2023-07-06 05:13:39 ET
Summary
- This is the second and final part of my deep dive on fuboTV.
- Before discussing how I arrived at an intrinsic value estimate for fuboTV, I will discuss some of the most important financial performance metrics of the company.
- There are several key developments investors should keep a close eye on.
Last Friday, I published the first part of this analysis in which I discussed the macroeconomic outlook for fuboTV ( FUBO ) and concluded that the company is operating in a high-growth niche in the global streaming industry. The findings last week also led me to believe that fuboTV is not well-positioned to enjoy competitive advantages in the foreseeable future, which is the case for all players in the sports streaming market. The objective of this second and final part of the analysis is to evaluate whether fuboTV can benefit from the expected growth of the sports streaming sector and to estimate the company's intrinsic value using conservative estimates.
The Financial Performance
Many factors can and will impact stock prices in the short term, but in the long run, corporate earnings are likely to determine stock prices. As investors, our goal is to predict the future earnings power of a company based on the historical performance of a company and rational projections for earnings growth. fuboTV is yet to be profitable - which is not a concern for me as a growth investor - but more importantly, the company needs to expand its meager gross profit margins meaningfully to have any success in the long term. For the second consecutive quarter, fuboTV reported a gross profit in Q1 2023, which is a step in the right direction given that the company has failed to report positive gross profits in any fiscal year so far. The company's gross profit can be calculated by subtracting subscriber-related expenses and broadcasting and transmission costs from total revenue.
Table 1: Gross profit calculation for Q1
Total revenue | $324.37 million |
Subscription related expenses | $301.38 million |
Broadcasting and transmission costs | $19.76 million |
Gross profit | $3.23 million |
Source: Company filings
As we can see, subscription-related expenses account for the largest chunk of costs for the company. This does not come as a surprise given that this line item is used to account for content acquisition costs. A streaming company's success largely depends on the quality of content available on its platform, and it is reasonable to believe the intensifying competition in the sports streaming industry will have a negative impact on gross margins in the future with many companies fighting for streaming rights. fuboTV acknowledged this risk in its latest 10-Q filing and wrote:
We have seen an increase in these costs in recent periods, and we expect further increases in the future. Moreover, the renewal of long-term content contracts may be on less favorable pricing terms in the future. As a result, our margins may face pressure if we are unable to renew our long-term content contracts on acceptable pricing and other economic terms or if we are unable to pass these increased programming costs on to our subscribers.
If we dig deeper into the numbers, we see the recent improvements in gross margins are masking the subscription business struggles of the company. The below breakdown of revenue in Q1 reveals fuboTV failed to cover subscriber-related expenses ($301.38 million) with subscription revenue ($300.86 million).
Exhibit 1: Q1 revenue breakdown
The company has failed to keep content costs below subscription revenue in recent years, and I do not expect a notable improvement on this front in the foreseeable future given that content acquisition costs are on the rise. As highlighted in the first part of this analysis, different types of players such as entertainment companies and cable TV networks are entering the sports streaming sector to grab market share of this growing segment, making life difficult for fuboTV. For the company to report market-moving gross profit margins, I believe its subscriber base has to grow exponentially from here. This is easier said than done as there is still room for disruption in the sports streaming market but I would not rule out fuboTV as the company has got off to a good start by continuing to attract subscribers even during challenging economic conditions. In a positive development, the company's revenue grew faster than subscriber-related expenses in Q1. While fuboTV revenue grew by 34% YoY in the first quarter, subscriber-related expenses grew by only 22%. This paved the way for the company to book a net loss of $81.46 million in Q1 against a loss of $128.36 million in the first quarter of 2022. Aided by a lower net loss, fuboTV saw an improvement in adjusted EBITDA margin to -18.2% from -39.3% a year ago, bringing the adjusted EBITDA loss to $58.9 million from $95.3 million.
For a young, fast-growing company such as fuboTV, efficient capital allocation is key to success. As investors, we need to keep a close eye on the company's cash-flow profile to gauge a measure of its future financial success. The improving adjusted EBITDA profile is certainly a positive development, and the company also claimed during the Q1 earnings call that its current cash balance of $364.8 million will be sufficient to fund its business operations through 2025 when the company plans to be cash-flow positive. Investors should welcome this development as this plan suggests a further dilution in ownership is unlikely in the foreseeable future.
Exhibit 2: Subscriber growth in Q1
The growing advertising business is also a positive sign. Historically, global advertising industry revenue has declined sharply leading up to recessions but has recovered spectacularly just before the global economy showed signs of improvement. The advertising industry, not surprisingly, has come under pressure today with global economic growth slowing down, which explains fuboTV's 2% YoY decline in advertising revenue in Q1. On a broader level, the advertising business has trended in the right direction since 2020.
Table 2: Advertising revenue
Year | Advertising revenue |
2020 | $24.9 million |
2021 | $73.75 million |
2022 | $101.74 million |
Source: Company filings
The growing advertising revenue is a testament to how advertisers are recognizing fuboTV as a platform worth advertising on. The continued growth of the subscriber base is the driver of advertising revenue. The growth of ad revenue since 2020 has led to higher ARPUs, which is a good sign for long-term investors.
