FuboTV (FUBO -0.74%) went public in October 2020 with great ideas about the direction in which it wanted to take livestreaming TV. But it will take significant investment to bring its ideas about interactive TV and sports wagering to life.
Unfortunately for the company, a terrible economy makes investing in its best ideas difficult. In addition, a significant sell-off of its stock has investors questioning whether the company will ever realize its promise.
Here are two reasons investors should continue to be cautious about fuboTV in the current market.
1. Difficulties monetizing its advertisement business
Sports draw premium audiences, and it has been fuboTV's plan from the beginning to build out a large subscriber base of sports-loving fans, increase engagement, and then monetize the subscribers through advertising.
But the company's second-quarter results showed a lack of progress in monetizing its users through advertising. You can measure fuboTV's ad monetization capabilities by looking at average revenue per user (ARPU). Ideally, you want to see ad ARPU growing, an indicator that the company's advertising profitability is improving. Instead, fuboTV's second-quarter ad ARPU declined 18% year over year to $7.25, its third consecutive quarterly decline.
Management blamed a terrible market environment, compounded by the company failing to get needed ad-tech upgrades in place by the second quarter -- a self-inflicted wound. Instead of having its technology upgrades ready for football season, the company pushed back the enhancements to the end of the year. These upgrades are necessary to reaccelerate ARPU, and now is not the time to fumble the ball in this challenging market environment.
Since investors in the current environment favor companies with profitable growth -- and growing the ad business is fuboTV's fastest way to achieve profitability -- investors might take a dim view of the lack of progress in getting proper ad technology in place.
2. Its Sportsbook is too much to handle alone
One potential casualty of this current economic turmoil is fuboTV's Sportsbook platform. When the company began building out its sports wagering business in 2021, the market was excited about investing in the idea for its big potential payout. But Sportsbook will likely take a long time to reach profitability, and since the economic environment has turned sour, investors are now fleeing investments with longer profitability time horizons.
Sportsbook has become a millstone around fuboTV's neck. As a result, one likely reason investors have sold off the stock is abhorrence at the thought of the company spending vast sums to make its wagering business profitable.
On the second-quarter earnings call, management announced that it has put the Sportsbook business under strategic review and will no longer pursue the opportunity on its own. While that sounds like fuboTV is simply looking for a partner, there might be scenarios where it could sell or shutter its wagering business if the economy significantly worsens.
A speculative stock in a bad market
All is not gloom and doom. So far, fuboTV has encountered very few problems growing its user base, despite significant headwinds. For example, the company recently posted second-quarter 2022 subscriber growth of 41% year over year, driving total revenue growth of 70% year over year to $221.9 million.
During its last earnings call, management said that it sees enough positive trends in key metrics to believe the company is on track to achieving its positive cash flow and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) goals in 2025.
The stock trades at a price-to-sales (P/S) ratio of 0.8, which many people consider significantly undervalued compared to the S&P 500's P/S of 2.2. If fuboTV manages to make it through this downturn with its business intact, it would have very high upside potential from its current valuation.
However, before investing, you should consider that many TV experts believe livestreaming is a terrible business and structurally unprofitable. Additionally, there are six players in the livestreaming market in the U.S., and with the overall demand for live video streaming continuing to slow, only two or three companies will likely survive. And at the end of 2021, fuboTV was the fourth-largest player by market share. Currently, Hulu Live, owned by Disney, YouTube TV, owned by Alphabet, and Sling TV, owned by Dish Network, dominate the industry.
So before you invest, understand that fuboTV might not survive the likely upcoming industry shake-out.
