FuboTV: Holy Convergence Of Cord-Cutting, Advertising And Sports Betting



Night at Home: Three Soccer Fans Sitting on a Couch Watch Game on TV, Use Smartphone App to Online Bet, Celebrate Victory when Sports Team Wins. Friends Cheer Eat Snacks, Watch Football Play.

gorodenkoff/iStock via Getty Images

Investment Thesis

fuboTV (NYSE:FUBO) is a sports-first virtual multichannel video programming distribution (vMVPD) company that provides internet streaming services (alternative to legacy pay-TV cable) of more than 120 live TV channels, including sports, news, and entertainment through its website, mobile app, and app on most streaming TV platforms. The vMVPD market is fiercely competitive, but Fubo has managed to garner a sizeable 5% share in this space. However, the vMVPD business has razor-thin margins, and as a result, Fubo has negative gross margins (highly negative operating margins). Right now, Fubo is burning a lot of cash in its core business; however, future expansion of its platform to include gaming and sports wagering makes this company an enticing prospect.

Fubo’s multibillion-dollar addressable market is set to expand manifolds as the company rolls out free-to-play gaming and sports wagering in Q4. On the back of multiple secular growth trends, Fubo is set to scale rapidly over the next decade.

Here’s my investment thesis for FuboTV:

  • FuboTV is a sports-first vMVPD provider that’s set to expand its platform into gaming and sports betting. By transforming passive sports-watching experiences into active participation, Fubo’s goal is to drive higher customer retention and engagement that will, in turn, increase subscription and advertising revenues.

  • Cord-cutting was accelerated during 2020 as pandemic pushed legacy pay-TV customers to move over to live TV vMVPD services such as FuboTV. The trend is showing no signs of slowing down even in 2021, and with ~78M legacy pay-TV users left, FuboTV has a huge growth opportunity.

  • The PASPA act was repealed in 2018, and the online sports betting market is opening up a potential $150B market through legalization state-by-state. According to FuboTV’s management, the online sports betting market will be worth $70B, and David (Fubo’s CEO) said that he believes Fubo could get a 5% market share in this market during a post-earning interview a few days back.

  • Fubo’s business model is similar to Roku, viz., the core business is a low margin (cost breakeven) operation built to form a subscriber base that can be sold to digital advertisers (for targeted in-video and platform ads). Furthermore, Fubo is adding free-to-play gaming and sports wagering to its platform later this year. These additions will add new revenue streams for Fubo and aid the company’s customer engagement, retention, and acquisition.

  • FuboTV’s sports-first differentiation is enabling the company to increase its market share in the vMVPD market by growing its subscriber base while competitors are reporting weaker numbers post-pandemic. Sports are set to go back to normal, and the economic reopening will benefit Fubo.

  • Fubo’s revenues are proliferating, with Q3 2021 revenue coming in at $156M (up 156% y/y). During the earnings call, Fubo’s management increased their guidance for revenue to $615M and announced the recent launches of gaming and Fubo Sportsbook. Today, Fubo is highly unprofitable, and the company is burning through a lot of cash; however, operational improvements are being made while the business scales up, and the addition of higher-margin businesses positions the company for a profitable future. Until then, the $398.5M+ of cash on its balance sheet is ample liquidity support.

  • Strong unit economics support the marketing investments being made by DraftKings to drive future revenue growth. The company has a fine leadership team that is passionate about customer-centric innovation and has so far demonstrated exceptional executional ability.

  • After Archegos’ blow-up in early 2021, FuboTV’s stock came under intense pressure, the stock collapsed from ~$62 to ~$15 in a few months. Despite some recovery, Fubo is still trading well below its fair value is ~$50. The expected 10-yr CAGR returns on Fubo are ~22%. Since these returns are greater than our investment hurdle rate of 15%, I rate Fubo a buy at $25.

What’s FuboTV?

FuboTV is a live TV virtual MVPD service provider that offers an affordable alternative to legacy pay-TV cable services. In a fiercely competed market that includes deep-pocketed rivals such as Google’s YouTubeTV and Disney’s Hulu+liveTV, Fubo is differentiating itself through a sports-first orientation.

In recent years, fuboTV has evolved into a leading virtual MVPD provider (5% market share) through continuous product innovation that has seen Fubo transform from a soccer streaming service to a sports-first cable replacement for families. Over the years, Fubo has consistently been ‘first to market’ across a number of areas, including product and technology (e.g., Fubo is the first vMVPD to stream in 4K), content (e.g., Fubo has distribution agreements with more than 120 live TV channels and more than 600 local network stations), and digital/connected TV advertising (e.g., Fubo launched dynamic ad insertion in Jan-2018, ahead of most competitors).