Overall, I am impressed with many aspects of fuboTV's recent financial performance but I feel obliged to keep a close eye on subscription-related expenses to evaluate whether scale advantages will offset content acquisition costs sufficiently to push the company toward profitability. Amid the rising costs of content acquisition, there is a risk of fuboTV's content investments not delivering the desired financial impact, which needs to be monitored carefully.
Promising Early Signs
fuboTV is trying to fill a gap in the streaming industry with its sports-first approach. This unique approach attracted me to the company a couple of years ago although I thought the stock was too expensive at the time. After all, valuation matters as much as the prospects for a company. The company's market value today is a fraction of what it was a couple of years ago, which makes now a good time to revisit the business.
fuboTV is not a general entertainment streaming platform that comes at the cost of two Starbucks coffees. With its sports-first approach, the company has got the freedom to charge substantially higher prices from subscribers. fuboTV Pro subscription, which is the entry-level option, was priced at $69.99 until last February (the company raised prices last year as well). With such high prices, subscriber churn has always been a cause of concern among investors. In February, the company raised the price of the Pro subscription by $5 to $74.99 and the Elite subscription by $5 to $84.99. Encouragingly, this price hike has not resulted in a noticeable improvement in churn so far, and the company continued to add new subscribers at a good pace in Q1. Churn increased by less than 100 basis points in Q1, and as of May 5, churn was down YoY in Q2. However, investors need to give fuboTV subscribers a couple of quarters to fully understand subscriber behavior. A stable subscriber churn rate for a premium streaming platform after price hikes during a high inflationary period is anyways a good early sign of the value fuboTV adds to its users. To make the most of this, fuboTV is continuing to add new channels and content, which is the right strategy in my opinion.
I am keeping a close eye on fuboTV's content acquisition costs to understand whether scale advantages will translate into higher gross margins. To expand gross margins, fuboTV plans to optimize its pricing strategy to leverage its apparent pricing power while focusing more on attracting customers to its premium plans.
Recent demand trends for advertising paint a promising picture as well. After seeing a decline in advertising demand in January, fuboTV recorded YoY growth in demand in March and April, which is an early indication that the global advertising industry is recovering from recent lows. Although it is too early to rule out the probability of a global recession, there are some encouraging signs from a macroeconomic perspective including improvements in the supply chain network. The company is well-positioned to capitalize on the recovery of the ad market.
Valuation
The expected growth of the sports streaming market, recent improvements in financial performance metrics, and the promising early signs discussed in the previous segment make fuboTV a company to look out for. The business is still not at a stage where it can enjoy competitive advantages, however, which makes it risky to take a long-term position in the company today. Investing is all about taking calculated risks, and the recent performance of the company has made it an attractive bet for investors with a high-risk appetite who are willing to bet on the future of sports streaming. To understand where fuboTV stands from a valuation perspective, I decided to use a discounted cash flow model. Below are the revenue growth projections I used in my model.
Table 3: Revenue projections
Fiscal year | Revenue estimate | Implied growth rate |
2023 | $1.27 billion | 26.5% |
2024 | $1.54 billion | 21% |
2025 | $1.86 billion | 20.5% |
2026 | $2.23 billion | 20% |
2027 | $2.68 billion | 20% |
Source: Author's estimates
I used an average tax rate of 20% in my model and assumed capital expenditures will remain at the current levels for the next 5 years. To account for the high-interest-rate environment and the disruption risks in the sports streaming industry, I used a weighted average cost of capital of 12% in my model. fuboTV is currently valued at a depressed price-to-sales multiple of 0.4, highlighting how the company's market value has fallen to around half of its last 12-month revenue. The company is valued more like a mature business with little growth prospects when in reality, fuboTV's financial performance has hardly been this good. In my model, I used a more realistic P/S multiple of 1.2 for terminal value calculation, which would still put fuboTV cheaply valued compared to Netflix, Inc. ( NFLX ) which trades at a P/S multiple of 6 today. I am not even remotely suggesting fuboTV should trade at a similar multiple to Netflix, but assuming the company will gain market share in the sports streaming industry, I believe a P/S multiple of 0.4 represents a major detachment from the true economic value of the business.
Based on these estimates and projections, fuboTV's intrinsic value estimate comes to $7.29 per share, which suggests an upside potential of 224% from the current market price. fuboTV seems cheaply valued today, but again, investors need to look for a sufficient margin of safety before jumping on board as the sports streaming sector is ripe for a significant increase in competition in the coming years.
Takeaway
Findings of the second and final part of this analysis on fuboTV suggest the company is attractively valued. As an investor, I will keep an eye on the company's cost structure, advertising revenue trends, new product launches by competitors, and subscriber churn to identify potential inflection points. Investing in fuboTV may not be suitable for every investor, and I believe it makes sense to use position sizing strategies to avoid over-exposure to this growing company.
For further details see:
fuboTV Deep Dive Part II - Valuation