While no one can ever be sure how a particular stock will perform in the long run, there are some stocks that have the odds heavily stacked against them. Two such stocks are Lyft (LYFT 1.87%) and Fubo (FUBO 1.46%). Your portfolio will thank you for staying away.
Lyft
Lyft is the no. 2 player in the U.S. ridesharing market. It generated $1 billion of revenue in the first quarter of 2023 from about 19.5 million active riders. On that revenue, it posted a net loss of $187.6 million.
The company managed to grow revenue by 14% year over year in the first quarter, but that growth came at a cost. Gross margin was 45%, down from nearly 50% in the prior-year period. Lyft attempted to keep operating costs in check, but total costs still rose nearly as fast as revenue. Scale is not helping.
Lyft's net loss is almost entirely due to stock-based compensation expense. The result of this excessive use of stock-based compensation is that Lyft's share count is expanding rapidly. The company's outstanding share count jumped 8% over the past year, diluting shareholders in the process.
A more fundamental problem for Lyft is that Uber, the market leader, is also unable to turn a profit. Uber posted an operating loss of $262 million on $8.8 billion of revenue in the first quarter. Granted, Uber does a lot more than ridesharing, including restaurant delivery and freight services. But still, investors should be wondering if it's even possible for a ridesharing company to turn a sustainable profit.
Lyft has plenty of cash and short-term investments, so it's in no danger of running into liquidity issues anytime soon. Non-restricted cash, cash equivalents, and short-term investments totaled $1.76 billion at the end of the first quarter. The company reported a free cash flow loss of about $120 million in the first quarter, so it can support itself for multiple years before cash becomes a problem.
While Lyft will have no problem keeping the lights on, it's not clear if there's a solid investment thesis for Lyft stock. It doesn't look like there's a viable path to profitability, and getting bigger is not helping the bottom line at all. Best to stay away.
Fubo
Sports-centric streaming provider Fubo has had little trouble winning subscribers and growing revenue. Revenue was up 34% year over year in the first quarter of 2023, and the subscriber count in the key North American market jumped 22%. The average revenue per user also expanded in North America, up 8% year over year.
None of this really matters, though, because Fubo is profoundly unprofitable. The company doesn't explicitly report gross margin, but if it did, the metric would be right around 0%. Total revenue of $324.4 million in the first quarter was offset by $321.1 million of expenses related to content, broadcasting, and transmission. Add in all Fubo's other costs, and you arrive at a net loss of $83.6 million.
To be fair, the profitability picture is improving as Fubo grows. The bad news is that Fubo is burning cash at an alarming rate. Free cash flow was a loss of about $80 million in the first quarter. The company has enough cash on hand to fund itself for about another year. Fubo raised $106 million from selling stock in the first quarter, but because the stock price has fallen so far, that move caused the outstanding share count to surge by 43% compared to one year prior. This game can't continue forever.
Fubo is in a race against time, and it looks unlikely that the company can possibly win. This is a 0% gross margin company in an ultra-competitive market funding itself by selling its depreciating stock. No thank you.