Fubo TV

Source: TechHive

Many critics have labeled vMVPD services as nothing more than legacy live pay-TV cable with better UI/UX. However, consumers have been cutting the cord for years, and vMVPD streaming services are the natural replacement for cable. The following chart explains the cord-cutting trend by user counts:

US pay TV vs non-pay-TV households

Source: eMarketer

As you may know, pay-TV households have been moving to SVOD (e.g., Netflix, Disney+, Amazon Prime Video, etc.) and vMVPD services (e.g., YouTubeTV, Hulu+liveTV, FuboTV, Sling, etc.) for many years now. However, data from eMarketer shows that more than 78M US households still use legacy pay-TV cable services, albeit cord-cutting is accelerating right since the coronavirus pandemic hit in Q1 2020. Last year, vMVPD subscriptions in the US reached 10M, and Fubo now enjoys a 5% market share.

Fubo TV market shareSource: Antenna

Interestingly, signup data from Antenna shows that FuboTV’s signup market share improved drastically in 2020. As sports came back in the second half of last year, FuboTV benefited massively from the acceleration in cord-cutting.

Fubo TV market share

Source: Antenna

Due to fierce competition, vMVPD has become an ultra-thin margin business, and the future of pure vMVPD plays looks hopeless. However, most of these platforms are digital advertising companies, and affordable content distribution is just for consumer acquisition. The digital nature of vMVPD offerings enables companies like FuboTV to carry out targeted programmatic advertising that delivers superior ROI to marketers.

Digital advertising companies (like Facebook (FB)) are facing headwinds from new privacy policies from Apple (AAPL), and marketers have anyways shifted some of their digital ad budgets to connected TV platforms to reach customers. By 2022, connected TV Ad spending in the US is expected to increase to $14.1B from $8B in 2020 (almost 2x). Hence, FuboTV has an enormous potential upside in its advertising business.

US connected TV ad spending by company

Source: eMarketer

Fubo’s long-term vision is to turn passive sports viewers into active participants by leveraging its proprietary data science and technology platform optimized for live TV and sports viewership and integrating gaming and sports wagering into the platform to create the most thrilling sports experiences. Through its video offering, FuboTV subscribers could stream more than 120 live TV channels – more than any other live TV streaming platform, according to Nielsen. With the addition of interactivity to its streaming experience via predictive free-to-play gaming and Sportsbook (Fubo’s Vigtory acquisition), Fubo is building a comprehensive next-gen sports entertainment platform. This new category will see Fubo compete with the likes of DraftKings.

In early 2021, FuboTV announced the acquisition of sportsbook startup – Vigtory, which will enable the company to get the technology needed to launch its own consumer-driven sports betting product by Q4 2021. The addition of integrated sports wagering into the FuboTV platform opens up a $70B addressable market for Fubo, and David (Fubo’s CEO) has already talked about reaching a 5% market share in this industry. Hence, Fubo could one day be doing several billion dollars in annual revenues.

Sports betting global trends

Source: DraftKings SPAC deal Investor Presentation

We are witnessing a convergence of multiple secular growth trends, viz. cord-cutting, connected TV advertising, and online sports betting. Since FuboTV’s platform evolution is one of the driving forces behind this convergence, I expect FuboTV to be wildly successful in the 2020s, i.e., Fubo will achieve massive scale and profitability in the long term.

Consensus revenue estimates

Source: Seeking Alpha

Now, let’s analyze Fubo’s current financials.

Analyzing FuboTV’s Financials

Bucking the slowing subscriber growth trends observed at streaming giants such as Netflix (NFLX) and Disney (DIS), FuboTV managed to substantially grow its subscriber count in Q3. On the back of strong customer additions and engagement, FuboTV achieved record-breaking revenues of $156.7M (up +156% y/y) with significant improvements in operating margins (due to a 28% decline in operating expenses).

Fubo TV key operating metrics

Source: FuboTV Q3 Shareholder Letter

Just in Q3 2021, Fubo added +265K subscribers to reach ~945K subscribers (up 108% y/y, up 39% q/q). This net adds number obliterated the wildest estimates on the street. The growth in subscribers also led to a 113% y/y jump in content hours streamed (284M in Q3). With more than 72M legacy pay-TV subscribers (left to switch over to streaming), FuboTV still has massive potential for subscriber growth.

Sequential subscriber growth

Source: FuboTV Q3 2021 Earnings Presentation

A larger subscriber base and higher customer engagement is attracting advertisers to Fubo’s platform, which is evidenced by the +147% y/y jump in advertising revenues. However, Fubo’s advertising ARPU of $8.23 is still relatively low compared to its industry rivals. Therefore, Fubo still has a lot of room (at least 20-25%) to increase its advertising ARPU.

