Description

Elevator Pitch

• FUBO is a virtual multichannel video programming distributor (vMVPD) offering live TV streaming  that focuses on sports broadcasting that is subscale, cash burning and highly leveraged
• Despite growing subscribers, the company has experience incremental margins degradation as  they lack pricing power with consumers AND bargaining power with content providers
  
  • The average subscriber lifetime is ~14 months & CLTV is ~$20 at the gross profit level
• FUBO’s burn rate is unsustainably high and has forced them to repeatedly do secondary offerings  to stay afloat. We believe they need to raise >50% of the market cap in the next 4-6 quarters.
• On top of that, FUBO has 3.5 years to refinance $400M of converts that are trading in the $0.44  range 

THESIS

FUBO is a structurally unprofitable pipe dream in the world of streaming that still has a market cap over $700M that needs to raise more cash over the next 10 months. This is a vMVPD like Youtube TV or Hulu Live that focuses on its sports bundle to drive subscriber growth that lacks any content or cost advantage paying broadcasters full freight for content. The company recently put out unrealistic margin guidance coinciding with its latest shelf offering. This high churn model, which cannot even cover the content and distribution costs, will likely have to raise another $300M in equity at the minimum just to play through the next few years with zero evidence they can hit breakeven profitability. We have been short this name throughout the mania and now believe it is time to ride the final leg down as FUBO does not need to exist and may cease to by early 2026 – making it a potential zero.

BACKGROUND

FUBO is a vMVPD that offers a ‘skinny bundle’ of channels as a cable alternative at a lower price. The average monthly cable bill is ~$110 versus FUBO at $65 per month and they argue the core content is the same. FUBO is now the #10 MVPD and 3^rd largest among those growing subscribers. FUBO is targeting ~1.34M subscribers with roughly 1M of those in the US. The goal for 2025 is getting above 2M subscribers. The main competing offerings are Youtube TV (GOOG) and Hulu Live (DIS) both of whom can afford to prioritize sub growth and customer data as they are tiny offerings inside massive and highly profitable organizations. The content package was created by taking strategic investments from their broadcast partners plus paying the same cost cable operators do to access content. These backers have completely sold out of FUBO over the past 18 months.

FRAMEWORK: FAD/ZERO

Capital Required

The simplest reason to be short FUBO now despite the high short interest is that they need to raise capital in the next 12 months and secondary offerings are their only option. They already conducted a ~$200M ATM offering in Q1 2022 and only have $380M of cash left after burning $220M in the first half of the year. Immediately after reporting Q2 and ahead of last week’s Investor Day, FUBO fired another $350M shelf. Management subsequently claimed they would only need to raise another $100M total to get to breakeven. While the latest guidance implies a toned down growth spend, the business is simply burning too much cash in a steady state to get to positive FCF any time soon and will likely have to raise the entirety of the secondary (>50% dilutive to the current shares outstanding) to play through to true breakeven. Additionally, they still need to pay off or at least refinance their $400M of Feb 2026 converts.

Unit Economics

The easiest way to gain comfort with this short is to look at the challenged unit economics to see how difficult achieving any real level of profitability will be. Looking at North American customers, the ~$72 ARPU in Q2 is made up of $65 per month (now $70) in subscription fees and $7 of ad revenue. This is offset by subscriber related expenses (content COGS) of >$70 per month. Before any other costs, FUBO has historically charged customers less per month than they are spending just for the rights to stream content. The argument is that they can take price, but costs have actually been growing faster than subscriber ARPU. They have zero pricing power with their content providers and based on conversations with former employees and broadcasters, FUBO is forced to pay for full packages e.g. DIS requires them to pay for Disney Channel and FX in addition to ESPN and ABC. The lack of pricing power with consumers is evident in the 10% churn in total subscribers they just experienced when they raised the subscription price by $5 per month.

Source: FUBO filings

Even if we assume they are able to raise subscriber prices to cover the consistently rising cost of content, there is an additional cost we consider part of Cost of Sales, which is Broadcast and Transmission and is another HSD% of historical revenue and this is largely variable. Just to have a positive true gross margin, that would be another ~$6 per subscriber in monthly costs that FUBO would need to cover, which would mean a high teens price hike to the mid $70’s in the monthly subscription fee. FUBO believes it can charge >$80 per month by 2025, which likely still will not be on pace with content cost growth.

