FuboTV: Riding The Wave Upwards, But Why A Hold Is Still Wise

Seeking Alpha01-13

Summary

  • Initially recommended during the pandemic for its sports focus and solid revenue growth, FuboTV has struggled with rising content costs and negative gross margins in recent years.

  • FuboTV's stock plummeted post-pandemic, but the Hulu-Fubo joint venture could revitalize the stock.

  • The Hulu merger stabilizes FuboTV financially, providing $220 million in cash, a $145 million term loan, and improved negotiating power with content creators.

  • Despite improved prospects, FuboTV remains on hold until the Disney deal is finalized, as the agreement faces regulatory risks.

I started writing articles on Seeking Alpha in September 2020 during the COVID era. Looking back, I see that most of the stocks I recommended then benefitted from the pandemic. Most of the pandemic-fueled stocks I wrote about soared higher in early 2021 but faded as the pandemic ebbed. One of those stocks was the subscription-based live-streaming service FuboTV. From my first article on the stock on January 6, 2021, to its 52-week low on June 21, 2024, it dropped around 96%. My last article on the stock was a buy recommendation at $19.62 on November 30, 2021, after which the stock sunk into oblivion. I consider my buy recommendation for FuboTV one of my biggest mistakes.

I should have given it a sell recommendation in August of 2022 when management put its sports wagering business under a strategic review since it was a key reason I first recommended the stock. Last week, I was on the verge of writing about it again to give it a sell recommendation because I believed the odds of it continuing as a viable business were low, and there was little reason to hold, watching it diminish. Then, The Walt Disney Company's Hulu + Live TV business merged with FuboTV to give it a new lease on life, and the stock soared 251% on January 6, 2025, to close at $5.06.

This article will briefly discuss why I first recommended the stock and why it declined precipitously in the post-pandemic period. We will also discuss what the Hulu and FuboTV merger means for the business, review the latest quarter's earnings report, the risks, the valuation, and why my rating is a Hold.

The reason I recommended FuboTV as a Buy in 2021

One of the most significant reasons Fubo became hot in late 2020 into 2021 was that the pandemic forced people to use the internet for virtually all their needs, including entertainment. Subscriptions to Netflix (NFLX) soared, and companies like Roku (ROKU) and FuboTV produced solid revenue growth and became high-flying stocks. At the time, it seemed like the pandemic would last forever, and streaming companies had a significant growth runway ahead. So, investors were susceptible to ignoring the risks many streaming businesses had and believing in the bullish investing thesis too firmly.

One interesting thesis for investing in the company was that its focus on sports would attract the lion's share of sports-loving cord-cutters. That thesis may have been valid. Netflix has recently aired two NFL games on Christmas Day and started airing WWE Raw wrestling on January 6. Netflix management likely believes sports will be a needle-moving category in 2024 and beyond, so Fubo might have been on to something very early. In 2021, Fubo's impressive growth in subscribers, revenue, and engagement metrics made it look like the company's sports-focused business was viable and that the company was going places.

Although profitability was an issue then, investors believed the company had several monetization possibilities to make Fubo profitable. These monetization opportunities included:

  • Advertising: Management expected high-margin advertising would be significant in helping it achieve profitability.

  • Value-Added Services: At the time, management believed it could introduce features like cloud DVR and multi-device streaming to differentiate and monetize the streaming service.

  • Sports Betting and Free-to-Play Games: In 2021, Fubo was still building a sports betting and free-to-play gaming service that management believed could differentiate its streaming service from other streaming services and significantly increase engagement and average revenue per user ("ARPU").

Fubo's business plan was very believable in 2021, and several prominent analysts gave the stock buy ratings, including Roth Capital Partners analyst Darren Aftahi, Oppenheimer analyst Jason Helfstein, Laura Martin from Needham, and CEO and Lead Tech Analyst for the Tech Insider Network Beth Kindig, who also writes articles on Seeking Alpha. Kindig wrote several bullish articles on the company before it flamed out in 2022. People venturing outside their house post-pandemic instead of sitting in front of TV screens and rising inflation put a big dent in the company's fundamentals and investor willingness to invest in Fubo.

Disney throws out a life raft

In today's investing climate, very few investors would buy into FuboTV's business as it existed in 2021 because it had extremely low gross margins. In the first quarter of 2022, the company had -2% gross margins due to pre-negotiated price increases in content licensing agreements that took effect on January 1, 2022. At the same time, Fubo failed to increase subscriber prices to offset the increasing content prices. The negative gross margins highlighted a profitability problem with the company that was a warning shot across the bow of all Fubo investors.

