Just because a stock is down doesn't make it a buy. A stock that has fallen by 90% has the same downside risk as one at all-time highs: losing all of your money. Conversely, just because a stock has crushed the market for a short while does not mean it is destined to rise forever. All that matters in the long run is growth in earnings per share (EPS) and the price you pay relative to that EPS.
Investors have gotten excited about fuboTV (FUBO 1.46%) in recent months, sending shares of the stock up 48% year to date. However, the company is plagued by huge cash burn, abysmal gross margins, and a history of major shareholder dilution. Here are a few reasons why fuboTV stock is a must-avoid for investors right now.
Low margins, big cash burn
FuboTV offers consumers a chance to buy the cable package without going through the cable company. It is known in the industry as a virtual cable provider, so all you need is an internet connection to access dozens of popular channels from the traditional cable bundle.
The problem with this strategy is that cable channels are expensive. Even though some fuboTV subscription packages cost upwards of $100 a month, the company struggles to generate a profit due to the huge licensing fees paid to channels such as ESPN.
Let's use the first half of 2023 to illustrate this issue. During this period, fuboTV generated $637 million in revenue, up 37% year over year. Great, right? Well, let's take a look at the expense line. If you add up fuboTV's licensing, broadcasting, and depreciation expenses, it comes out to $628 million. That leaves the company a whopping $9 million to cover its marketing, research, and corporate overhead costs. Unsurprisingly, the company reported an operating loss for the period of $134 million.
All this has led to a consistent and growing cash burn for fuboTV even as it grows paying subscribers. Over the last 12 months, it has burned $261 million in free cash flow.
Data by YCharts.
Competitive pressures will only get worse
What's crazy about fuboTV is that the competitive landscape in streaming video is only getting more intense. Alphabet's YouTubeTV is selling its virtual cable package as a loss leader, which it can afford to do with over $100 billion in cash on its balance sheet. The company has started to invest heavily in sports rights, recently paying big to get NFL Sunday Ticket for seven years. Disney's ESPN is about to launch its own direct-to-consumer (DTC) streaming application, bypassing the virtual cable providers such as fuboTV. On top of this, it has its own fuboTV competitor in Hulu Live TV that is being sold as a loss leader.
Let's not forget that technology giants Apple and Amazon -- both with gigantic balance sheets -- are starting to scoop up sports rights. Sports are supposed to be fuboTV's calling card. This will make things extremely tough for the company as it will be virtually impossible for the company to raise prices over the next few years. These four competitors don't care if they lose money on new streaming sports initiatives because they can make it up through separate business units that generate sizable profits.
The path forward looks treacherous
Even if fuboTV continues growing its revenue, the path forward does not look promising. The company only had $293 million in cash at the end of the second quarter, which gives it about one year before it runs out of money. It is likely that management will be forced to do another equity raise, which will be extremely dilutive for shareholders at its current market cap of $730 million.
Over the last three years, fuboTV's shares outstanding have climbed over 560%. This is an extreme level of shareholder dilution that will likely continue in the years ahead. Put everything together, and it is clear that fuboTV is a stock investors should avoid, even if it is beating the market this year.
