When fuboTV (FUBO -4.02%) went public in October 2020 for $10, investors were enthralled by his plan to integrate live TV into sports betting. Not long ago initial hype around fuboTV’s sports betting plans pushed its stock price above $50 at various times between December 2020 and February 2021.
Unfortunately for fuboTV, the investment environment has soured in 2021 due to rising inflation and supply chain challenges. Additionally, a short report from Kerrisdale Capital hit the mark, pointing out multiple flaws in the company’s business model, including fuboTV’s sports betting ambitions. Here’s why investors are taking a huge gamble by investing in fuboTV.
FuboTV makes a risky bet to boost its profitability
fuboTV currently generates most of its revenue through its TV subscription business. However, since the television subscription business has always been low-margin, fuboTV will need to produce high-margin revenue streams to achieve overall profitability. And sports betting and gaming is one of the revenue sources that fuboTV has chosen to increase its margins. Unfortunately for fuboTV, this is a tricky business to tackle for several reasons.
First of all, online sports betting faces immense competition from companies such as DraftKings (DKNG -10.80%), Entertainment Caesars (CZR -2.45%)and BetMGM LLC. DraftKings and FanDuel have 7.3 million and 12 million users respectively. BetMGM did not disclose its customer count, but estimated it became the second-largest player based on market share in an April 2021 investor presentation. In contrast, fuboTV only recently surpassed one million TV subscribers, many of which are not even in states where the Fubo Sportsbook is approved.
Second, each state must approve sports betting initiatives, and so far the approval process is progressing slowly. After two years, fuboTV has only 10 market access agreements. And out of the big four states of New York, Florida, California, and Texas, fuboTV has only signed an access agreement with Texas. It could take several years for Fubo Sportsbook to be available in New York, California, and Florida.
Third, sports betting might turn out to be a less lucrative business than FuboTV hopes. During an interview in February, American Gaming Association CEO Bill Miller told Yahoo! Finance Live that sports betting is likely to remain a low margin part of the gambling market compared to traditional betting styles.
Fubo Sportsbook might have an edge
FuboTV believes its Sportsbook has several advantages over other sportsbooks.
First of all, Fubo Sportsbook is the only US owned and operated application that can synchronize viewing and live sports betting on one platform. Management has evidence that an integration of live TV and sports betting sets it apart from its competitors. For example, fuboTV recently shared data showing that cross users (people who are both video subscribers and sports betting players) place more bets than sports betting only players. Additionally, fuboTV has found that it retains cross-users at higher rates.
Second, fuboTV believes it can acquire customers at a significantly lower cost than its competitors. For example, competitors such as Caesars, DraftKings and MGM use TV ads to reach customers – a very expensive way to market these products.
In contrast, fuboTV markets directly to its streaming subscribers, the people most likely to use Fubo Sportsbook, reducing marketing costs to acquire players and shortening the path to profitability.
So is FuboTV a buy?
So far, the sports betting operation has provided less juice to fuboTV’s results than investors initially thought. For example, fuboTV reported that its sports betting operation lost $301,000 in its Q1 2022 earnings report – with Sportsbook hardware revenue projections only from 2023. Additionally, fuboTV announced a stream negative operating cash flow of $126.6 million in the first quarter, including a loss of operating cash flow of $7.5 million from betting activity.
Therefore, since the commercial segment is pre-revenue, many advantages of Fubo Sportsbook are still mostly theoretical. As a result, it may take some time for fuboTV to prove the profitability Sportsbook can achieve.
Meanwhile, fuboTV’s Q1 2022 earnings report also showed the company was backtracking, with gross margins negative 1.5%, the lowest fuboTV has reported since Q2 2020. Moreover, investors were upset to see fuboTV cut its revenue and total. Membership tips for fiscal year 2022.
So while fuboTV’s gaming and sports betting segment sounds enticing in theory, there are other reasons why the company only sells at 0.63x tracking sales. Also, although management has many good ideas, many of these ideas are speculative and will take time to materialize, which will not help fuboTV’s short-term profitability issues.