Vertigo3d
And back down we go again. fuboTV (NYSE:FUBO) is back down to $3.70. It was trading as low as $2.50 before spiking to $6 mid-August. The immediate cause of the spike – in the middle of a bear market, no less – was the fuboTV 2022 Investor Day, at which management offered updates on a number of initiatives and presented a generally upbeat financial forecast. Should investors jump on a stock that is now 40% cheaper than it was a month ago? Or is another visit to $2.50 in FUBO’s future?
Like most Investor Days, management touched on a lot of things, and covering all of it would be to do justice to none of it. I am going to try to briefly touch on all the key points, but then there’s just a couple I want to drill down on.
False Steps Mean Further Dilution
Probably the most significant financial, as opposed to operational, disclosure was the admission that even management now knows it will need to raise considerably more capital than it was expecting. As they disclosed in their last earnings call, capital raises using their existing at-the-money offering were halted when the stock price crashed so low as to make such sales prohibitively dilutive. At $2.50, raising $300 million would have nearly doubled the float.
For now, management is insisting that it only thinks it needs about $100 million more to get it to the promised land of profitability. This, they insist, gives them great “optionality” in raising it that will minimize the harm to existing shareholders. I have some doubts about that, but this is, for now, management’s number.
More alarming than the dilution itself, however, is what is says about management’s competence in raising capital optimally.
In announcing that fuboTV would eventually need capital, the company essentially admitted that its management team erred drastically in failing to secure it before the decline in its stock made such raises massively more dilutive. Regardless of whether the “optionality” in question turns out to be literally optional – convertible debt – or just trying to time the best moment to go back to market, any capital raise now will likely be roughly 10x as dilutive as it would have been last year, when the stock opened January at over $40. If it plunges back down to $2.50 it will be almost 20x as dilutive.
For now, whatever investors ultimately think the market cap of this company will be, it probably makes sense to divide it over at least double the current 185 million outstanding shares.
2023 Initiatives
Of course, even a doubling of the float could produce a very nice profit for investors if it yielded a business with any kind of sustained profit. In a nearly $200 billion US pay-TV/streaming industry, fuboTV needs only a $200 million profit stream at a 20 P/E to be worth 3x its current share price even with share count doubled.
To bring profit into view, management has a number of ongoing initiatives. Among them is not gambling, which fuboTV has taken under “strategic review” and is now looking for a partner to essentially take over that aspect of the operation. This comes as a body blow for fuboTV bulls, but it was to be expected. Last year, I wrote an article explaining that fuboTV was highly unlikely to be aided in any substantial way in its profitability by gambling revenues, since they simply wouldn’t be big enough to move the needle in the context of a pay-TV operator.
Since that article, fuboTV is down a staggering 86%.
International Expansion
But there are other initiatives. One is international expansion. This includes not only Europe, where FUBO’s Molotov purchase continues to advance, but also Canada, where fuboTV has just launched its first premium plan for C$34.99 per month. But it’s too soon to say if this is succeeding or not so there’s not much to say about it until we know more.
FAST… slowly
Of more discernible positive benefit is the ongoing development of a FAST (Free Ad Supported Television) tier. To hear FUBO management tell it, they already have one – the CEO boasted of 40 FAST channels on the last earnings call and insisted it would be 100 by the end of the year. But this is not quite right, because FAST channels do not a FAST service make.
To be sure, the service does now include FAST channels, which FUBO has been steadily adding to its service for the past several months. But so far, the only real benefit of them is that they do not swell FUBO’s ever expanding content expenditures. FAST deals are almost always straight revenue-split deals.
In fuboTV’s case, FAST deals are usually 50/50 revenue share agreements with no upfront fees, a welcome respite from fuboTV’s usual flat-rate per channel deals that have fueled its steady cascade of red ink.
But this doesn’t make those channels true FAST channels; you still have to be a fuboTV subscriber to watch them. That’s not “free.” Free to FUBO, maybe, but not to its customers. Its competitors are considerably more true to the FAST ideal. DISH Network’s (DISH) Sling TV, for example, allows users to watch several of its FAST offerings without even so much as entering their credit card data.
Management has now finally confirmed that it will work to correct this. Beginning sometime next year, true FAST viewing will be possible on all FAST channels. Like a lot of the Day’s announcements, this is something less than a major announcement but still a positive step. It allows people to get a good grasp for how FUBO’s user interface works and see if they like the service. The hope is that soon, this will let fuboTV eliminate its free trial offering – which costs money since content owners still have to be paid – and create a more cost-effective way of introducing customers to fuboTV.
