blistering pace. The only problem is that it also generates massive losses on the bottom line.
The shortfall is partly because fuboTV sells its services to consumers for less than the price required to cover its costs. Of course, it's easier to grow if you offer unreasonably low prices, but that strategy is not sustainable over the long term.
In its most recent quarterly earnings announcement, on May 5, fuboTV finally shifted its focus from growth at all costs and started considering profits.
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fuboTV is balancing growth ambitions with profitability
To put fuboTV's operating imbalance into perspective, consider that it generated $242 million in revenue in its first quarter, which ended March 31. At that same time, fuboTV lost $141 million on the bottom line. The most significant expense the company grapples with is content costs, or what it calls subscriber-related expenses. These are fees that fuboTV must pay third parties for the rights to show their content to fuboTV viewers.
FUBO Revenue (Quarterly) data by YCharts
In Q1, these totaled 102% of revenue, up from 95% of revenue at the same time the year before. It's a troubling sign for investors when a company's costs as a percentage of revenue go up despite surging revenue growth. Typically, as revenue increases, costs as a percentage fall due to economies of scale. Undoubtedly, this trend is partly to blame for fuboTV's stock price crash of 95% off its highs.
FUBO Net Income (Quarterly) data by YCharts
Management finally acknowledged what investors have been concerned about for several quarters and moderated its growth ambitions in the near term. In the shareholder letter on May 5, the company said, "We have sharpened our focus on our strategies to achieve profitability as we continue to scale. We believe that the initiatives we are undertaking strike an appropriate balance of capturing market share while driving the operating leverage inherent in our model."
One step it is taking is migrating existing customers on a lower-priced tier to a higher-priced service. The change will boost the average revenue per user at the expense of losing a few existing customers who will balk at the increase. Additionally, it may slow subscriber growth in the future to replace an attractive entry-level service with a higher-priced tier. Most importantly, the change will better balance the company's variable costs with revenue.
NYSE: FUBO
Key Data Points
Recall that the company endures expenses with each new subscriber or group of subscribers. If it increases the price each subscriber has to pay, the impact of each new member will have a more positive effect on profitability. The move also signals to investors that fuboTV management is moderating growth ambitions.
What this could mean for fuboTV investors
Ultimately, fuboTV is benefiting from the long-running trend of consumers switching from the cable TV bundle to streaming services. That trend is unlikely to reverse because of the lower price and greater convenience of streaming. What's more, fuboTV's choice of target customers (sports fans) goes after those most likely to prefer the bundled service. That's because live sports are not nearly as available through any other type of service.
With 1.35 million subscribers as of March 31, fuboTV has a long runway ahead. Getting the company on a more sustainable footing -- and ensuring it endures for the long run -- might be more important than attracting the most subscribers in the shortest time.
