fuboTV: The Memeforce Is Strong In This One (NYSE:FUBO)

Overview

fuboTV Inc. (NYSE:FUBO) is a popular choice in the burgeoning streaming service market. It has an established, sizeable moat as one of the only services offering comprehensive professional sports streams that include the NFL, MBA, NBA, NHL, and others.

fuboTV got its start in 2015 exclusively streaming soccer, but quickly expanded its offerings. They offer multiple membership tiers with different channel options, but the basic level includes over 100 channels. fuboTV is the industry leader in sports streaming, and investors agree. After an acquisition, fuboTV traded briefly in the OTC markets but completed an IPO in late 2020 at $10/share, which gave the company a $620M valuation.

Since then, macroeconomic conditions have caused FUBO stock to swing wildly – with a 3.50 beta, the stock is much more volatile than the broad market. After trading downwards for most of the year and in a narrow band over the past month, shares rocketed almost 50% on August 16th, 2022. What happened? And is this meme stock worth buying?

Why Did FUBO Skyrocket?

FUBO is reacting to competition from cable and sister streaming services and a belt-tightening economy with rising yields triggering a move away from unprofitable growth stocks into defensive havens. Their inaugural Investor Day on August 16th reassured investors and traders that FUBO was positioning itself to weather the upcoming economic storm. This reassurance and positive, forward-looking statements caused the stock to skyrocket.

Investor Day Insights & Forward Outlook

Like many companies, FUBO acknowledged the need to reassess its business model and reorient towards establishing financial fundamentals. To that end, CFO John Janedis pledged to implement $10M+ in annualized cost savings to ensure viability during the market downturn.

FUBO also developed global product team efficiencies and technology consolidation initiatives that are projected to save over $75M over the next three years.

This shows that FUBO is serious about slicing off unprofitable and unnecessary expenditures to improve financial health against the increased cost of debt and without issuing new shares that dilute current shareholder equity.

However, more critical to FUBO’s future is their forward outlook laid out during Investor Day. The focus of this, salient in the current fundamentals-focused market, was their path to profitability (P2P). A key indicator for startups and unprofitable growth stocks, the P2P is a symbolic road that lays out, by milestone or period, the steps, requirements, and length of time necessary before the firm is profitable.

Before we get into the strategic details, let’s look at some numbers from their presentation:

• Over the past year, North American subscribers grew 230%, and total revenue grew over 400%.

• A compounding annual decline in cable subscriptions means that FUBO projects a 20% CAGR through 2025 – targeting positive cash flow in the same year.

• Sustained subscription growth is expected to lead to 1.3M by the end of 2022.

• More and more subscribers are choosing or transitioning to their more expensive Elite plan, priced at $79.99/mo compared to $69.99. Of course, this represents a revenue increase but also demonstrates the product’s stickiness as existing customers upgrade their experience.

This reinforces that FUBO is thinking hard about maximizing its financial standing, and traders agreed after viewing the presentation as the stock surged.

Strategically, the company is looking to capitalize and expand on that established growth trajectory:

• Platform consolidation efforts may offer a free version of the service in the U.S. and pay-per-view options, capturing a more significant market share at the top of the funnel before converting them to paid subscribers.

• Although engagement is high on the platform, with subscribers watching up to six hours daily and a cumulative 100M monthly streamed hours, FUBO wants to increase active engagement:

  • Expand existing free games and sports betting. FUBO’s ongoing Sportsbook partnership development is key to accessing a new market share of sports gamblers and increasing existing engagement.

  • Optimize the FanView experience to give sports fans more relevant scores and stats.

• FUBO also revealed plans to add multi-functional, multi-channel in-app offerings like merchandise shopping and even food.

• Build out additional content and entertainment to keep subscribers plugged in outside of high-interest sports seasons. There are already HGTV show offerings and some movies, and FUBO plans to increase the scope and depth of non-sports entertainment.

These strategic developments bode well for the future of FUBO as a company, but what about the current valuation? How do we fairly price the stock of an unprofitable growth company in a risk-averse macroeconomic environment despite lofty plans and goals?

fuboTV Valuation

The gold standard of firm valuation discounted cash flow (DCF) modelling is more art than a science. This is doubly true for unprofitable growth firms with uncertain prospects, and FUBO is no exception. The best alternative for uncertain assets is a multiples valuation compared against industry peers or using a financial ratio as a stand-in for an aggregate of firm values.

