One thing keeping consumers from cutting the cord is live sports and news, but fuboTV (FUBO 2.60%) is changing that. It is focused on providing live TV streaming, and it has seen rapid adoption by focusing on this niche space.
However, this offering is becoming more commonplace across other platforms, which casts doubt on fuboTV's ability to take market share from deep-pocketed competitors. While the service is seeing continued adoption, there is a lot of skepticism about whether or not this will continue. The company has a few red flags that cause me to question whether fuboTV will succeed over the long term in this intensely competitive industry.
fuboTV is growing (for now)
fuboTV's niche focus has served the company well in terms of adoption so far. The company's first-quarter 2022 earnings, which were reported on May 5, 2022, showed strong adoption, with its North American subscriber count jumping 81% year-over-year to 1 million. International subscribers also grew substantially, soaring 102% year-over-year in Q1 to 305,000. This helped total Q1 revenue expand 102% year-over-year to $242 million.
However, that is where the good news stopped in the company's first quarter. The company's guidance for $1.05 billion in 2022 revenue was slightly underwhelming. It was less than the $1.07 billion that analysts were hoping for, which signals that fuboTV could be seeing growth slow down earlier than expected, maybe due to less adoption because of the increasing competition in live TV streaming.
A cash-burning machine
There were also concerns about fuboTV's cash generation and unprofitability. The company's net loss worsened 101% year-over-year to $141 million in Q1. The company also had a free cash flow burn of $129 million. It only has $451 million in cash, so if this continues, fuboTV will soon need to raise capital.
This would not be good for shareholders. fuboTV investors have already had a difficult time, seeing the stock decline 91% from its 52-week highs, and now management told them "a modest cash requirement" is needed in 2024, which likely means a secondary offering of shares. This will dilute existing shareholders, making returns even less lucrative.
The company is expecting positive adjusted EBITDA and cash flow in 2025, but the jury is out on when the company would become profitable. When looking at the company's losses and cash, it's hard to paint a picture of where this turns out good for investors. With positive cash flow so far away, fuboTV is looking like it will keep burning cash for a long time. This would make it hard to keep up with competitors in terms of how much it can invest in content.
Competition is heating up
Deep-pocketed competitors like Disney's (DIS -0.29%) Hulu and Alphabet's (GOOG 0.70%) (GOOGL 0.66%) YouTube TV are entering the sports streaming industry, and these players have lots of cash to fuel a cash flow burn for much longer than fuboTV could. This means that streaming competitors can take their time gaining market share in the space, whereas fuboTV might have to face a tough choice between staying afloat or gaining new subscribers.
It will be really difficult for fuboTV to maintain market share when it is facing big competitors with lots of money behind them. While the streaming service doesn't seem to be losing share right now, that could become a reality as it burns cash and falls into a tricky financial situation.
Why I sold fuboTV
I bought fuboTV because of its success in a niche category with few competitors besides cable TV. Now, however, this story has changed. Many streaming services are diving head-first into live sports streaming, and these competitors have much more money to invest in creating a more valuable platform than fuboTV. This is a cutthroat industry, and if a company can't spend the money to obtain exclusive, top-tier sports content, it will likely fall by the wayside. With fuboTV's cash burn, it is rapidly losing its ability to attract the best live sports to stream exclusively on its platform. On top of this, the company's profitability picture looks bleak, and if it does survive for the next decade, it would likely have to dilute shareholders substantially along the way.
Shares trade for a valuation of 0.7 times sales -- much lower than other streamers like Netflix (NFLX 1.31%), which trades at 2.8 times sales -- but this seems more like a value trap than a buying opportunity.
The bottom line for fuboTV is that it is facing rising competition in its core competency, and its financial picture casts doubt on the company's ability to continue taking share in the space. fuboTV is not guaranteed to fail, but the hill it needs to climb looks extremely difficult, and I would rather put my money elsewhere.