fuboTV (FUBO +0.00%) is a fast-growing sports-first streaming platform that spends more money than it makes, fueling investors' fears that the company could eventually run out of cash. As a result, fuboTV's stock price has dropped significantly over the past year. Here's why investors are right to be cautious about investing in fuboTV.
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fuboTV's subscription business has profitability issues
fuboTV faces two problems. First, many viewers don't want to pay high prices for TV subscriptions, which could limit fuboTV's ability to raise prices. For example, when Netflix (NFLX +2.90%) raised subscription prices recently, it lost 600,000 customers in the United States and Canada.
Second, fuboTV negotiated many current broadcasting rights contracts several years ago, when it had a much smaller subscriber base -- which gave it less bargaining power and less favorable contracts with large content providers. As a result, fuboTV still has some less profitable agreements on the books -- sometimes making positive gross margins difficult to attain. For example, although fuboTV achieved gross margins of 7% in fiscal 2021, fuboTV's first-quarter 2022 earnings report showed a disappointing negative 1.5% gross margin. CFO John Janedis said in the first-quarter 2022 earnings call that the negative gross margins resulted from a broadcast rights price increase on Jan. 1, 2022, without a corresponding subscriber fee increase to cover those higher costs.
Low or negative gross margins often mean that a company is financing its operations from whatever cash is on the balance sheet -- and if those reserves run too low, the company will have to raise money through debt or equity. Selling new shares to raise cash could water down existing investors' holdings and make stock prices plunge; adding debt to the balance sheet as interest rates rise would pile greater expenses on the company's future.
For example, fuboTV sold $203.8 million in equity in the first quarter of 2022 at $7.52 a share -- upsetting fuboTV shareholders who bought at higher prices, and who now have a decreased ownership stake and less profitability per share. No wonder fuboTV's stock price dove to under $3 a share.
Why fuboTV can still succeed
First, fuboTV's subscriber gains give it the ability to negotiate better broadcasting rights contracts. CFO John Janedis said in the first-quarter 2022 earnings call that the gross margin should improve over the next six to 12 months as more broadcasting rights come up for renewal. In addition, fuboTV raised subscriber fees on its lowest base package as of May 1, 2022 to account for increased content costs -- helping improve future gross margins. If the market sees fuboTV make significant progress in growing its gross margins, investor sentiment could rapidly improve.
Second, fuboTV plans to selectively acquire direct content rights rather than obtaining broadcasting rights through a third-party channel -- a way to lower content costs. For instance, fuboTV recently acquired the rights for two major European soccer organizations: Union of European Football Association national team competitions and the English Premier League.
Third, fuboTV plans to monetize TV viewers in other ways besides subscriptions. One way is through advertising, which currently represents 9.5% of revenues. Those revenues grew 196% year-over-year in fiscal 2021.
Fourth, although fuboTV 's recent equity offering failed to please investors, it did increase the company's cash hoard to $456 million at the end of the first quarter of 2022. Considering that fuboTV burned through $206 million in 2021, it likely has enough money to carry it through 2023 -- hopefully long enough for the current terrible market to subside. Furthermore, fuboTV is targeting positive cash flow and adjusted EBITDA in 2025.
The bottom line for investors
Rising interest rates have driven investors away from seeking growth at all costs, toward seeking for profitable companies. As a result, investors are now less enamored by fuboTV's triple-digit revenue growth, and they're more concerned about severe consequences from a lack of progress on the profitability front. So until investors see profitability improvement, even fuboTV's current valuation of 0.62 times trailing 12-month earnings may not be enticing enough for people to invest in the company.