Since FUBO and some peers’ income is negative, most standard earnings-driven multiples (P/E ratio, EV/EBITDA, etc.) are impractical. We’ll value FUBO against peers using Price/Sales (P/S) ratios and Price/Book (P/B) ratios. In this case, P/S is helpful because it shows whether an unprofitable firm is at least generating revenue and how those compare against stock price. P/B ratio is valuable as it shows whether a firm is valued “correctly” compared to its book value (assets on the balance sheet, less liabilities). Since a P/B ratio of 1 indicates “proper” market pricing of book value, less than 1 implies undervaluation and over 1 implies overvaluation – but, like the P/S ratio, it is helpful to compare P/B against industry peers. All figures are accurate as of August 19th, 2022.

• FUBO

  • PPS: $4.35

  • Market cap: $806M

  • P/S: 0.89

  • P/B: 1.45

• LVO (live entertainment digital firm focused on music)

  • PPS: $1.01

  • Market cap: 85.3M

  • P/S: 0.84

  • P/B: 27.53

• HOFV (resort and sports entertainment)

  • PPS: $1.03

  • Market cap: 121.16M

  • P/S: 9.98

  • P/B: 0.60

• GTN.A (legacy television and streaming conglomerate with a significant sports production subsidiary)

  • PPS: $18.00

  • Market cap: 1.68B

  • P/S: 0.59

  • P/B: 0.95

From this, we can determine that FUBO trades at a discount with a P/S ratio less than the S&P500 (1.67) and is generally in line with its industry peers. FUBO P/B ratio, on its own, indicates overvaluation. Still, it is fairly in line with peers – and, since the P/B ratio measures tangible assets, all of FUBO’s proprietary streaming and digital technology is not considered, as it’s an intangible asset. This artificially inflates the P/B ratio, especially compared to GTN, which has a series of networks and broadcasting real properties across the country.

In all, FUBO looks to be slightly undervalued at today’s price – and analysts agree. Morningstar’s algorithmic approach affirms this thesis and pegs the fair value at $11.65, implying a 160% upside potential.

Investing Risks

Investors and traders were drawn in with future strategic plans and growth prospects, and FUBO seems financially undervalued – so why did it rise, then fall back close to its previous narrow range? FUBO is still a risky investment.

Its growth prospects look great, but Murphy still has a vote, and things can go awry quickly in this environment as rates rise and inflation pushes investors into fixed-income securities. Just because FUBO laid out a plan to reach positive cash flow doesn’t mean it can achieve it. Its latest earnings report shows a net negative cash flow of $113M and only $456M remaining on its balance sheet. This gives FUBO a runway of 4 years with no new financing. Still, their lofty goals may require debt assumption or equity offering despite increased subscriber count and tendency towards plan upgrades.

As their new Sportsbook collaboration is yet to return revenue while it awaits strategic review, it is a net loss thus far and could remain so if the review doesn’t pan out (remember, they already bought a sports betting firm in January 2021 before deeming independently-ran operations impractical).

And, of course, the systematic market risk remains a threat to a FUBO investment. The economy is already rocky, and increased unemployment could mean cutting out needless expenses like FUBO. And, if another global event like COVID-19 occurred, sports would go back on hiatus and tank FUBO.

Conclusion

fuboTV’s management thought long and hard about becoming adaptive and resilient in the new economy. FUBO has shown a sincere desire to cut needless expenditures, reduce operating costs, and has a clear path to profitability through existing subscriber growth alone. They’ve also tamped down some growth expectations, like running a solo sports betting venture, while also looking towards expansion into demonstrated viable enterprises.

Nevertheless, there is still significant risk in a FUBO investment. While the financials indicate undervaluation, their cash burn and low/no-revenue ventures compound a precarious financial position. Traders seemed to agree – although it spiked on Investor Day news, it reverted to its recent mean the following day, perhaps as some realized the illusory nature of managerial plans or saw the pricing at the end of the day as overvalued and took profits.

Indeed, FUBO can be considered a meme stock, but that doesn’t mean investors can’t profit from it. In my view, fundamentals are strong enough to support holding this stock with the aim of selling in the next rally. The upcoming soccer FIFA World Cup could provide the perfect catalyst for a short squeeze.