Advertising growth

Source: FuboTV Q3 2021 Earnings Presentation

In addition to growth in its advertising ARPU, Fubo also raised its subscription fees earlier this year, leading to a total ARPU of $74.54 in Q3 and helped the company register adjusted contribution margins of +12.4% (up +189 bps).

Contribution margin expansion

Source: FuboTV Q3 2021 Earnings Presentation

As Fubo continues to scale up, the company is delivering operational leverage. The following graph outlines the reduction in Fubo’s expenses as a percentage of revenue:

Expenses as percentage of revenue

Source: FuboTV Q3 2021 Earnings Presentation

Fubo’s vMVPD business has ultra-thin margins due to high content costs; in fact, Fubo has negative gross margins (-1%), which means Fubo is selling $101 for $100. Such a business is unsustainable in the long run; however, Fubo’s primary business is advertising (not content distribution). If you remember, Roku (ROKU) built its platform through the sale of streaming hardware at breakeven (low-margin) and now makes tons of free cash flow through ad sales. Fubo is a mini-Roku, i.e., it is offering vMVPD at cost breakeven to build a large subscriber base. In the future, Fubo will derive higher advertising sales from its platform (which will soon include gaming and sports wagering services).

Net loss and adjusted EBITDA

Source: FuboTV Q3 2021 Earnings Presentation

Even though Fubo is a loss-making company, its Net Loss and Adjusted EBITDA numbers are trending in the right direction. In Q3 2021, Fubo’s EBITDA margins and Net Loss margins improved by +2,600 bps and +38,000 bps, respectively. Despite significant progress on the margin front, Fubo continues to lose a lot of cash every quarter (-36.36M in Q3). The cash burn rate is dropping, which is a big positive.

Fubo free cash flowSource: YCharts

After raising $183M in its IPO, FuboTV once again dipped into capital markets in Q1 2021, raising $350M through a convertible debt offering. At the end of Q3 2021, FuboTV had ~$406M on its balance sheet, which is adequate liquidity and growth capital for Fubo.

Fubo cash and short term investments Source: YCharts

With acceleration in subscriber growth (and, by extension, revenue growth), FuboTV raised its 2021 revenue guidance to ~$615M, which represents revenue growth of 135% y/y (against tough comps from the pandemic-boosted FY-2020). Also, Fubo expects to exit this year with 1.06M subscribers. Therefore, Fubo is projected to have a great year in 2021, and with the rollouts of gaming and Fubo Sportsbook later this year and into 2022, I think Fubo investors are in for fireworks as these positive triggers materialize over the next few quarters.

Fubo stock guidance

Source: FuboTV Q3 2021 Earnings Presentation

Now, let’s formulate the valuation and expected returns for Fubo to decide if the stock is worth buying at current price levels.

FUBO Stock Fair Value and Expected Return

To determine Fubo’s fair value, we will utilize conservative assumptions as mentioned below:

  • For 2022, Fubo is likely to generate revenues of $1B (consensus analyst estimates). Now, Fubo’s historical outperformance suggests that the company will likely beat these numbers; however, in order to be conservative, we will base our model on this $1B figure.

  • The company’s margin profile seems unattractive, but it is eerily similar to an early-stage Roku (low-margin hardware business, high-margin ad business). Fubo’s low-margin vMVPD business is getting boosted by rapidly growing high-margin ads business. The impending addition of gaming and sports wagering business lines will add additional higher-margin revenue to Fubo’s repertoire. Hence, assuming a long-term potential FCF margin of 20% will likely prove to be conservative.

  • Fubo has a massive addressable market for its vMVPD offering; however, the gaming and sports betting market could really move the needle for Fubo in terms of driving future revenue growth. Hence, the assumption of a long-term growth projection of 20% per year is also conservative.

Other assumptions:

Forward 12-month revenue [A]

$1 billion

Potential Free Cash Flow Margin [B]

20%

Average fully-diluted shares outstanding [C]

~150 million

Free cash flow per share [ D = (A * B) / C ]

$1.33

Free cash flow per share growth rate (conservative estimate)

20%

Terminal growth rate

3%

Years of elevated growth

10

Total years to stimulate

100

Discount Rate (Our « Next Best Alternative »)

9.8%

Results:

Fubo valuation model

Source: L.A. Stevens Valuation Model

As you can see above, Fubo’s fair value is ~$50, i.e., it is massively undervalued at the moment. Fubo fits in well with our strategy of buying small companies with great potential. To make an informed investment decision, let us now assess the expected returns for Fubo:

Fubo total expected price return

Source: L.A. Stevens Valuation Model

By designating a ten-year « Price to FCF » multiple of 35x, we get to a 2031 price target of $192 for FuboTV’s stock. Considering today’s price of $25, an investor can conservatively expect to generate 22.62% CAGR returns or ~8x their money on Fubo in ten years. Since the projected returns are greater than BTM’s investment hurdle rate of 15%, I rate Fubo a buy at $25.

