FuboTV, A Sequel To The Roku Story

FuboTV Inc. (NYSE: FUBO), the recent IPO, is already popular among Bears and the doubts raised will remind you of the early years of Roku Inc. (NASDAQ: ROKU) given most doubts are based on ill-formed opinions about how the consumer streaming industry works, consumer trends, and growth investing in general.

We looked at the name, liked it enough to own the stock, and included in our weekly list of top ideas for the week. Most doubts can be summed up as uncertainty that usually surrounds a developing story but a closer look at the fundamentals and key performance indicators will remove all such doubts.

Underneath the headline numbers, there is a growing streaming service that is winning for its superior execution above all, and financials, though unprofitable right now, are on the right trajectory to create meaning value for the shareholders down the road.

A lot of times it’s the lack of vision among Bears that causes them to see through value when the business is in the early stage of growth. FuboTV stock seems to be one such case and more coverage will make them see through the opportunity, after all, numbers are performing better than the last few years trend at Roku.

Why comparing to Roku? Yes, even though services aren’t similar, the two companies do share the broader digital media streaming market space and Bears raised somewhat similar doubts about Roku a few years ago, i.e. competition, the viability of product itself, valuation, etc.

Why bother looking at the stock now?

Valuation difference is one big reason. Based on the company’s guided fourth-quarter revenue number of $72-78 million, the stock is trading around 3-4 times revenue, while revenue during the fourth quarter is expected to grow at 62-75% and the number of subscribers is expected to grow at 50-54% over the same period last year. For next year, the company has guided for revenue growth of another 78%.

Compare that to Roku that is trading at 20 times sales while revenue is expected to grow at 40-45% for the current year. YouTube TV, the behemoth in the space, and a direct competitor to FuboTV has 2.5 million subscribers, 4.5-5 times the expected 2021 subscribers of FuboTV. Though part of Alphabet (NASDAQ: GOOG), it is safe to assume that analysts are valuing YouTube TV significantly more than $4-4.5 billion in their ‘sum of the parts’ valuation analysis.

All in all, risk reward tradeoff makes it a no brainer to take a closer look at the business right now, whether you believe in some or all the Bear concerns.

Few doubt long-term tailwinds in favor of FuboTV and live streaming

What exactly does the company do and why such a service makes sense?  

Launched in 2015 as subscription-based dedicated sports live streaming service, the company now also offers news and entertainment content, besides tens of thousands of live sporting events. The platform is device agnostic.

The platform is known for its clean, compact, and user-friendly web interface, including some of the more popular features like full DVR functionality and 3-day Look Back. One of the top reasons why customers go for FuboTV is still the company’s sport streaming lineup, including ESPN channels.  

The rise of streaming has been a one-way street

There is hardly anyone who questions the strong long-term trends in favor of streaming services. Cord-cutting and cord-never households, almost 49 million in the US, are moving to such services, with a growing number of devices to content, availability of wide channel selection, and advancement of services like full DVR functionality.

The trends started with news and entertainment content, followed by sports, which is still early in its adoption phase. Besides the subscription revenue, streaming platforms do have an opportunity to drive revenue from eCommerce transactions, sports betting, which FuboTV is planning to enter soon, and other services.

Bear arguments are valid, but lack deeper analysis, at best

So, if questioning the relevance of such services is irrelevant, what are some of the genuine concerns related to the business? They can broadly be summed up under,

  • Competition
  • Subscriber growth
  • Profitability

Time and again, temporary issues like broadcasting rights negotiations, etc. do capture the news flow, but I believe Bears are smart enough to overlook the same. FuboTV and Nexstar Media (owner of CBS) are indulged in one such dispute.    

Competition

There are six major players, i.e. YouTube TV, Hulu + Live TV, Sling TV, Philo, AT&T TV Now, and FuboTV. Almost all have a larger subscriber base, most are backed by balance sheets that are significantly larger than FuboTV, and some like YouTube can benefit from cross-subsidization with other parent companies.

So no doubt, competition is a real threat and probably the only serious issue raised by Bears in our opinion. Still, there are things do position FuboTV to not just hold its ground but also thrive in the long run.

It is better to focus on differences that are meaningful for revenue and long-term growth, rather than going over individual features, which readers can found out via a simple Google search comparing these services,.

There are three,

  1. FuboTV’s clear leadership and dominance in offering sports content, including live events.
  2. FuboTV offers one of the largest numbers of channels. YouTube TV is close but many others offer barely 60-70% of what is offered by YouTube TV and FuboTV.
  3. DVR functionality is another feature that sets FuboTV, and YouTube TV, significantly ahead of many others.

