Shares of fuboTV (NYSE:FUBO) have made an attempt to recover in recent months, rallying from their 52-week lows of $1.03 in April to $2.17 as of writing this article. While the sports SVOD (subscription video on demand) service’s stock more than doubled in roughly three months, fuboTV remains one of the heavily impacted hyper-growth stocks in the aftermath of the COVID-19 sell-off, with its shares still trading at over 96% below their previous high.
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Despite the stock’s challenging performance during this period, a resurgence of investor interest can be attributed to management unveiling its ambitious plans to achieve positive cash flow by 2025 last year, on which the company has been indeed making progress. Recently, management also assured shareholders that fuboTV possesses ample cash resources to attain this significant milestone without the need for further capital raises.
If management actually delivers on this target, shares of FUBO could be subject to massive upside, as the stock is still trading at a relatively depressed price-to-sales multiple. On the other hand, if the company exhausts its cash reserves and resorts to raising additional funds, there is a significant risk that the market will completely lose faith in management’s value-creation capabilities.
It’s a race against time, and although it involves significant risk, I have taken a bullish stance on FUBO due to its recent growth surpassing expectations.
Cash Burn Has Destroyed Shareholder Value, but Growth Remains Very Strong
Cash Burn – How Shareholder was Destroyed
FUBO stock’s value has significantly diminished over the past couple of years due to the company’s substantial cash burn, resulting in a significant erosion of shareholder value. Following FUBO’s IPO, the company experienced a period of exuberance in the markets, aiming to swiftly capitalize on the burgeoning SVOD and sports streaming trends in order to achieve rapid growth.
While the company did manage to amass a strong base of subscribers and achieve impressive revenue growth, it came at a considerable cost. Securing streaming rights for various channels and sports leagues proved to be a costly process, and attracting customers also incurred substantial costs.
Additionally, the company spent tons of money on R&D in an effort to construct an innovative SVOD platform. Consequently, FUBO ended up expending a substantially greater amount of cash than it could sustainably afford. Specifically, operating losses climbed from $231.0 million in Fiscal Year 2020 to $324.9 million and $411.9 million in 2021 and 2022, respectively.
These amounts were notably higher than the initial IPO proceeds, resulting in the company conducting multiple capital raises through debt and equity and sustaining high levels of stock-based compensation to stay afloat. Heavy dilution and higher indebtedness destroyed shareholder value massively during this period.
Strong Growth is Being Sustained Despite Expense Control
With FUBO’s expenses spiraling out of control in previous years, management recognized the urgent need to implement an effective expense control strategy to salvage any value left and hopefully improve the company’s long-term prospects. Encouragingly, despite efforts to curb expenses, FUBO’s robust performance has remained resolute, fueled by the thriving organic demand for its live sports SVOD service.
The company’s recent Q1 results were strong, showcasing remarkable revenue growth of 34% to reach $324.4 million. This result starkly contrasts other well-known SVOD platforms, which have struggled due to market saturation.
FUBO’s distinctive focus on live sports has allowed it to set itself apart among consumers even in challenging market conditions, resulting in a tremendous 22% increase in subscribers, reaching 1.285 million, and an 8% boost in average revenue per user (ARPU) to $76.79. That certainly makes for an encouraging development in the company’s journey to cash-flow positivity.
The Journey to Cash-Flow Positivity
With FUBO managing its expenses while growing revenues, its margins have been gradually expanding, in line with the company’s target of reaching cash-flow positivity by 2025. Specifically, in Q1 2023, the company’s net income margin improved from -53% to -25.7%, while its adjusted EBITDA margin improved from -39.3% to -18.2%.
Note that while this marks a substantial headway, the company is still losing money. Sure, operating losses fell notably compared to last year’s $123.0 million, but they still came in large at $81.5 million during the quarter.
To address this concern, during the Q1 earnings call, FUBO’s management stated, “We believe that our current cash balance of $364.8 million is sufficient to fund our operating plan until we achieve positive cash flow in 2025,” and “…based on our current outlook, we have no further plans to sell under the ATM program,” meaning that the company doesn’t intend to raise more money via share sales.
This also implies that the company will have to trim its operating losses further and sooner than later if the $364.8 million is to last them until 2025. It’s certainly a risky (and for some, maybe improbable) endeavor, but shareholders could be rewarded massively should they succeed (see below).
Is FUBO Stock a Buy, According to Analysts?
Turning to Wall Street, FUBO has a Moderate Buy consensus rating based on two Buys and three Holds assigned in the past three months. At $3.43, the average FUBO stock price target implies 58.1% upside potential.
Takeaway – The Optimistic Scenario Has Merit
FUBO’s ambitious goal of achieving cash flow positivity by 2025 presents a challenging journey as the company continues to experience substantial losses compared to its current cash position, despite diligent cost-cutting efforts. However, if FUBO manages to reach this target and avoids further dilution, it could potentially reward its current investors handsomely.
Based on management’s guidance of $1.3 billion in revenues for this year, the stock is currently trading at a forward price-to-sales (P/S) ratio of approximately 0.5, considering its market capitalization. Even if FUBO’s revenue growth slows down significantly, achieving a modest profit margin in the near future could rapidly drive the stock’s P/S multiple to 1x or higher (i.e., a modest P/E of 10 on a 10% profit margin), potentially doubling its share price.
If FUBO sustains its current growth rate, the resulting valuation expansion would likely be even more substantial, presenting significant potential for share price gains.
Overall, FUBO’s investment case is rather speculative, regardless of which perspective one supports. Nevertheless, considering the underlying potential for returns, a bet on the optimistic scenario may be worthwhile.