Advertising
There’s also the seemingly perpetual unfulfilled promise of advertising. Again, fuboTV has continued to invest in new advertising capabilities, but at the end of the day building advertising capabilities is really just a matter of money. While fubo has it, so do its competitors. Even FUBO management admitted on the last earnings that it was disappointed with its ad revenue growth.
I believe, like most analysts, that success in advertising in a post-streaming revolution world ultimately comes down to data and market position, two things money can’t buy. And two things unlikely to favor fuboTV for the foreseeable future. I’ve already talked about all the ways advertising so far is basically only a success for the Big Three, so I won’t repeat all of those points here. Advertising if anything is a headwind to FUBO because its chief competitor, Google’s (GOOGL) (GOOG) YouTube TV, probably can make a considerable profit stream out of it, unlike fuboTV.
What I’d really like to see here is some sort of strategic partnership with one of the other two of the Big Three. Either Amazon (AMZN) or Meta (META) could probably put FUBO’s advertising time to far better use than FUBO can. So far, however, there is no indication that this is pending. I’d be very cautious about penciling in any long-term advertising.
FuboTV’s Real Path To Profit
All in all, the advertising, gambling and other profit paths that bulls have been banking on seem dicey at best. But I noted in my very first article last year that fuboTV might have another path to profit if it could prove successful in content curation.
I more recently returned to the subject, writing in an article at the beginning of the year that fuboTV seems to have notched its first real win in that regard, though only with a relatively middle-priced channel bundle that alone will not be enough to give it a substantial competitive advantage over larger competitors like YouTube TV and Hulu Live.
Content Curation Success
Turner Networks just passed the two-year anniversary of being dropped by fuboTV, which has quadrupled in size since doing so while Hulu Live and Sling TV have stagnated.
It is worth noting that the largest player in this space, YouTube TV, specifically declined an offer to incorporate Turner networks into its offering when if first launched. It would later recant that decision and add them in after all, so clearly someone thinks that they are worth carrying. At present, then, of the only two TV services actually growing subscriber levels, one carries Turner and one doesn’t. But certainly fubo doesn’t seem to be missing them.
After my last article, a reader did reach out to me to point out that actually fuboTV did have another curation move last July. Almost a year to the day after dropping Turner networks, fuboTV decided to drop A&E Networks channels as well. This one flew a little under the radar compared to the much larger Turner networks, partly because A&E is a non-sports channel collection – making it easier to believe fuboTV would decide to proceed without it – as well as because A&E Networks simply isn’t publicly traded, although publicly traded Disney (DIS) does own half of it in a joint venture with Hearst Corporation.
Defying The Consensus…
Like Turner, the decision appears to have been a success. As I already noted in my previous article, fuboTV’s growth came in very strong in the third and fourth quarters last year, so losing A&E doesn’t seem to have slowed it down very much. Like Turner, that seems a little surprising because A&E generally ranked pretty highly on a dollar-efficiency basis in most consumer surveys. That is, while it wasn’t the most popular content in the bundle by any means, it also didn’t cost nearly as much, and seemed to deliver high viewership per dollar spent.
A&E Networks, for those who don’t recognize the name, delivers not only the eponymous A&E Network station but also such relatively highly ranked cable networks like History Channel and Lifetime. Still, with no channels in the top 20 it’s not too hard to see why fuboTV felt like it could get by without them, though unlike with Turner, I’m not so sure they saved very much money, so this one goes in the “small victories” column even if it didn’t cost them a single subscriber.
…And Doing It With Confidence
It’s the latest in a series of successful content curation moves by fuboTV, and just like the others, competitors seem to be moving to emulate it. DIRECTV dropped A&E Networks as well over the winter though they had a curious provision allowing customers to essentially call customer service and get the channels reinstated.
It’s also worth briefly noting the relative decisiveness with which FUBO management moves on content. Management tested its last price hike for almost a month before rolling it out nationwide. But when it comes to content, fuboTV projects pure confidence – content is simply dropped, usually with little warning to consumers or investors. (Admittedly, the nature of content contracts in TV makes it hard to do anything else.)
