There’s no question fuboTV’s (NYSE:FUBO) stock has been battered and beaten for what seems like a decade. It’s basically been a downhill ride since November of 2021, with a few gasps of air in between. But Q1’s earnings report shed a different light on the business and created an irrefutable contrast to the stock price. For the first time, management proved the bear thesis of having no leverage in the business wrong. Furthermore, the report put several more aspects of the bear bankruptcy thesis to rest, at least enough to refute a case for the stock trading in the $1 range. This is why I added over 60% to my FUBO holdings following the report and why I might continue to hold beyond the just “getting out” point.
Management laid out several factors contributing to the strengthening of the bull case and the weakening of the bear case. The most important ones were:
- Expenses are now growing less than revenue
- Seasonality and price hikes haven’t thrown off subscriber trends
- Cash burn has been reduced enough to get to 2025 breakeven
Expenses are easy to look at, but it does require looking at the trends of those line items. Seasonal churn coming down amid price hikes is a significant consideration for the momentum of the company’s dollar machine and ability to attract and retain customers. And, of course, both of those factor into cash burn and cash on hand.
These aren’t small facets of the investment case; they’re the core of whether one invests in FUBO or not – and, really, any high-growth company. But up until now, things weren’t looking great for bulls from a business operating standpoint. With Q1’s earnings report showing numbers to back up the bulls and Q2’s guidance showing it isn’t a fluke, the bears should begin to unwind their shorts.
Expenses Can Be Helped It Turns Out
Aside from sales of its products, the most pivotal aspect of a company is its expenses. If it costs twice as much to provide a product than it’s sold for, it becomes a problem when there isn’t gold buried underground to fund the operation. But when expenses grow slower than revenue, eventually leading to a crossover in absolute dollar terms, a cash burn situation is heavily mitigated.
The market has been so keenly aware of this expense and margin predicament and, to this point, has priced in no improvement. If margins didn’t improve, cash burn wouldn’t improve, and cash on hand would dwindle, resulting in the company going belly up. This is the crux of the bear thesis; all other aspects of the company are merely layered on top.
I’ve been tracking revenue and expense growth for the last few quarters but particularly Subscriber Expenses. This is the single largest expense line item and is basically the company’s cost of goods sold. It contains its licensing and broadcasting contracts with TV networks, allowing Fubo to transmit content to its users.
And Sub Expenses have been a topic for the better part of a year as management continually pointed toward more favorable negotiations with a growing subscriber base. Yet, for what seemed like an eternity, this line item had little to no improvement.
That is, up until Q4.
As management predicted, the leverage due to a larger subscriber base started taking effect. In Q4 and Q1, the line item’s growth slowed considerably. After growing 50% in Q3 ’22 and 38% in Q4 ’22, Q1’s growth rate was an astonishingly low 23%. This compares to revenue growth of 43%, 38%, and 34%, respectively. This has formed a clear trend – not just a one-off change – of a drastic reduction in expenses growth against a slow revenue growth deceleration. The following chart says it all.
While Subscriber Expenses were 74% of all expenses in Q1, the other 26% was down 13%. This combined for total expense growth of only 11%. This compares with Q4’s expense growth of 27% and Q3’s expense growth of 44%. While my comparisons have been sequential – quarter-over-quarter – the company has decent linearity in the business, especially expenses, so it’s a valid check on the company’s improvements.
This is precisely what this company has needed for the last several quarters, and it couldn’t come at a better time; the business is growing, and corralled expenses haven’t impacted business performance.
Management expects this trend to continue throughout the year.
…we demonstrated greater leverage over our subscriber related expenses, which decreased from 101% to 93% of revenue in Q1 2023 versus the prior year period.
We expect this year-over-year trend to continue as we work towards meaningfully growing subscribers, optimizing our pricing, and further improving our mix of premium plans.
– John Janedis, CFO, Q1 ’23 Earnings Call
Combined with Q2’s revenue growth guidance of 36% – acceleration from Q1’s 34% – this bodes well for my chart to show further improvement as these new content contracts continue to roll into the year.
Subscriber Trends Remain Within Seasonality Even With Price Hikes
Expenses are half the battle, but selling the product is the other half. Fubo has seen seasonality with its subscriber base as long as it has been operating, and this is due to the sports-centric content it provides. And since sports are seasonal, the subscriber base ebbs and flows depending on the sports season. For example, since the winter months are the quietest months with no NFL, MLB, and NASCAR, among others, subscribers will cancel service until their sport is in season. This has been well-recorded and well-telegraphed by management over the years.
