“You find me offensive, I find you offensive, for finding me offensive..”
– Eminem
Do you enjoy rooting for companies to fail?
I was asked that question in an e-mail from the head of investor relations of a $20B+ company we were publicly “short”. I had been writing on the company for a few years and was never shy to publish what I thought and the results of my analysis that was mostly negative. Despite our negative view, I always respected management for their willingness to engage. The reality is that most companies won’t give you the time of day if you have a negative bias.
But this question caught me off guard. It was somewhat spontaneous as it came toward the end of an e-mail thread discussing the nuances of the most recent quarterly earnings report. The question was followed by a lengthy diatribe about how “I am betting against the livelihoods of their +25k employees” and “their retirement savings where the stock represented a large allocation for many”. The company just had a poor earnings report, our short thesis was playing out, and it was becoming personal.
I am self-aware enough to know how irritating I can be to a management team and/or shareholders of a company we are “short”. I even had one prospect say, “I would consider subscribing to Freedman if he didn’t constantly write/tweet about how all [company name] shareholders are idiots.” Of course, I never explicitly called anyone an idiot. Still, I guess it was somehow implied from our work.
It is never my intention to hurt people’s feelings or insult someone’s intellect. And while I admittedly could use a lesson in tact (my wife is helping me with that!), I find it more efficient to call it like I see it. For me, it isn’t personal – it is about doing the work, engaging in intellectual/respectful debate, and finding the right answers (long, short or otherwise).
Actively seeking out opposing views helps me get to better conclusions faster. If I am wrong, so be it. Learn from it and move on to the next idea or switch sides. Being comfortable with being wrong, embracing uncertainty, and mental flexibility is a competitive advantage.
As I look back over the last year, we have had more consistent success on the short side than long. Don’t get me wrong; we have had our fair share of losers too! But in the spirit of shameless self-promotion here are some highlights:
- FUBO 12/28/20 (-50%)
- BMBL 2/16/21 (-58%)
- VIAC 3/22/21 (-67%)
- PINS 7/14/21 (-42%)
- SNAP 10/13/21 (-35%)
- ATUS 12/3/19 (-33% / -56% YTD)
(Performance from date of initiation and/or last directional pivot through 11/23 unless noted otherwise; includes both active shorts and bench ideas)
Back to the Communications Grind…
With that said - let’s talk Turkey!
(Sorry, couldn’t get away with writing the post-Thanksgiving EL without some holiday reference)
Let’s talk about a company with one of the worst business models I have ever seen and whose stock I believe is a high-probability zero bet long-term. The company is none other than – you guessed it! FuboTV (FUBO).
Now, this isn’t a new idea of ours. We have been short since 12/28/2020, but some ideas get better with age, like a fine wine.
For those who are less familiar, Fubo TV is a virtual multichannel video programming distributor (vMVPD), which positions itself as the leading OTT video service for sports fans. The company competes directly with other vMVPDs, including YouTube TV (Google), hulu w/live TV (Disney), and SlingTV (DISH Network). The vMVPD business is known for its poor unit economics due to rising programming costs, intense competition/low-switching costs (i.e., high customer churn rates), and questionable value proposition.
The fundamental problem with this business is they lose money on every subscriber. Losing money on every customer or funding large deficits isn’t always a program for growth companies as long as there is a path to profitability.
However, for FuboTV, there is no path to profitability. The company pays out 105% (YTD average) of its subscription revenue to the content owners (i.e., media companies) in the form of carriage fees. Carriage fees are based on the channel lineup (each channel has a $ cost per month) and the number of subscribers (variable cost). Carriage fees per subscriber are subject to mid-single-digit annual price increases to reflect higher costs of production. Therefore, FUBO must continue to raise its service price just to maintain its currently negative gross margin. However, because it is a commodity product with relatively low switching costs, FuboTV can’t raise its price without risking a significant increase in churn.
Helping offset some of the subscription costs is FuboTV’s advertising business, which generated $18.5M in revenue in 3Q21 or ~12% of sales. But even if we account for this additional, high-margin revenue stream, the company barely breaks even on the gross profit line. Then we get to layer in the $100M in operating expenses this last quarter, including $50M spent on sales and marketing to acquire subscribers that return less than 0 (LTV / SAC = -0.2 YTD average).
Operating losses continue to grow as a result. In 3Q21, operating losses were $103M vs. $81M in Q2 and $65M in Q1. Cash burn increased by 68% to $84M QoQ or annualized $336M versus a cash balance of $393M (the company has been funding losses through an ATM).
Management’s solution to this problem? Sports betting! Enter an industry with high barriers to scale, fierce competition, and questionable unit economics that can actually detract from revenue in the short-term.
Ultimately, we don’t view the stand-alone vMVPD business as structurally viable, and sports betting remains an expensive call option (high risk/low reward). This is a high-churn business model and management is chasing a TAM that we don’t believe exists. If FuboTV went away tomorrow, few would miss it, and those who do can subscribe to YouTubeTV or Hulu w/Live TV. If we are right, the model will eventually collapse upon itself, and common equity holders get wiped out.
Let’s not forget that the company was on the brink of insolvency before Fubo TV cobbled together a reverse merger with FaceBank Group in April 2020 and raised $197M at $10/share in a public offering on the NYSE in October 2020.
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P.S. The short answer to the question… no. I don’t enjoy rooting for companies to fail. I do enjoy being right though for the right reasons. The way I see it, a good short thesis is a playbook for how a company can get better and create more value for shareholders. In the case of the $20B+ company referenced above, it ended up with an activist getting involved and new management team coming in.
Of course, some issues are structural and can’t be fixed. Like in the case of FuboTV, there isn’t much that can be done to turn the vMVPD business into a “good” business. I am not rooting for them to fail, I just don’t see how this is a viable business model. And I think management agrees with me, which is why the company is trying to diversify into other businesses.
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.49-1.69% (bullish)
UST 2yr Yield 0.45-0.65% (bullish)
SPX 4 (bullish)
NASDAQ 15,508-16,102 (bullish)
RUT 2 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 28,602-29,995 (bullish)
VIX 15.31-25.52 (bearish)
USD 94.71-97.17 (bullish)
Oil (WTI) 73.04-82.98 (bullish)
Nat Gas 4.65-5.33 (bullish)
Gold 1 (bearish)
AAPL 151-166 (bullish)
AMZN 3 (bullish)
FB 325-350 (bullish)
GOOGL 2 (bullish)
NFLX 630-701 (bullish)
TSLA (bullish)
Bitcoin 53,480-65,101 (bullish)
Have a great weekend,
Andrew Freedman, CFA
Managing Director – Communications