BTM Crucial Characteristics Check

Crucial Characteristic

Notes

Visionary Founder/CEO

Before starting Fubo in 2014, David Gandler (Fubo’s CEO and Co-founder) had a prolific 15-year advertising career at companies like Scripps Networks, Time Warner, and NBC Universal’s Telemundo. Within a relatively short span of 7 years, Fubo has evolved into a leading vMVPD player under David’s leadership. The company has now outperformed expectations for five straight quarters since IPO, and David’s interviews and earnings calls have been very impressive. To drive the next phase of growth at Fubo, David’s working on integrating gaming and sports betting into the Fubo platform (sports wagering went live in the first state last month).

David’s Twitter account is fun to follow, and he seems to be building a cult-like following on social media. So far, David has compared Fubo to the likes of Netflix, Roku, and Spotify, which is a clear indicator of ambition. Under David’s leadership, Fubo has a good chance of turning into a 10x investment in the 2020s (especially from these depressed prices).

Proprietary Tech

Fubo’s streaming services are powered by its proprietary technology, and the content selection and packaging decisions are based on advanced data science techniques. By the end of 2021, Fubo will be integrating free-to-play gaming (ad revenues) and betting sportsbook (wagering) into its platform.

Network Effects

The addition of gaming and sports wagering will increase customer retention, and Fubo’s loyal users are likely to recommend the service to others. Furthermore, the interaction between video and sportsbook offerings will drive additional customer adoption for the company.

Powerful Secular Growth Trend

A holy convergence of powerful secular growth trends such as acceleration in cord-cutting continued rise of digital advertising, and legalization of online sports betting (still in early stages in the US) is supporting Fubo’s meteoric growth.

Sounds Financials

In Q3 2021, Fubo grew revenue to $156.7M (up 156% y/y) with paid subscribers growing to 944K. Earlier in Q1 2021, Fubo broke subscription seasonality trends in the process (indication of an inflection point). With the addition of sports wagering, Fubo is set up for continued growth over the coming years, albeit at a slower pace. In this quarter, the company raised its revenue guidance to $615M based on 1.065M subscribers. Although Fubo’s vMVPD business remains an ultra-low margin, loss-making operation, the company has a solid path to profitability – growth in subscribers, growth in advertising revenue, growth in gaming & sports wagering revenues. The contribution margins are showing a positive trend and reached 12.4% in Q3. With $398.5M of cash on its balance sheet, Fubo is well-capitalized to drive future growth as the company moves towards profitability.

International Expansion

As of now, FuboTV is available only in the US, Canada, and Spain. The recently announced deal to acquire Molotov SAS gives Fubo an entry into France. However, Fubo’s management team has ambitions to make FuboTV a global streaming platform. Hence, the company has massive growth potential to access via international expansion.

Moat

Fubo’s sports-first differentiation combined with upcoming free-to-play gaming and sportsbook (online sports betting) is the creation of an entirely new category of sports entertainment (similar vision from DraftKings). The integration of gaming and sportsbook into its product will help the company build some sort of moat in an otherwise fiercely competitive, high-churn vMVPD market.

Concluding Thoughts

After reporting another spectacular quarter, Fubo’s stock has taken its customary plunge; however, I think this dip is a fantastic buying opportunity. Since going public, Fubo’s management has displayed a knack for outperforming expectations, and this trend could go on for years to come. Fubo is evolving from just another vMVPD player to a core entertainment offering for households, and consequently, gaining market share.

The addition of free-to-play gaming and sports wagering to its platform will help Fubo improve customer acquisition, retention, and engagement – driving further long-term growth at the company. Fubo is at the center of the holy convergence of multiple secular growth trends (such as cord-cutting, digital (connected TV or OTT) advertising, and legalization of online sports betting in the US), and so, it is fair to say that Fubo is just getting started.

Fubo has a strong leadership team in place, and the company is taking a balanced approach for growth and profitability. The stock is severely undervalued after another vicious sell-off, and buying in at $25 could yield massive alpha for long-term investors.

Key Takeaway: I rate FuboTV a buy at $25.

Thanks for reading. Please share your thoughts, questions, and/or concerns in the comments section.



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