Calling Fubo “maybe the most compelling short we have ever identified in our career as analysts,” LightShed Partners’ Rich Greenfield, Brandon Ross and Mark Kelley have launched coverage on the online TV service provider with a Sell rating and an $8 target. That target is 85% below Fubo’s Wednesday’s close of $52.59.
As of the time of this article, Fubo is down 15.9% in Thursday trading to $44.58. However, shares are still up about 400% on the year.
“Over the past few months, we have seen numerous examples of companies with valuations that defy logic,” LightShed, which is a TMT firm based in New York City, wrote. “We understand the broader market dynamics at play with ‘cheap money’ and an exuberant retail investor. However, the run-up in Fubo shares is just plain egregious, in our view.”
The analysts kick off their bear case for Fubo by noting that cord-cutting is gradually dwindling the size of Fubo’s addressable market. They forecast the total number of pay-TV subs in the U.S. -- whether signed up with a traditional pay-TV service provider (MVPD) or an online pay-TV provider (vMVPD) -- will drop to about 55 million within five years, from a current level of 78 million.
LightShed is also skeptical of Fubo’s efforts to pitch itself as an ideal pay-TV solution for sports fans, noting that it doesn’t carry the Turner networks (TNT, TBS, etc.) and that both Fubo and online TV rivals have dropped many regional sports networks (RSNs) over the past year.
Next, the firm questions expectations among bulls that Fubo will be able to grow its monthly ad revenue per user to more than $20 from a current level of about $7. LightShed points out that TV viewing is declining, that Hulu’s online TV service only generates about $10/user/month in ad revenue in spite of having made large ad-tech and sales investments, and that the expected shifting of sports content from cable to broadcast networks will reduce its ad inventory.
LightShed then throws cold water on hopes that sports betting services will be a major profit engine for Fubo. It observes that Fubo is at a major scale disadvantage relative to rivals such as FanDuel and DraftKings (DKNG) - Get Report, and that the fact its content is typically consumed on TVs (rather than mobile devices or PCs) both creates regulatory challenges and user-experience issues for any sports betting service that it launches.
Likewise, a few days after Fubo’s stock soared in response to comments made by its CEO about potentially acquiring exclusive sports rights, LightShed expresses skepticism that Fubo has the resources to obtain sports rights of value. “With only $240 million or so in cash on Fubo’s balance sheet with the company burning cash quarterly, we find it hard to fathom how they could buy any meaningful sports rights without a multi-billion dollar equity offering first,” the firm wrote.
Finally, LightShed argues Fubo’s history provides reasons to be skeptical that its management can make good on the story that it’s selling. While calling CEO David Gandler “scrappy and incredibly driven to succeed,” LightShed also notes he “has pivoted constantly to not only [keep Fubo] alive, but create value for his investors.”
“Effectively, the Fubo local sports story has been transformed into a national sports and general entertainment service that looks similar to other vMVPDs and has less sports content than its facilities-based, albeit more expensive, MVPD peers,” LightShed says.