Streaming platform fuboTV (FUBO 1.46%) was a market darling during COVID-19 when the stock quickly soared more than 700% to its peak in late 2020. But investors are left picking up the pieces after the stock has fallen 96% from its high since then.
The rapid growth of fuboTV makes it an intriguing stock for bold investors, but there are some potential problems on the horizon that you should know about.
Understanding fuboTV's business
As a TV streaming service, fuboTV offers live channels for sports, which it emphasizes, as well as entertainment and news. Some streaming services like Disney+ or Netflix attract eyeballs with their original content, making money with subscriptions.
But fuboTV is more like a distributor, paying fees to broadcast the channels it carries to its audience. It is competing with cable companies and other streaming platforms, so it must charge as little as possible, essentially giving away its service for what it pays in broadcasting rights.
Subscriber-related fees, which are the broadcasting rights fuboTV pays for, were 102% of revenue in the first quarter of 2022.
Think of the TV channels as a carrot that fuboTV dangles to get you onto the platform. Once there, the company can advertise to you and offer interactive gaming and betting to make additional money. These are much more profitable than the channel broadcasting itself and are the key to the company turning a profit over the long term.
Ad spending could slow down
Advertising has steadily become a bigger contributor to fuboTV's business; ad revenue grew 81% year over year to $22.8 million in 2022 Q1, about 10% of total revenue.
However, there are warning bells from other advertising companies that the industry could be heading into a downturn. Roku is a competitor of fuboTV and has a much larger advertising business. Roku recently reported a down quarter and warned that it's seeing advertisers dramatically reduce or pause their ad spending due to economic uncertainty.
This is likely impacting fuboTV, too; less ad spending means fewer ad dollars offsetting subscriber-related fees, which probably won't help the company slow its losses.
Burning cash in this economy?
You can see how much fuboTV needs to grow its ad and betting businesses in the chart below. The company grew subscribers 81% year over year to 1 million in 2022's first quarter, but because those unprofitable monthly subscriptions make up more than 90% of the business, fuboTV's cash losses are growing with revenue.
FUBO Free Cash Flow data by YCharts.
Ideally, fuboTV can continue to raise cash and burning money until it grows large enough that its ad and betting segments can move the needle and push the company toward turning a profit.
But the volatility in the market could put the company in a tight spot. It has $456 million in cash and short-term investments; it burned through $129 million last quarter, so it could look to start raising money within the next two quarters if that pace continues.
There's already $402 million in debt on fuboTV's balance sheet, though it's not due until 2026. But more debt creates more interest expenses, which isn't ideal for a cash-burning business, so fuboTV will probably try to avoid borrowing if it can.
Issuing new shares of stock is the other option; it's a routine procedure for young companies. But adding new shares causes dilution, which means existing shareholders own less of the business, lowering the share price.
That's why it works best in bull markets. When share prices are high, a company can raise a lot of money with minimal pain to shareholders. Now, fuboTV won't be able to raise much cash without issuing a ton of new shares because the stock has lost so much value.
Ultimately, fuboTV will do what it must to survive, but it might not be shareholder-friendly. For that reason, investors should consider waiting it out to see what management does to keep the business going and revisit the stock once there's more clarity around fuboTV's financial health.