However, to FUBO’s credit, the Ad business has been growing nicely and brings very high incremental margins. At $7 per month in revenue today helps them get to breakeven on a non-GAAP gross profit basis as of Q2. The goal here is to get to $15-20 of monthly ad ARPU in 2025. We think this is quite achievable given how early stage the CTV category is. In the bull case we are looking at $95-100 of total ARPU.  If we pretend subscription revenues can cover content plus transmission costs and the Ad rev is pure gross profit, we finally get to the issue that plagues all streamers, which is S&M costs to drive subscription growth and replenish churn customers.

FUBO does not give quarterly churn metrics, but has a stated goal of ~5%, in line with prepaid wireless providers. We think today they are at HSD% but to their credit, this number has been improving (per management). That means average customer lifetime today is ~1 year and the goal it to stretch it to 20 months. With a steady historical subscriber acquisition cost (SAC) of ~1.1x monthly APRU and the above theoretical gross profit (versus the zero GM business that is today), the best-case Lifetime value is ~$250 of total contribution margin. At 2M subscribers, that would be ~$75M per quarter. As it stands today, T&D and G&A are $38M per quarter and these costs grew at +56% y/y. If we generously assume they only grow at a 15% CAGR (versus subs at ~20%), then 2025 quarterly corporate operating expenses will be $58M. This leaves ~$17M per quarter to spend on retention S&M and on OPEX with whatever amount remains. With zero retention spend, this is a 3% EBITDA margin business in a bull case scenario.

Source: FUBO filings

The dream case management laid out last week is 15% EBITDA margins in 2025. The delta here comes from two factors. The first is a fundamental debate on whether they can increase GM above what we believe by holding content and transmission costs largely in line while raising subscription prices alone in excess of these expenses. In theory, they can drop certain channels or renegotiate better rates, but we have found zero evidence of this at this point in time. The second issue with the 15% margin goal is seemingly a clerical error on their part where they simply ignored Broadcasting & Transmission in their guidance (as depicted below). Therefore, management’s own blue-sky scenario only gets them to a HSD% EBITDA margin assuming broadcast costs cannot shrink past 6% of revenues. Splitting the difference gets us to a 5% best case long-term margin outcome

Source: FUBO filings

Competition

In theory, if FUBO were a differentiated offering with some special value proposition, then we could understand the pricing power narrative, but as a low-cost alternative to cable it is hard to argue that they can grow subscriptions while taking price as the incumbents grow increasingly aggressive about retention. Even if you assume the cord cutting continues at a MSD% CAGR, FUBO is not even the dominant vMVPD offering. Youtube TV (GOOG) and Hulu Live (DIS) are the top live streaming competitors with 5M and 4.1M subscribers, respectively. Not only are these platforms more than 4x the size of FUBO, but they can afford to prioritize subscription growth and customer data as they are tiny offerings inside massive and highly profitable organizations. Youtube TV costs $65 per month, which is now less than FUBO and Ad-Free Hulu + Live TV with Disney+ & ESPN+ all in one bundle only cost $76/mo. Finally, you have AMZN and AAPL getting into live content as well with the former winning Thursday Night Football and the latter the constantly reported front runner to take over NFL Sunday Ticket.

Source: M Science

BULL REBUTTAL

TAM

Finally, the vMVPD world is steadily growing at ~2M subscribers per year as the 65M households remaining decline at a ~MSD% rate, which means that 2/3 of cord cutters subscribe to a live streaming offering. However, the trough in cable households is expected to be in the mid 40Ms before the end of the decade, which leaves an incremental 20M max homes up for grabs over ~8 years. This is still a massive growth runway and means if FUBO can hold share, that would be a ~3.5M max subscriber base in the US. Additionally, FUBO has carved out a niche offering in Spanish- speaking countries by leading with its soccer-centric roots.

Our counterargument here is multi-pronged: FUBO should continue to lose share, incumbent cable providers will get continuously more proactive about retaining customers, and international subscriptions have an ARPU of <$6. We have alluded to the first two points above. To expand on the last piece, even though the unit economics are superior ex-US (~high teens contribution margin), with a goal of 600K international subscriptions in 2025, this is not enough to move the needle for the entire company. At an $8 ARPU at that size and a 20% contribution margin, you are looking at just over $10M in Gross Profit.

