On its face, fuboTV (NYSE:FUBO) stock almost looks like easy money. FUBO is a play on not just one, but two potential megatrends over the next decade.
In that context, a sharp pullback seems to make the opportunity even cheaper. FUBO has dropped by more than half from its brief December highs. It’s down 35% over the past month, including a three-session, 28% plunge after fourth-quarter earnings last week.
That decline, in turn, makes the stock look reasonable. The company currently has a market capitalization of roughly $3.3 billion. And guidance for 2021 revenue currently sits at $465 million to $475 million. Furthermore, a price-to-sales (P/S) multiple of 6.12, for this story, in this market, looks exceedingly attractive.
But I’ve long argued that investors need to look much closer at FUBO to understand the whole story. That’s still the case, and Q4 earnings show why.
The Earnings Miss
The wire service headlines show that fuboTV earnings missed Wall Street expectations by a wide margin, with revenue coming in ahead of consensus. Truthfully, I’m not terribly concerned with either of those metrics.
As far as earnings go, a major driver was the change in warrant liabilities, which “cost” fuboTV about $92 million in the quarter. That, however, is a non-cash charge actually created by the rising FUBO stock price.
A more valuable stock means more valuable warrants, and accounting rules require that higher value to go somewhere on the profit and loss statement (P&L). But the warrant liabilities have no impact operationally — and that’s what we care about.
On that front, the core concerns still hold. Yes, the top-line numbers look good. FuboTV’s revenue in Q4 grew 98%, excluding FaceBank AG, with which fuboTV merged last year. Subscribers rose 73% year-over-year.
The company is winning streaming customers. That’s fine. I’m still skeptical it does all that much for FUBO stock.
The Margin Problem
In its fourth-quarter shareholder letter, fuboTV discusses what it calls “contribution margin.” Contribution margin is the difference between subscriber revenue and variable subscriber costs, with a few adjustments to better focus on in-quarter results.
In Q4, contribution margin came in at 11.7%. For the year, it was 10.1%, although the figure got a 1.4 percentage point boost (according to fuboTV itself) from the timing of contract negotiations. Those figures sound good. Essentially, contribution margin is the difference between what fuboTV charges its customers for its service, and what content providers charge fuboTV for the media it streams.
Of course, there’s another common term for that: gross profit. Gross profit is the difference between revenue and direct costs. That essentially is what fuboTV is measuring via contribution margin. The problem is that gross profit needs to pay for operating expenses. On that front, fuboTV is nowhere close to breaking even. For the year, in dollars, contribution profit was $27.1 million.
Excluding the direct variable costs, operating expenses totaled $197.4 million, even with significant adjustments (including nearly $27 million in stock-based compensation).
Let’s simplify this. In 2020, fuboTV generated about $27 million more in subscription revenue than in content costs. It cost nearly $200 million to operate the entire business.
Quite obviously, that math doesn’t work. Even with results in Q4 that were improved from the beginning of the year, it still didn’t work, or come all that close.
A Lack of Scale
On the streaming side of the business, fuboTV believes it can find ways to squeeze more revenue out of subscribers. Surely, it will. Both broader price increases, greater add-on revenue and advertising sales (which rose 133% in 2020 to $29 million) can help.
But those content costs also are going to rise. One of the big problems with the streaming business is that contracts are executed on a per-subscriber basis, generally with annual escalators. More subscribers mean more costs. As such, the business doesn’t scale.
We’re seeing that in the Q4 numbers. Subscribers rose 73%. The adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss only narrowed modestly, to $43.5 million from $46.3 million the year before.
This is why a number of major media companies have either shuttered or de-emphasized their streaming businesses. It’s why big cable companies are letting their video customers walk. Streaming live video is a low-margin business, albeit one that still has significant competition.
Simply put, it’s not a great business. Even if fuboTV continues to add subscribers, it’s still a long way (think years) from reaching breakeven.
FUBO bulls who believe the stock should get some huge price-to-revenue multiple should keep margins in mind. This isn’t software, where gross margins can reach 75% or higher. It’s not even manufacturing. Gross margins of 10% and 12% on revenue simply mean that revenue is not all that valuable.
FUBO Stock Isn’t Cheap
And yet, FUBO stock still is valuing that revenue rather highly. Again, public data sources currently cite a $3.3 billion market cap. That’s not correct. Including convertible preferred stock, as fuboTV noted in the shareholder letter, there are 138.9 million shares outstanding. SEC (Securities and Exchange Commission) filings show another 27.5 million outstanding warrants and options (as of Sept. 30, 2020).
Do the math, and at $30, fuboTV actually has a market capitalization of almost $5 billion. That’s more than 10x revenue guidance for 2021.
Now, two points need to be made. The first is that a big part of the bull case for FUBO stock is the potential for sports betting. Indeed, fuboTV has announced two additional market-access agreements, after getting into the Iowa market via its acquisition of Vigtory.
The problem here is that fuboTV is both late and dealing with a number of entrenched incumbents. As for the potential unification of streaming and sports betting, two rivals have executed a partnership to do precisely that — with the benefit of far larger user bases on both sides.
Meanwhile, Vigtory was supposed to go live last year. It’s late. It also promised to compete on pricing, which only adds to the broader margin concerns facing fuboTV.
The second point is that all of the math here shouldn’t obscure the broader issue. FuboTV sounds like a great business, but it isn’t. Margins aren’t high. Economies of scale are minimal. Competition is stiff.
At first glance, this seems like a hugely attractive business, trading at 6x revenue. Look closer, and it’s a business with a number of concerns whose actual multiple is twice as high.
The decline in FUBO stock since earnings shows that some investors are starting to figure that out. The risk going forward is that many more will.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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