What happened
Shares of streaming-TV service fuboTV (FUBO -11.61%) fell 13.2% in May, according to data provided by S&P Global Market Intelligence. The company reported financial results for the first quarter of 2022 on May 5. And the market's negative reaction to the report entirely accounts for the stock's underperformance for the month.
So what
FuboTV offers a streaming service that revolves around live sports. The company ended Q1 with over 1 million subscribers, which was an 81% increase from the first quarter last year. And Q1 revenue jumped 102% year over year to $242 million. These are sensational growth numbers, and yet the stock sold off after the report.
One of the primary ongoing concerns with fuboTV's business is its gross profit margin -- or lack thereof. If something costs $1 to make and it sells for $2, the gross margin is 50%. fuboTV doesn't own its live-sports content. Rather, it signs contracts for the rights to broadcast. And these contracts are part of its cost structure. And as it stands in Q1, its gross margin was negative 2%. In other words, it spent about $1.02 to generate every $1 of revenue -- and that's before other operating expenses. You don't have to be a math whiz to recognize that this isn't sustainable.
Image source: Getty Images.
On the conference call to discuss results for the second quarter of 2021, fuboTV CEO David Gandler said that, long-term, he expects the company can reach reach 50% gross margin. And analysts had expected the company to at least be making marginal progress in that regard. However, Q1's profitability took a step back, motivating many analysts to downgrade fuboTV stock.
Investors have been willing to take a chance on the low-profit business because they believe other parts of fuboTV's business have greater potential than the revenue it generates from selling streaming subscriptions. Specifically, they like fuboTV's advertising business and its potential in sports gambling. However, in Q1, average revenue per user (ARPU) for advertising fell 5% year over year. And it's still not generating revenue from wagering.
Now what
For the second quarter, fuboTV management expects to lose some subscribers as it increases prices. However, it expects to end the year with almost 1.5 million subscribers, up 31% compared to the end of 2021. And it expects full-year revenue to increase 61% to over $1 billion.
The growth outlook remains solid for fuboTV. But profits are still a long way off. Management hopes to achieve breakeven on an adjusted basis in 2025. Put another way, it expects to be burning cash for approximately the next three years. The company is well capitalized with $456 million in cash. But considering it had $126.6 million in negative cash from operations in Q1 alone, shareholders will want to see rapid progress toward breakeven.
FuboTV management said it expects cash-flow improvement throughout 2022. And, in my opinion, shareholders should hold it to that promise.