So, as for serious replacement of TV, FuboTV and YouTubeTV may be one of the only options for customers. Can others catch up, yes, but negotiating contracts and managing relationships in the broadcasting industry is rarely a cakewalk.

Customer growth

Another valid concern of the Bears is the recent churn in subscriber base.   

Subscribers (‘000)FuboTVHulu+LiveYouTube TVSling TVPhiloAT&T Now
Q1 2020 287 3,300 2,300 2,310 580 788
Q2 2020 286 3,400 2,500 2,250 750 720

Yes, we won’t blame you if the chart above spooks you given FuboTV lost subscribers last quarter, but here again, a little digging will help understand that headline numbers may not be giving a complete picture.

First, since FuboTV has a heavy sports-oriented customer base and Covid-19 caused mass cancellation of sports events, which may have led to a sudden spike in cancellations.

Secondly, FuboTV, like YouTube TV, hiked subscription prices that usually lead to a temporary spike in customer churn for any subscription-based service.  

Third, competitors like Philo aggressively marketed its services that are priced at 1/3rd the subscription price of FuboTV or YouTube TV, even though channel selection is extremely limited. With the absence of sports events and limited new content, the shifts may be somewhat temporary. 

Despite the recent stagnation in subscriber growth, we believe there are reasons to feel bullish, and here’s why.

Subscriber base grew more than 40% last quarter and even after the second quarter stagnation, mostly due to temporary reasons as discussed above; the subscriber base is up almost 23% for the year.

No wonder, the company guided for subscriber base growing to 435,000 by the third quarter, which will be more than 50% growth over last year and significantly higher than previous expectations of 20% growth.

Indeed, the subscriber base is expected to grow to 475-485,000 during the current quarter, more than 50% growth over last year, and almost 10% sequential growth, which may position the company as one of the fastest-growing live streaming services platform.

All in all, results may put to rest all these concerns related to churn or subscriber stagnation.

Profitability

Yes, the company is making losses and even though investors in this market may have learned to ignore looking at the profitability, markets turn and any meaningful run in the stock will be capped unless a clear path to value creation is visible.

Can the business create value, yes, we believe so, and here’s why

FuboTV Inc.   
As % of Subscription revenue   Q2 2020
Subscriber related expense141.0%151.1%125.0%
    
As % of total revenue20182019Q2 2020
Broadcasting and transmission32.6%22.6%18.0%
Sales and marketing63.3%25.2%15.1%
Technology and development26.1%20.1%16.3%
General and administrative14.3%10.5%6.1%
Depreciation and amortization0.6%0.4%0.3%
Total non-subscription exp./ rev.136.8%78.7%55.8%
Excludes stock-based compensation

As the chart above shows, a closer look at the expense structure does clear a few things,

  1. There is decent operating leverage in the model, i.e. as the revenue grows, expenses grow at a significantly slower pace. So profitability will come.
  2. All expense headings are showing improvement, declining as a percentage of revenue, and other than subscription-related expenses, all other expense headings have reached ‘normal’ levels, even though further leverage may flow through.
Purnha’s source: SEC Filings

Another important metric to measure profitability and the company’s ability to create value is adjusted Contribution Margin, which is measured as (Platform Bookings – Variable COGS)/ Platform Bookings.

The metrics ignore some of the non-cash and non-recurring subscriber-related expenses, e.g. sometimes distribution rights are paid in advance or are subject to minimum guaranteed payments.

As the chart above shows, the Contribution Margin has improved significantly, with avg. revenue per user growing, thanks to increasing attach rates and growing advertising revenues, and the average cost per user has stabilized. Indeed, Contribution Margin may get a further boost if the company renegotiates minimum guaranteed payments.

Still not impressed? compare it with Roku

Roku is the current darling in the broader digital media streaming space and investors have come to accept the business model, at least looking at the stock valuation, so it might be apt to compare the recent IPO FuboTV with Roku.

Roku Inc.      
 20152016201720182019Q2 2020
Revenue growth 25%29%45%52%42%
As % of revenue      
Gross profit28%30%39%45%44%50%
Research & development15%18%20%20%20%20%
Sales and marketing14%13%12%12%14%15%
General and admin9%8%9%9%9%10%
Operating margin-10.1%-8.8%-1.7%3.3%1.8%4.8%
Excludes stock-based compensation

As the chart above shows, FuboTV is growing faster and showing significantly higher operating leverage, especially if we exclude the subscriber-related expenses.

Please note that this comparison is more to highlight the FuboTV potential rather than undermine Roku’s improvement over the last few years.

DISCLOSURE: We are Long FuboTV Inc. stock. Before writing a note, we usually ask (via Twitter and Stocktwits) for things readers would like us to cover in the note, please do share your views for our next note. This is purely an academic exercise for our internal use and you should NOT invest based on this note.

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