This market downturn has been brutal. Tons of stocks have lost most of their market value, and live-TV streaming service fuboTV (FUBO -2.14%) is among them. The stock once traded at more than $40 last year, but it sits in the low single digits today. The good news is that some of these beaten-down stocks will recover, eventually setting new highs as the businesses flourish.
But will fuboTV be one of them? Unfortunately, the company is stuck in a bind that puts shareholders in a potential heads-you-lose, tails-you-lose scenario. The company has demonstrated stunning revenue growth over the past couple of years, but it has financial red flags that investors should consider before buying the stock.
The business model could be flawed
fuboTV's core product is live-television programming. It doesn't own the channels it offers. Instead, it pays the network companies fees for broadcasting rights. This isn't a unique business model; virtually every live television service does the same thing. This makes live television significantly price-competitive, so fuboTV must offer its service nearly at cost to remain competitive.
For example, fuboTV brought in $224 million in revenue for its most recent quarter ending Sept. 30. Its broadcasting rights cost fuboTV $214 million, or 95% of revenue. Once you factor in other expenses like sales and marketing, general and administrative, transmission, and others, fuboTV's business is losing a lot of money. Operating losses were $150 million in the third quarter, more than half of revenue.
Most of fuboTV's competitors can offset the miserable margins of live television. Alphabet, which offers YouTube TV, is a trillion-dollar company that makes billions in profits from advertising on the internet. Walt Disney, which owns most of Hulu, has a content portfolio and other business segments. fuboTV has been trying to get additional revenue streams like ads and sports betting up and running, but has had mixed results thus far.
Heads, you lose
A company can't lose money forever, and fuboTV's operating losses equaling more than half of revenue is a sign that the company is nowhere near turning a profit. So the question is: How long can fuboTV do this?
It may not be much longer. You can see below that fuboTV burned through more cash in the past year than it has left on its balance sheet. To make matters worse, there's already $400 million in debt, which costs the company in interest to service.
FUBO Free Cash Flow data by YCharts
The worst-case scenario is that the company goes bankrupt, unable to secure funding to stay in motion. No matter how low you buy a stock, you can still lose your entire investment when a company goes out of business. This company is losing so much money that it's something investors must at least consider, even if there are options for fuboTV in the near term (more on that below).
Tails, you lose
Unfortunately, the other side of the coin isn't great, either. fuboTV's best option right now is issuing new shares of stock to raise money. Management is already pulling this lever; outstanding shares have increased 26% in the past year.
FUBO Shares Outstanding data by YCharts
Adding more shares is like cutting a pie into more slices. The pie doesn't get any larger, so cutting it more means the pieces get smaller. When a company adds more shares, investors' existing shares represent less of the company, meaning their value decreases. This is called dilution, and it can ruin investment returns if enough dilution occurs.
The significant risk here is that fuboTV keeps issuing shares to raise the money it needs, diluting all of the potential returns from the stock, even if fuboTV's business eventually flourishes. Remember, fuboTV's share price is so low that it would have to issue lots of new shares to raise a significant amount of cash.
fuboTV's business must improve rapidly, or investors could risk seeing their shares wiped out in bankruptcy or diluted from a continually increasing share count. It's a game with no clear path to victory, so why play? fuboTV would ideally turn things around, but investors may be better off looking elsewhere until the financials show more improvement.