Cost controls

Management has been preaching greater cost control and, as stated above, claims to only need $100M of incremental capital to get them to breakeven. They point to a steady SAC spend, reduced churn, and now lowered subscription growth expectations to show that the burn rate will come down materially. They are even scrapping their ambitions to build out their own live sports betting platform (which we believe was never going to work for a plethora of reasons we will not discuss in this memo). These discussions of price taking and cutting content to lower the cost of their bundles would be the biggest incremental helper.

While management can speak about any hypothetical math that they want, these measures are not showing up anywhere in the reported results. The math above shows how far unit economics are from reaching a breakeven point and it is high unlikely they can course correct fast enough before they have to raise significant equity.

RISKS TO BEAR CASE

The biggest risk to the bear case is their content partners cutting them a deal on content costs. While this is possible, we find it highly unlikely given every media company is shifting their priority to drive bottom line results. If you are DIS or WBD or FOXA, you have zero incentive to give FUBO a break on any live content because that is your own life blood as you look to retain as many full value eye balls as possible across mediums. FUBO’s spend with them does not move the needle enough for these partners to ensure their survival. More so, if FUBO were to shutdown today, their ~1M subscribers would simply join a competing vMVPD, which is either owned by or paying similar fees to these media companies. Beyond that, the risk would be a major pivot back to its core as a Spanish-friendly soccer centric offering.  However, even then it is hard to see FUBO having more than 750K subscribers paying ~$30 per month with a 20% gross margin and best case ~10% EBITDA margin to be a $30M/yr EBITDA business worth ~15x.

The final risk we have to mention in a name like this is meme squeeze potential. We saw this last week as BBBY went vertical and FUBO somewhat went along with it. There is a scenario where for non-fundamental reasons, FUBO’s stock gets to a level so high ($10+) that they could issue the >$500M needed to not only get to the breakeven point, but also pay off their debt that currently trades at 44c. With fall season being their best net add time of year and this year having a Winter World cup, we expect results to look solid in H2 22 and may give FUBO a window to raise at least some of the capital that they need. We see rallies to $5+ as an ideal place to increase the short position.

VALUATION

It is difficult to speculate how much FUBO should be worth similar to many businesses spiraling toward insolvency, but it is fair to say that the stock is incredibly overvalued today given the upside prospects. In the survival base case outlined above, if they were to raise another $350M to get to 2M+ subscriptions with $100 total ARPU and 5% EBITDA margin, you are looking at a $130M of EBITDA, which is an ~8x multiple today accounting for future dilution. NFLX and DIS are trading at 11x 2025 EBITDA so if everything works out to the bull plan, there is <40% upside from here (to $5/share) and you would have to hold through serial dilution plus several more quarters of negative margins. In the more likely event, if they are still fighting to get breakeven after 2025, FUBO will likely have to default on the notes due 2/26/2022 and file Ch. 11. The lack of assets or clear path to meaningful profits means the equity gets wiped out and therefore is essentially worthless today.

KEY INVESTMENT FACTORS

‘Contribution Margin’ (adj Gross Profit)

Burn rate and capital raises

Meme inflows

DISCLAIMER

The information in this presentation is for illustration and discussion purposes only.  It is not intended to be, nor should it be construed or used as, investment, tax or legal advice, any recommendation or opinion regarding the appropriateness or suitability of any investment or strategy, or an offer to sell, or a solicitation of an offer to buy, an interest in any security, including an interest in any private fund or account (the “Fund”) or any other private fund or account advised by Stamina Capital Management LP (the “Investment Manager”) or any of its affiliates.  This material does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific investor. You should not rely in any way on this summary. Performance targets or objectives should not be relied upon as an indication of actual or projected future performance; past performance is not indicative of future results.  Actual returns will depend on a variety of factors including overall market conditions. No representation is made that these targets or objectives will be achieved, in whole or in part. This information is as of the date indicated, is not complete and is subject to change. Certain information has been provided by and/or is based on third party sources and, although believed to be reliable, has not been independently verified.  The Investment Manager is not responsible for errors or omissions from these sources.  No representation is made with respect to the accuracy, completeness or timeliness of information and the Investment Manager assumes no obligation to update or otherwise revise such information.

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Catalyst

• Lowered growth guidance

• No improvement in unit economics

• Secondary Offering

• Risk of pop from easy macro backdrop (football + World Cup)