Meme stocks have been unpopular investments in this bear market. Take a live TV streaming company fuboTV (FUBO -1.58%), for example. Shares are down 93% from their highs. But the stock has shown a pulse, rising 52% in the past month.
Is some optimism finally returning to the market? Will FuboTV finally begin its share price recovery journey? Maybe, but that’s why investors should steer clear of fuboTV.
Is a short compression coming?
It’s an old cliché that the stock market is driven by fear and greed, but there is some truth to this saying. Sometimes the pendulum swings too far in one direction; you can see below that short sellers are piling into fuboTV, shorting almost 30% of the stock’s outstanding shares. These must be redeemed at some point so that short sellers can close out their positions.
FUBO Percentage of Outstanding Short Shares Date by YCharts.
Shorts jumped on fuboTV during the euphoric market in late 2020-early 2021 and paid off when the market peaked and began to cool. But this time things may not go so well.
The stock took a beating, losing most of its market value. Meanwhile, market sentiment has improved significantly recently. CNNs Indicator of Fear and Greed indicating that investors have shifted from fearful to neutral and S&P 500 It recently broke above the 125-day moving average, a sign of potential positive market momentum.
Short sellers could have their hands in the metaphorical cookie jar if this is the start of a broader market recovery from last year’s lows. A short squeeze It can happen if too many short sellers try to buy the stock to close out their positions.
Management takes action
The streaming company has grown successfully, but the business is bleeding cash, something dangerous can be difficult when attracting new funds in a bear market. The company’s fragile financials likely prompted short-sellers to jump into the stock as it is.
The company has about a year to run out of cash free cash flow last year and its current cash balance:
FUBO Free Cash Flow Date by YCharts.
Fortunately, the management has realized this and is acting accordingly. In the second quarter earnings announcementthe company said it is looking for a partner for its sports betting segment rather than going it alone, which could help it roll out the service faster and cost less to do so.
Second, fuboTV signed a content deal with an entertainment company owned by Ryan Reynolds that will provide unscripted TV content for the platform and ad sales for the channel.
The company has a lot of work ahead of it. In Q2, its global spend was 152% of revenue, but these moves are at least a step in the right direction. Investors will want to see how well it can control costs, as profitability becomes increasingly necessary for long-term survival.
Treat FuboTV like it is
It’s important to have the right mindset when approaching a stock like FuboTV. Increased short-seller activity can create a short squeeze if the market rallies. However, buying a stock for the possibility of something speculative like a short squeeze is not an investment; this gambling.
Meme stocks like FuboTV are likely to remain highly volatile, and could give back many of those gains if the company shows signs of financial distress in the coming months or quarters. So if you buy fuboTV, think of it as a speculative position, a small part of a diversified portfolio built with a foundation of blue-chip stocks with solid fundamentals.
Justin Pope has no position in any of the listed stocks. The Motley Fool owns and recommends positions in fuboTV, Inc. The Motley Fool has it disclosure policy.
