Some stocks occasionally experience significant price drops due to shortsighted reasons. When that happens, it presents an excellent opportunity for careful and patient investors to buy the dip.
Other times, shares of companies move in the wrong direction for good reasons. In those cases, it is generally best to stay away unless there are good reasons to think the corporation in question can overcome whatever headwinds it is facing.
That brings leads to fuboTV (FUBO +0.00%) and Chegg (CHGG 7.23%), which have significantly lagged the market over the past two years. Both are now penny stocks, but even though they look cheap, these stocks aren't worth investing in. Here is why.
NYSE: FUBO
Key Data Points
1. fuboTV
FuboTV is a leading streaming specialist that focuses on sports. Though it has been somewhat successful in this niche, it has encountered several problems.
FuboTV remains unprofitable. At the same time, the company's revenue and subscriber growth have declined sharply in recent periods. In the third quarter, fuboTV's revenue increased by 20.3% year over year (less than half its top-line growth rate in Q3 2023) to $386.2 million.
FuboTV's current situation is bad enough, though some might point out that it is improving on the bottom line. In the third quarter, the company's net loss per share came in at $0.17, much better than the $0.29 reported in the year-ago period. That's all well and good. However, fuboTV faces other important problems, including stiff competition.
Netflix is increasingly looking to get into the sports streaming niche. It recently hosted a live, highly anticipated boxing match. It will stream pro football games on Christmas Day.
These initiatives are not a significant threat to FuboTV -- yet. However, Netflix could continue to dip its toes into sports streaming. And if it does, it could take market share away from fuboTV.
That's not all. FuboTV is currently fighting a legal battle to stop Venu from being launched. Venu is a potential competitor to fuboTV backed by three media giants: Disney, Fox, and Warner Bros Discovery. If Venu ever sees the light of day, it will be catastrophic for fuboTV.
FuboTV might win this legal fight, but if it is already struggling to turn a profit -- and absolutely needs a would-be competitor to stay off the market to do so -- that says nothing good about the strength of its underlying business. So, investors would be better off staying away from fuboTV, despite its shares significantly lagging the market in recent years.
NYSE: CHGG
Key Data Points
2. Chegg
Chegg is an online learning platform. It offers a subscription service that gives students access to help from experts on textbook or homework problems.
No doubt many students can benefit from this, and many have. However, Chegg now faces a serious, seemingly insurmountable problem: the rise of artificial intelligence (AI). Nifty generative AI chatbots like ChatGPT can help students write essays and solve problems across a wide variety of disciplines. GPT-4 did, after all, pass a bar exam.
The result is that in the eyes of many students, Chegg has become obsolete. Chegg's financial results and subscription growth have been terrible in recent years.
To be fair, this trend predates the launch of ChatGPT. Chegg has struggled to keep up the torrid pace it had in the early pandemic years. Still, the AI revolution made things worse. In the third quarter, Chegg's revenue declined by 13% year over year to $136.6 million. The company had 3.8 million subscribers, down 13% compared to the year-ago period. Chegg's net loss per share of $2.05 was much worse than the $0.16 recorded in the prior-year quarter.
Is there a way back for the company? Chegg has tried to introduce AI-supported services. Students prefer the help of AI when it is enhanced by the knowledge of human experts, or so the company says.
Chegg's AI-related initiatives might succeed, but considering the company's current state, it's hard to bet on a comeback. And until Chegg's AI options prove their worth, investors should stay a safe distance away. There is a reasonable chance those who initiate a position in the stock today will end up with worthless shares in a few years.
