Share prices of sports-centric streaming service fuboTV (FUBO -1.51%) are down more than 90% from their all-time high and down more than 70% year to date. A big reason for the drop is that the company is burning tons of cash and racking up a net loss of $485 million over the past 12 months. That's a pretty astounding loss for a small-cap stock with a market capitalization hovering around $710 million.
Investors knew it would be a tough business model to succeed with, but some hoped fuboTV would turn the corner on profitability by monetizing its large user base in more lucrative ways. Recently, the company announced it was abandoning what many had hoped would be its cash-flow machine. The news is leaving remaining investors to wonder what to do now.
Why fuboTV loses so much money
fuboTV just released preliminary results for its third quarter of 2022. The highlight of this report is it now has more than 1.2 million paying subscribers -- an increase of 27% year over year. The stock popped on this news because subscriber growth is important.
However, there's something investors need to know about fuboTV's subscription business: In the second quarter of 2022, it generated about $200 million from its paying subscribers. However, the company spent about $219 million on the sports content that was streamed. In short, it's long been a negative-gross-margin business.
fuboTV's subscriber base has exploded over the past couple of years: It ended 2019 with 316,000 paying subscribers and has roughly quadrupled in size in the less than three years since. But since this is a negative-margin business, the company's overall losses have accelerated.
FUBO Net Income (TTM) data by YCharts
This entire business model is unsustainable ... unless fuboTV didn't have other ways to monetize its user base. One way is through advertising, which has high potential given most streamers like to watch sports on a real TV (and not via mobile) and that's also where advertisers prefer to display ads.
Another way to monetize is through an in-house sports gambling operation and many investors bought the stock specifically because they liked this component of the investment thesis. And indeed, the idea makes a lot of sense. Integrating sports viewing and sports gambling into a single user experience could have value.
However, fuboTV is abandoning the endeavor. In Q2, management said fuboTV couldn't build out its wagering platform on its own because of "market conditions" -- in other words, it's too expensive with the cost of investment capital going up due to rising interest rates. It did look for a partner but ultimately couldn't find one. And it's consequently shutting this business segment down now, and instead doubling its efforts to reach break-even cash flow.
Can fuboTV really turn the corner?
At its Investor Day presentation in August, fuboTV's management said it's trying to get to 2 million paying subscribers in North America and 600,000 paying subscribers outside of North America by 2025. That's substantial subscriber growth from where it is now. But again, this is a negative-margin business, meaning subscriber growth alone won't carry fuboTV to profitability.
This dynamic places the profitability burden on fuboTV's ad business. By 2025, management hopes to make $15 to $20 in monthly ad revenue per user on average. It generated $7.25 in average revenue per user (ARPU) for ads in Q2 this year.
More than doubling monthly advertising ARPU from here in just four years will be a herculean task for fuboTV considering its ARPU is already top-tier. For perspective, Netflix is launching an ad-supported tier to its service, which Netflix Chief Operating Officer Gregory Peters believes will be "sort of equal" to its comparable paid-streaming tier in terms of monetization. Considering the difference between these two tiers is $3 per month, that seems to be about what Netflix believes it can generate in monthly advertising ARPU, at least initially.
Similarly, connected-TV platform Roku is generating just $3.68 in monthly ARPU. Granted its 63.1 million users watched between three and four hours of TV per day in the second quarter of 2022 whereas fuboTV's users stream about six hours per day. But I believe this shows that fuboTV already has world-class engagement and monetization numbers. It's hard to imagine the ARPU more than doubling from here.
All in all, fuboTV's streaming business has negative margins and the sports-gambling business is no more. Therefore, the company's ad business is its only hope to reach profitability. And that's why I'd avoid fuboTV stock -- I doubt it can get that much stronger.
If I'm wrong and fuboTV achieves all of its subscriber and monetization goals, fuboTV could be generating north of $600 million annually in ad revenue alone with little incremental cost. If management can rein in spending, that may be enough to generate positive returns from the low price that fuboTV stock trades at today. Unfortunately, that doesn't bode well for the price to improve much.
