When fuboTV (FUBO 1.58%) came public in October 2020 for $10, investors were fascinated by its plan to integrate live TV with sports betting. It was not long before the initial hype around fuboTV's sports-betting plans pushed its stock price above $50 at different points in time between December 2020 and February 2021.
Unfortunately for fuboTV, the investing environment turned sour over 2021 due to rising inflation and supply chain challenges. Additionally, a short report by Kerrisdale Capital hit home, pointing out multiple flaws in the company's business model, including fuboTV's sports betting ambitions. Here's why investors are taking a massive gamble by investing in fuboTV.
FuboTV makes a risky bet to boost profitability
fuboTV currently generates most of its revenues through its TV subscription business. However, since TV subscription businesses have historically been low-margin, fuboTV will need to produce high-margin revenue sources to achieve overall profitability. And sports wagering and gaming is one of the revenue sources fuboTV chose to raise its margins. Unfortunately for fuboTV, that's a tricky business to get into for multiple reasons.
First, online sports wagering has immense competition from companies like DraftKings (DKNG -0.37%), Caesars Entertainment (CZR -1.10%), and BetMGM LLC. DraftKings and FanDuel have 7.3 million and 12 million users, respectively. BetMGM has not disclosed how many customers it has, but it has estimated it became the No. 2 player based on market share in an April 2021 investor presentation. In contrast, fuboTV has only recently risen above 1 million total TV subscribers, with many not even in the states where the Fubo Sportsbook is approved.
Second, each state must approve sports betting initiatives, and so far, the approval process has been moving slowly. After two years, fuboTV only has 10 market access agreements. And out of the big four states of New York, Florida, California, and Texas, fuboTV only has signed an access agreement with Texas. It could take several years for Fubo Sportsbook to become available in New York, California, and Florida.
Third, sports betting could turn out to be less lucrative business than FuboTV hopes. During an interview in February, American Gaming Association's CEO Bill Miller told Yahoo! Finance Live that sports betting is likely to remain a lower-margin part of the gaming market compared to traditional brick-and-mortar styles of wagering.
Fubo Sportsbook might have an edge
FuboTV believes its Sportsbook has several advantages over other sportsbooks.
First, Fubo Sportsbook is the only owned-and-operated app in the U.S. that can sync live sports viewing and wagering on a single platform. Management has some evidence that a live TV and sports wagering integration does differentiate it from competitors. For instance, fuboTV recently shared data showing that crossover users (people who are both video subscribers and sportsbook players) place more bets than sportsbook-only players. Additionally, fuboTV discovered that it retains crossover users at higher rates.
Second, fuboTV believes it can acquire customers at a significantly lower cost than its competitors. For example, competitors such as Caesars, DraftKings, and MGM use TV commercials to reach customers -- a very expensive way to market those products.
In contrast, fuboTV directly markets to its streaming subscribers, people who are more likely to use Fubo Sportsbook -- thereby achieving lower marketing costs to acquire players and shortening the path to profitability.
So is FuboTV a buy?
So far, the sports betting operation has provided less juice to fuboTV's results than investors initially thought. For example, fuboTV reported that its sports betting operation lost $301,000 in its first-quarter 2022 earnings report -- with projections of material revenue from Sportsbook only beginning in 2023. Additionally, fuboTV announced negative operating cash flow of $126.6 million in Q1, including a $7.5 million operating cash flow loss from the wagering business.
Consequently, because the business segment is pre-revenue, many of Fubo Sportsbook's advantages are still primarily theoretical. As a result, it could take some time for fuboTV to prove how much profitability Sportsbook can achieve.
Meanwhile, fuboTV's first-quarter 2022 earnings report also showed the company going in reverse, with negative gross margins of 1.5%, the lowest fuboTV has reported since the second quarter of 2020. Additionally, investors were unhappy to see fuboTV lower its revenue and total membership guidance for the fiscal year 2022.
So while fuboTV's gaming and sportsbook segment sounds enticing in theory, there are other reasons why the company only sells at 0.63 times trailing sales. Additionally, while management does have many great ideas, many of those ideas are speculative and will take time to come to fruition, which won't help fuboTV's near-term profitability issues.