Fubo TV (FUBO -3.57%) was one of the hottest stocks of the 2020-21 pandemic stock market bubble. Shares of the live TV streaming platform went from under $10 in mid-2020 to almost $50 in early 2021 as it became one of the famous "meme" stocks popularized by Reddit traders.
But now, with markets heading lower and the recent era of speculation over, Fubo stock has taken a tremendous tumble. Its shares trade at just $1.21, down over 95% from their early 2021 highs. Investors have major concerns with Fubo's razor-thin gross margins and substantial operating losses that won't move in the right direction.
Can Fubo TV make it out of this recent stock slump? I think that is unlikely. Here's why.
Q4 results: More of the same (losses)
Look at the first page of Fubo's fourth-quarter shareholder letter, and you'd think things are going smoothly for the live TV provider. The company surpassed $1 billion in annual revenue, hit $100 million in advertising sales, and exceeded its subscriber growth forecast by 80k for 2022. Executives seem optimistic as the company increased its net margin and reaffirmed its goal for positive free cash flow in 2025.
Ignore this management commentary and focus on what actually matters for shareholders: profits. Fubo has sky-high licensing costs to TV channels like ESPN and Fox that give it abysmal gross margins, which were approximately 1% last quarter. And this was a major improvement from a few quarters ago when the gross margin was well into negative territory.
Add on overhead costs, marketing spend, and technology development, and Fubo had an operating loss of $412 million last year and $93.9 million just in the fourth quarter. Both numbers were higher than a year ago, which shows how little operating leverage Fubo is getting from its virtual cable package products.
FUBO Free Cash Flow data by YCharts.
Competition is fierce
The core problem with Fubo's business is that, aside from a few select channels, its service is a commodity going up against competitors like Alphabet's YouTube TV and Walt Disney's HuluLiveTV. It also faces competition from legacy cable TV providers like Comcast and Charter Communications. While its competitors vary, what they have in common are diversified businesses that allow them to run their live-TV services at break-even or a loss and still generate a consolidated profit.
Fubo does not have this luxury. This gives the company two choices today. It can keep prices even with the competition and hemorrhage money (what it is currently doing) or raise prices significantly and start losing customers to other providers. Neither path means a sustainable business model.
A third option is possible, which is to differentiate its product offering enough to give it pricing power and obtain sustainable profit margins. But the likelihood of this is low as Fubo does not produce any video content itself. And if it does, it certainly won't happen overnight. Therefore, I think that Fubo's next few years will look a lot like 2022, burning hundreds of millions of dollars off the balance sheet each year.
No price is low enough
Fubo had $337 million in cash on its balance sheet at year's end. In order to keep the lights on, management has sold shares of its common stock, raising $292 million through various methods last year. This strategy has heavily diluted shareholders, with shares outstanding up 15% last year alone.
But at its current depressed stock price, future share offerings are going to be much more dilutive. For example, if it wanted to raise the same amount of money it did in 2023 as it did in 2022 from common stock sales, its shares outstanding would go up by more than 100%.
FUBO Shares Outstanding data by YCharts.
Or, Fubo management can choose to raise cash through a debt offering, which would almost assuredly come with high interest rates given the company's historical net losses. Either decision -- which Fubo management will be forced to make because of its huge operating losses and dwindling cash pile -- is bad news for Fubo stockholders.
A company that will never generate a profit isn't worth anything to shareholders. Avoid buying the dip on Fubo stock and put your money into more steady blue-chip securities instead.