As a smaller company battling against goliaths like Alphabet's YouTube TV and Hulu + Live TV, Fubo competed by offering lower prices. However, FuboTV didn't have enough heft to negotiate lower prices with content creators in a competitive environment. Eventually, the prices it paid to content creators rose to the point where it needed to raise customer pricing, lowering its service's attractiveness compared to its larger competitors. As a result, subscription and revenue growth were destined to slow. Additionally, the company's profitability and cash flow issues would likely catch up with it as a standalone company. The likelihood that Fubo's ship would eventually go under was very high. Then Disney came to the rescue by reaching a deal to combine the Hulu + Live TV business with Fubo, becoming a 70% majority owner of the joint venture with Fubo's existing management team under Chief Executive Officer ("CEO") David Gandler, running the combined entity.

The press release announcing the Hulu + Fubo combo stated the benefits of the combination:

"We are thrilled to collaborate with Disney to create a consumer-first streaming company that combines the strengths of the Fubo and Hulu + Live TV brands," said Gandler. "This combination enables us to deliver on our promise to provide consumers with greater choice and flexibility. Additionally, this agreement allows us to scale effectively, strengthens Fubo's balance sheet and positions us for positive cash flow. It's a win for consumers, our shareholders, and the entire streaming industry."

Under its new structure, the combined entity has considerably more heft, becoming the second-largest vMVPD (Virtual Multichannel Video Programming Distributor) with 6.2 million subscribers behind only YouTube TV's 8.0 million+ subscribers. It will also be behind the traditional cable TV and satellite MVPDs Spectrum (13 million subscribers), Xfinity (12.8 million subscribers), DirectTV (9.8 million subscribers), and Dish/Sling (8.0 million subscribers). With a more extensive subscriber base, Fubo is now better positioned to negotiate carriage fees with networks, potentially leading to better deals and lower content costs. A larger scale business means it can have more effective marketing campaigns and a broader reach, potentially attracting more subscribers.

The new combination also stabilizes Fubo's financial situation. As a result of the deal, Disney, Fox, and Warner Bros. Discovery will pay the company $220 million in cash, ending Fubo's litigation against those companies for a planned low-cost sports streaming platform, Venu Sports. Fubo successfully gained a preliminary injunction to block the launch of Venu Sports. Still, if those companies ultimately beat Fubo in court, a successful launch of Venu might have been an event that sent the company down into Davey Jones's locker. So, the Disney-Fubo deal significantly de-risks the company.

Additionally, Disney will provide Fubo with a $145 million term loan in 2026. The end of the litigation should eliminate the legal costs on Disney's and Fubo's side, allowing both companies to focus on growth. Last, the Fubo and Disney combination should result in cost savings through more efficient operations, marketing, and technology. The press release announcing the deal states, "The combined company is projected to be well-capitalized and cash-flow positive immediately after the closing of the Transaction."

Company fundamentals

FuboTV Third Quarter 2024 Shareholder Letter.FuboTV Third Quarter 2024 Shareholder Letter.

FuboTV's third-quarter 2024 total revenue increased by 20.3% year over year to $386.2 million, beating analysts' estimates by $9.45 million. Its core North American market revenue increased by 21% year over year to reach $377 million, beating company guidance.

The company's subscriber base increased by 9% year over year, reaching 1.613 million subscribers at the end of the third quarter, exceeding its goal. Fubo's ARPU rose by 2.5% over the previous year's third quarter to $85.64, meaning the company increased customer monetization.

Fubo's Rest of World (ROW) revenue increased by 6% year over year to reach $.8.9 million in total revenue. ROW paid subscribers were down 8.1% over the previous year's third quarter to 378,000. ROW ARPU increased 7.5% year over year to $7.50.

The company's gross margin has improved significantly from the negative gross margin in 2022, reaching 14% in the third quarter of 2024. The company likely achieved better gross margins by raising subscriber fees, which is challenging to keep doing in a highly competitive market. Although FuboTV management had often talked optimistically about eventually becoming profitable, the company likely would have found it difficult to achieve profitability without the Disney deal and only 14% gross margins in a highly competitive vMVPD market. The high cost of licensing content left little room for profitability while paying expenses like marketing, technology, and customer support. The Disney deal should go a long way to help increase the company's scale and reduce licensing costs.

