Streaming service FuboTV (NYSE:FUBO) has been among the hardest-hit stocks of the past two years. Having peaked at over $40 per share in early 2021, FUBO share price has cratered to below $3 per share.
This massive drop has coincided with a period of rapid revenue growth, leaving FUBO as a bit of a conundrum for investors. Fundamentally, there are reasons to buy but the share price looks like a falling knife, so is Fubo a good stock to buy or is it best to steer clear?
FuboTV is a subscription-based streaming television service. The company’s content is tightly focused on sporting events.
Until late in 2022, the company also operated Fubo Sportsbook, a sports gaming platform that allowed users to place bets on their favorite sporting events. Fubo Sportsbook was ultimately closed in an effort to trim down the company and support greater profitability going forward.
Subscriber Count Hits All-time High
FuboTV’s Q3 report detailed a 40 percent increase in overall North American revenue to $219.2 million.
The company’s subscriber count also hit an all-time high of 1.2 million, a 31 percent increase over the same period in 2021. Despite these impressive growth numbers, FuboTV’s growth has actually slowed over the last few quarters as the company has raised prices in an attempt to improve its bottom line.
FuboTV reported a loss of $0.82 per share in Q3. This continued a trend of similar quarterly losses that has gone on since 2021. The Q3 loss did, however, exceed what analysts had expected, as the consensus estimate for the quarter was $-0.73.
Over the next year, FuboTV’s losses are expected to continue, albeit at a slower rate. Forward projections suggest a loss of $2.22, compared to $3 over the trailing 12 months.
With that said, FuboTV is still far from profitability. The company’s net margin is approximately -57 percent, while its return on equity is -86 percent. Barring drastic improvements, it seems unlikely that FuboTV will be in the black anytime soon.
Ultimately, FuboTV is a company that has shown enormous sales growth at prices below its breakeven point. Unfortunately, this leaves management with a considerable problem to solve before a stock rally can begin.
Because higher revenues have not resulted in higher earnings, the company will have to significantly improve its margins through higher prices or reduced expenses.
Analysts Peg Fair Value 130% Higher
Although FuboTV is expected to continue losing money over the coming year, analysts are extremely bullish on the stock’s short-term performance.
Price targets for FUBO range from $3 to $6, representing an upside of anywhere from 39.5 percent to 179.1 percent from the current price of $2.15.
Analysts consensus forecast is $5 per share, which would result in an upside of over 130 percent. Even if the stock massively underperforms these expectations, investors could see significant upside from FUBO.
FUBO’s valuation is a mix of positive and negative factors, but the stock appears to be overvalued at today’s prices. FUBO trades at ratios of 0.42 to sales and 0.79 to book, both of which would ordinarily be positive value indicators.
However, FuboTV’s cash flow is -$2.27 per share, more than the current market price of each piece of stock. Between this, a debt load of 86 percent of equity and the company’s ongoing losses, there doesn’t seem to be much for value investors to like in FuboTV.
Negative Cash Flow Is Scary
A serious red flag for FuboTV is its ongoing negative cash flow in conjunction with a diminishing cash stockpile.
As of the most recent quarter, FuboTV’s operating cash flow was -$76 million. Its liquid cash reserve, meanwhile, was slightly over $200 million. Unless the company can drastically pare back its losses, it could run through its current supply of cash within less than one year.
FuboTV also faces the risk of competition in the sports streaming market, most notably from ESPN+. As part of Disney’s family of brands, ESPN does not face the same cash flow issues that FuboTV does.
ESPN+ can also be bundled with Disney+, giving consumers more options when choosing their streaming services. As the most established name in the sports broadcasting space, ESPN also maintains a moat that FuboTV may have difficulty circumventing.
A final concern for FuboTV is the possibility that consumers will not respond well to price increases. In order to improve its profitability and capitalize on revenue growth, the company will almost certainly need to charge higher prices for its subscription packages.
Since FuboTV has defined itself as a cheaper alternative to more prominent streaming services, it’s far from clear that the company has robust pricing power.
Is FuboTV a Good Buy?
Despite carrying heavy risks, FuboTV has obviously earned optimism from Wall Street. In addition to a positive outlook from analysts, the company has seen significant buying activity from institutional investors recently.
Over the last 12 months, institutional inflows have more than doubled outflows, suggesting that investment funds may be eyeing FuboTV as a source of high returns.
However, the risks that FuboTV faces are too large for investors to ignore. The company is rapidly racking up losses, and there does not appear to be a clear path to profitability in the near future. If FuboTV is forced to raise additional capital, it could end up with badly diluted stock or a debt load that impedes future growth.
For most individual investors, FuboTV likely represents too large of a risk until it can slow down its rate of losses. Growth investors with very high risk tolerances may find the stock’s potential upside appealing enough to take out very small positions on.
Given the number of sold-off stocks in today’s market, however, there are likely better options out there for the majority of individual investors.
If the company does note pare back its losses in the upcoming quarters, investors who already hold FuboTV may want to contemplate selling before additional capital-raising measures are required.
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