Meme stocks have been unpleasant investments in this bear market. Take live-TV streaming company fuboTV (FUBO 0.37%), for example. The stock has fallen a whopping 93% from its high. But the stock has recently shown a pulse, rising 52% in just the past month.
Is some optimism finally heading back into the market? Will fuboTV finally begin its journey of share price rehabilitation? Perhaps, but here's why investors should handle fuboTV with care.
Is a short squeeze coming?
It's an old cliche that the stock market boils down to fear and greed, but there is truth in that saying. Sometimes the pendulum swings too far in one direction; you can see below that short sellers are piling into fuboTV, shorting almost 30% of the stock's outstanding shares. These must be repurchased at some point so that short-sellers can close their positions.
FUBO Percent of Shares Outstanding Short data by YCharts.
Shorts jumped on fuboTV during a euphoric market in late 2020 to early 2021, and it worked out when the market peaked and began cooling off. But this time, things might not work out so well.
The stock has been hammered, losing the majority of its market value. Meanwhile, market sentiment has noticeably improved lately. CNN's Fear & Greed Indicator shows that investors have moved from fearful to neutral, and the S&P 500 recently surpassed its rolling 125-day average, a sign of potential positive market momentum.
Short-sellers might get caught with their hands in the metaphorical cookie jar if this is the beginning of a broader market recovery from the lows of the past year. A short squeeze could occur if too many short-sellers try buying shares to close their position.
Management is making moves
The streaming company has successfully grown, but the business is hemorrhaging cash, a dangerous thing in a bear market when raising new funds can be challenging. The company's vulnerable financials have probably motivated short-sellers to jump on the stock as they have.
The company has about a year before its cash runs out, based on its negative free cash flow over the past year and its current cash balance:
FUBO Free Cash Flow data by YCharts.
Fortunately, management has recognized this and is acting appropriately. In its second-quarter earnings announcement, the company said that it's seeking a partner for its sports wagering segment instead of going about it alone, which could help roll the service out faster and cost less money doing it.
Secondly, fuboTV signed a content deal with an entertainment company owned by Ryan Reynolds that will give it unscripted television content for the platform and ad sales for the channel.
The company has a lot of work ahead. Its global expenses were 152% of revenue in Q2, but these moves are at least a step in the right direction. Investors will want to see how much it can get its costs under control as profitability becomes increasingly necessary to survive long-term.
Treat fuboTV like what it is
It's essential to have the right mindset when approaching a stock like fuboTV. The increasing short-seller activity could create a short squeeze if the market rallies. However, buying a stock for the possibility of something speculative like a short squeeze isn't investing; it's gambling.
Meme stocks like fuboTV will probably remain very volatile and could give back much of those gains if the company shows signs of financial distress over the coming months or quarters. So if you buy fuboTV, consider doing it as a speculative position, a tiny part of a diversified portfolio built with a foundation of blue-chip stocks with solid fundamentals.