Data by YChartsData by YCharts

FuboTV's third-quarter 2024 operating expenses increased 10% to $444.8 million. The good news is that revenue is growing faster than operating expenses, meaning the company is slowly becoming profitable. The bad news is that Fubo's third-quarter operating income is still deep in the red, with a -$58.63 million loss. Operating margin was -15.18%.

Data by YChartsData by YCharts

The company produced a loss from continuing operations of -$54.7 million. Diluted loss per share was -$0.16, beating analysts' estimates by $0.02. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss was -$27.6 million, an improvement over a -$61.4 million loss in the third quarter of 2023.

FuboTV's trailing 12-month ("TTM") cash flow from operations ("CFO") to sales has increased since the middle of 2022, reaching -6.38%, showing significant progress towards positive cash flow. TTM CFO was 0.235 million. TTM Free cash flow ("FCF") was -118.43 million.

Data by YChartsData by YCharts

At the end of the third quarter, the company had $152.3 million in cash, cash equivalents, and restricted cash, with $332.7 million in long-term debt, primarily convertible notes. Since the company lacks positive EBITDA and positive EBIT (earnings before interest and taxes) to pay interest and the principal on its debt, without the Disney deal, Fubo management would have likely needed to raise capital through equity or additional debt offerings. The company has been a notorious capital destroyer throughout its history, with the third-quarter 2024 return on invested capital at -31.62%. There is no guarantee that the market would invest in another Fubo equity offering or debt raise.

Data by YChartsData by YCharts

The company's third quarter 2024 10-Q states:

We may not be able to obtain additional financing on terms favorable to us, if at all, due to unfavorable market conditions, including rising interest rates, or otherwise. In addition, the 2029 notes indenture, and the exchange agreement entered into in connection with the issuance of the 2029 Convertible Notes (the "Exchange Agreement"), restrict our ability to incur certain indebtedness and issue certain equity securities. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.

The image shows FuboTV's fourth quarter and full year 2024 guidance.The image shows FuboTV's fourth quarter and full year 2024 guidance.

The results disappointed the market, and the stock dropped around 13%.

Risks

The most significant risk is that the deal fails to close due to the inability to gain regulatory approvals on the terms and conditions outlined in the agreement. If Disney and Fubo cannot get the deal across the goal line, Fubo will return to its precarious position before the agreement. Without the $220 million cash payment and the $145 million term loan, it would likely need to raise capital under unfavorable terms. Fubo would also lack the heft necessary to reduce content costs. The deal includes a new carriage agreement that gives FuboTV access to Disney's valuable sports and broadcast networks at a reasonable price. Without the deal, it loses a key competitive advantage. The loss of the agreement would likely also result in a resumption of the legal battle with Disney, Fox, and Warner Bros. Discovery. Last but not least, the news of this deal sent the stock up over 250%; the loss of this agreement would likely send the stock on a round trip to where it was before the announcement.

Valuation

FuboTV's price-to-sales (P/S) ratio is 1.041, well above its three- and five-year median. Without the Disney deal, some would consider the stock grossly overvalued. With the company's improved prospects from the Disney deal, the market would likely compare its P/S ratio to the sector median. FuboTV's P/S ratio is -16.92% below the Communication Services sector median of 1.25. If it traded at the Communication Services sector median, the stock price would be $6.45.

Data by YChartsData by YCharts

The following chart compares FuboTV's one-year forward P/S of 0.852 to two companies in the content distribution space. Since FuboTV is the only pure-play vMVPD, it doesn't have a direct publicly traded comparison. YouTube TV is probably the best comparison, but it's part of Google. Roku (ROKU) and Comcast ( which owns XFinity) have different business models but distribute content from third-party providers similarly.

Data by YChartsData by YCharts

The most significant difference in the above comparison is the gross margin. A gross margin of 14% leaves very little room for error, which is likely one reason the market has awarded FuboTV a one-year forward P/S ratio below one. Although investors shouldn't expect a vMVPD to reach gross margins similar to Roku and Comcast, they likely want to see gross margins improve and the company become FCF-positive before investors award it a much higher valuation. The stock may be close to fairly valued at current prices.

FuboTV is a hold

Investors who lack an existing position should avoid buying on the Disney-Fubo news. The market will likely want to see the deal finalized before revaluing the stock and pushing the price much higher. Until then, the stock could be in limbo, and investors can probably find other investments with more near-term upside. However, existing investors should continue to hold the stock as it now has a better opportunity to produce long-term gains. I rate FuboTV as a hold.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
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