But with price hikes in Q1, churn outside of seasonality was a concern. As a result, management expected churn would be a bit higher in Q1.
…the guidance that we provided [for Q1] was relatively conservative just because the price up. The size of the price up was pretty significant. The $5 base price plus the $11 to $14 in the RSN was pretty significant. And so if you think about that, plus the timing of the price that we typically price customers up in the third quarter. So this was our first time pricing up customers in the first quarter. And then…you add on top of that the regular seasonality plus some other noise such as the CBS affiliates, and we felt we would err to the side of conservatism on this.
– David Gandler, CEO, Q4 ’22 Earnings Call Q&A
However, the company remained on par with typical seasonality, even with the added risk of price hike churn.
In fact, guidance for Q1 was for 1.15M subscribers, while the quarter came in at 1.285M, far exceeding expectations and remaining consistent with past seasonality. The trend is expected to continue into Q2 based on the midpoint of subscriber guidance for 1.13M subscribers.
for 2Q…we’re always looking at a tail potentially in terms of a churn impact, call it a couple of months or a quarter or two out. And what I can say as of now at least is that quarter-to-date churn is actually down year-over-year.
– John Janedis, CFO, Q1 ’23 Earnings Call Q&A
This color says the company is taking another conservative stance for Q2, especially with churn down year-over-year. My expectation is for subscribers to come in moderately higher than guidance. It likely won’t be as large as Q1’s 135K subscriber beat, but even a beat of 40K subscribers puts the company ahead of last year’s Q2 seasonality. 1.17M subscribers would be a sequential decrease of 9% for 2023 versus 2022’s 10% sequential decrease.
Between price hikes and the typical seasonality, the company has continued to grow subscribers year-over-year and remained within the seasonal fluctuations quarter-to-quarter. So if the company can outperform on subscribers – beating guidance marginally – with meaningful price hikes on an off-cycle quarter, it bodes well for the strength of the main business.
The Combination Drastically Reduces Cash Burn
The center of the bear case rests on the company being unable to sustain itself through the streaming business model and running out of cash. And this was probable not but two quarters ago. But with expenses running well under revenue growth and Q2’s revenue growth at the midpoint of guidance set to accelerate year-over-year (36%), it bodes well for 2023 to be a self-righting year.
Year-over-year, the net loss and adjusted EBITDA margins grew by more than half.
This has accelerated a steady trend of working toward breakeven. Q1 was one of the most significant year-over-year margin expansions to date, and with revenues set to remain in the mid-to-low 30s and expenses falling, the company won’t be burning near as much cash as it was just a year ago.
To put a finer point on this topic, the company’s cash used in operating activities in the last two quarters has shrunk to the lowest levels in the combined period.
As cash burn continues to come down year-over-year in the quarters ahead, it gives the company enough cash to make it to the end of 2025. But I have it modeled the company is cash flow break even in Q3 ’25 with about $50M in cash on hand still available. If management finds outperformance in the business or better content contracts along the way, it may pull in breakeven to 1H 2025.
The Stock Will Need To Readjust
Considering the company’s expenses are coming down dramatically and are set to crossover dollar-wise in the coming quarters, the stock no longer needs to price in bankruptcy. So far, coming off the bottom near $1 to peak over $2 is an excellent initial sign, but the stock hasn’t seen anything yet. Once shorts begin to unwind, the stock will likely reach $3, $4, or even $5 before the year ends.
This isn’t to say the risks are over.
The company could find issues with subscriber growth later in the year. Consumers may pull back spending and cut fuboTV as one of their expenses. But it’s worth reminding you cutting cable TV still has a long way to go while it has a much higher expense level. Considering the average cable bill is above $200 a month, Fubo’s proposition at around $80-$85 a month means subscribers can “cut the cord” and save $120 or more yet still watch their favorite sports and entertainment channels – and do it in a way cable TV can’t provide (Multiview, FanView, etc.). And there are 71M customers primed for it. Just 1% of that would add 60% to the company’s current subscriber base. If anything, I see a recession as a likely tailwind for the company as people reduce expenses but still enjoy their luxuries.
For now, the outlook looks much better than it was even two quarters ago, and the company does have a path to breakeven and in the time it needs to get there before cash runs out. However, the stock needs to readjust to the new reality, which may come over the next several months. This is why I added 60% more shares to my at-then current position at $1.41. The business is shifting while sentiment is beginning to shift, and I want to capitalize.