But so far, FUBO has never had to go crawling back to the channels for a new deal, as YouTube TV did when it tried to drop ESPN. fuboTV hasn’t guessed wrong on content deals in a while.
fuboTV’s Growing Growth Conundrum
The one thing that leaps out at you about these various deals is that they almost always involve non-sports channels. Not surprising, given FUBO’s intense sports focus.
fuboTV’s record low general entertainment engagement
In fact, even by the US’s sports-obsessed pay-TV standards, FUBO is a true standout. Nielsen’s research has shown that even the heaviest of sports fans only spend about 28% of their TV viewing time watching live sports. The average TV viewer – who already skews towards sports, since a lot of non-sports TV watchers have already cancelled their pay-TV subscriptions – averages around 10%. In fact, in Pay-TV, news and sports combined only accounted for 28% of all TV viewing in 2018.
But FUBO’s numbers veer sharply away from these averages. While heavy sports users are usually 28% sports, CEO David Gandler had recently indicated that for fuboTV, the breakdown was more like 40% sports, 20% news, and 40% general entertainment.
Given that fuboTV openly markets itself as a sports-focused live TV service, I guess it’s not impossible that there could be such a large disparity between what FUBO subscribers watch and what general pay-TV subscribers watch. However, how long can that last? fuboTV obviously needs a much larger subscriber base if it is ever going to hit profitability. That probably means attracting at least some less sports-obsessed viewers. But even attracting more of the sports-obsessed ones, they probably won’t be quite as sports obsessed at the current crop, given Nielsen’s research.
I do think it noteworthy that if these figures are accurate, it almost certainly signifies that even long before FUBO begins attracting a less-sports focused clientele, it will… begin attracting a less sports-focused clientele. That is, even among those we would consider sports viewers, to have quite this much sports viewing is not entirely normal, and almost certainly not sustainable.
This means that as FUBO continues to grow, it almost certainly will see the percentage of its sports viewing continue to trend downward. Correspondingly, the percentage of general entertainment viewing will trend upward. What implications does that have for FUBO’s strategy of dropping ever-increasing amounts of non-sports channel providers?
Canary In The Coalmine?
It’s possible that management itself is thinking along similar lines. When Univision’s deal with fuboTV was recently expiring, talks went down to the wire, but ultimately a deal was reached to keep them on the service.
We can’t really tell yet who won these negotiations; did fuboTV’s increasing reputation for culling non-sports content give them credibility to threaten a walkaway and leverage cost concessions? We don’t know. But clearly, fuboTV has at least some trepidation about dropping too much non-sports content. Indeed, with its newly launched Vix+ service offering so much of the same content as on the linear feeds, Univision if anything might have been expected to be one of the harder bargains to strike.
But struck, the bargain was.
A Coming Inflection Point?
And yet, fuboTV isn’t profitable yet. So it needs more content curation and, probably, culling of channels, not less. What exactly is management’s plan to escape this catch-22? They say they will simply use their viewership data to identify the right channels to keep, and the success of the Turner and A&E decisions shows that is not mere bluster. But the preponderance of sports in the total cost of the TV bundle makes it hard to see how much a purely non-sports content culling can do.
If FUBO is determined to cut costs a little further, it shouldn’t have long to wait for more prospects. On its most recent earnings call, CFO John Janedis, only three months into the new gig, declared that most of fuboTV’s content deals run right around 3 years. Assuming that holds true for Warner Discovery (WBD) as well, the expiration of its carriage agreement should be hitting sometime next month, or at least in the not too distant future. That will probably tell us a lot about just how far they think they can take this content strategy.
Investment Summary
Altogether, considerable storm clouds are gathering on fuboTV’s horizon. Gambling is out, advertising is trending the wrong direction, it’s very late to market with a free tier, further dilution is approaching, international’s best grade is probably an Incomplete. And content curation, the one true path to profit it might have, looks like it could become increasingly difficult going forward.
Against all this, must be set the fact that management is consistently proving better at content curation than the bears gave it credit for. I’ve long felt that this was the real key to FUBO’s potential, and nothing has happened to move me off that view. But with the market squeezing its access to capital, FUBO has only a limited amount of time to turn this drip-drip of small-to-medium sized content victories into a profitable business.
Management has done a great job, quadrupling subscribers in the last two years while Hulu, Sling and DIRECTV Stream have stagnated, receded and completely collapsed, respectively. And it has done this with superior content evaluation, sometimes dropping channels that industry veterans felt could not be lost without setting off an exodus of customers. But the tighter market and the high cost of sports means it’s still a high mountain to climb.
I remain a cautious Hold on fuboTV.
Be the first to comment