Fubo stock is on the rise: should you buy?

FuboTV (FUBO 0.60%) stock has been on a tear this month. The virtual cable provider, with a focus on sports content, has had a rough time in recent years, with its stock down 97% from all-time highs, but it just received positive news about a court ruling on the launch of a competing product from some of its content providers. The stock is up about 20% in the past 30 days to $1.68. At one point in 2021, it was trading at over $60 per share.

With a small market cap, improving financials, and rapidly growing earnings, is now the time to finally buy shares of Fubo stock before it explodes higher? Let’s take a deeper look at this TV streaming disruptor and find out.

A court decision in his favor

This summer, media conglomerates DisneyFox and Warner Brothers Discovery attempted to launch a direct-to-consumer (DTC) sports streaming app called Venu. The app would cost $43 a month and give sports fans a chance to cut the cord, but still have access to sports leagues that media companies have rights to.

Venu is a potential competitor to FuboTV. The company is what’s known as a virtual cable provider, which allows someone to subscribe to a cable television package but access it directly through an Internet connection. It’s on cable, but the internet streaming version. Fubo has focused on sourcing sports content and wants to be the sports package of choice for customers looking to upgrade to a modern television solution. Disney, Fox, and Warner Brothers Discovery all sell channels to Fubo, so seeing them team up to bypass it likely sent panic among its executives.

In fact, they are taking the companies to court, claiming that Venu’s app is anti-competitive and an entrenchment of monopoly power in sports content. Earlier this month, Fubo got a preliminary injunction from the courts to stop the launch of the Venu app. This is only an initial stop, and the whole case has to go through a court process, but it will help FuboTV fend off some potential competitors for now. Investors saw it as a win. The announcement was a catalyst for the stock’s rally this month.

Tough margins and big competitors

As a video content aggregator, FuboTV must essentially pass on the costs charged by TV channels like ESPN and then pay its customers a slightly higher rate. This will appear in a company’s gross margin figure. Previously, Fubo actually posted negative gross margins, meaning it was selling its virtual cable package below the price it cost to get the channels from the content providers. Today, it fixed that, but margins are still low at just 9%.

The improvement in margins helped improve Fubo’s cash burn. At its lowest point, the company was burning through $360 million in free cash flow a year. In the past 12 months, it has burned less than $150 million. There is still a lot of improvement before it can achieve positive cash flow, but Fubo is in a much better place than it was a few years ago; however, the stock is much smaller.

Another concern for Fubo is its direct competitor — YouTubeTV. Owned by AlphabetYouTubeTV has an almost infinite war chest to try to expand with subscribers. This is why it has a much higher market share. Alphabet can make money indirectly by getting more people to watch YouTube ads and buying data for its advertising business. Fubo has been nimble so far in acquiring sports rights, such as regional sports networks, but from a thousand-foot perspective, it’s severely disadvantaged compared to YouTubeTV.

FUBO Free Cash Flow Data by YCharts

Should you buy the stock?

As of this writing, Fubo stock has a market cap of just over $500 million. It generated $1.5 billion in revenue over the past 12 months and grew revenue 26% year-over-year last quarter. If gross margins continue to improve and the company can achieve positive cash flow, there may still be value in Fubo stock. It has $150 million in cash on its balance sheet and about $300 million in convertible debt that doesn’t mature until 2026 or later, so near-term liquidity isn’t a big concern if cash flow continues to improve .

However, this does not mean that you should rush to buy stocks. I think Fubo is a risky stock because of huge competitors like YouTubeTV. It is also unclear whether Venu will be allowed to operate. The outcome of the process is not predetermined, even if the company has received an initial injunction. For these reasons, FuboTV stock is best left outer of your portfolio for now.