Description

The wide market selloff provided us with many growth opportunities that were way  too expensive a few months ago. One of them is Fubotv, a streaming television platform/distributor with tremendous growth that has a market cap of  just $1.5bn. A year ago, the stock was trading for  $50 a share. Now, at $10, it has the potential to double in price in a year, imo. Essentially, the crux of my  long thesis is that Fubo is growing too fast to be ignored at the current prices. It is going to be a large business, so even if all the planned layers of revenue stream fail to materialize as management is hoping they would, and the business doesn't upgrade from good to great, you can still make money.

The company was founded just 7 years ago, by former executives of various media businesses. At first, Fubo was launched as an online pay service for soccer fans, streaming  Copa America and some Tier 2 soccer leagues around the world, but in 2017, it moved to the current format of general sports + entertainment and news. It is a Internet-delivered bundle of linear networks, or so called virtual MVPD.  At the moment, Fubo is serving customers in the US, Canada, Spain and after the recent acquisition of Molotov SAS it added France to that list. On numerous occasions, the management was very clear saying that they were not thinking small: “This company has one massive ambition: we are looking for global domination.”  Among a wide range of channels,  Fubo primarily focuses on those  that distribute live sports.  There are several service options, so in addition to the basic package, with 100+  channels and for $65 a month in the US, it offers add-on packages with more channels and features.  The company has more than 50 thousand live sporting events, including the largest package of NFL and college football in the US, World cup, Olympics…

Fubo has three co-founders: David Gandler, Alberto Horihuela and Sung Ho Choi. David Gandler, Fubo's CEO, and driving force  ( previously worked at Telemundo, Time Warner, Scripps Networks, DramaFever), is a smart and capable guy who understands the business, has a  lot of experience as ad sales executive, knows his customers, has a clear idea where the industry is heading and where Fubo has to be.

Fubo's growth so far has truly been impressive. The company is going to end 2021 with roughly $625 million in revenue, a big jump from just 3 years ago when it had no revenue at all.  From a year ago, the company doubled the number of its subscribers  to 1.1 million and revenue increased even more (140%), driven by strong ARPU growth. ARPU has reached $74.5 per month in the third quarter ( growing 10% yoy). Of $74.5 in ARPU, 8.3 dollars comes from ad revenue, the rest from subscribers.  On a run-rate basis, ad revenue has climbed to 100 million dollars annually. The management thinks they can double ad ARPU and, since this is a higher margin revenue, it will have a significant impact on the bottom line. Advertising went from 7% of the total revenue in Q4 2018 to 12% in the last quarter. It should be the largest driver of margin improvement in the forthcoming years as advertisers move from TV to digital and can use the huge pool of data available to Fubo. Besides, Fubo has a premium audience that on average spends 7 hours on the platform daily.

The company's strategy is rooted in the intersection of 3 big mega trends: the secular decline of traditional TV, the shift of  ad TV dollars to connected devices, and  online sports betting.  Today, its business model is based on subscription and advertising, but the plan is to add wagering as a third revenue stream for the company.   They see sports betting as a natural extension of their offering. The idea is to fully engage their customers and transform  passive viewers into  active participants. Many thought these were just buzzwords with the goal of exciting markets but after  several AI-related acquisitions, in November last year the company launched Fubo Sportsbook, its betting app in Iowa and early signs are very encouraging – around 30% of registrations in Iowa, and Arizona have both fubo Sportsbook and TV products. So, a big chunk of their customers were brought to the  platform with minimal acquisition costs, which gives them a cost advantage  over the average online betting platform that is  paying significantly larger sums to acquire customers ( a wide range of figures, but it is in hundreds of dollars; for example, for DraftKings it is $370; some others up to $900). As an additional advantage, betting experience is going to be highly personalized, reflecting what a  viewer might be watching at the moment. Viewers are going to spend many hours watching live sports on Fubotv and it would make no sense for them to move to another online betting platform when they have everything at their disposal with  Fubo. Even better, by using a vast amount of viewers data the platform is going to offer them bets they might prefer. So, despite the fact that the online betting market is quite saturated, I believe Fubo betting service has the edge on the cost side and quality side. As is the case with advertising, this is going to be a higher margin business. The management even speaks of 50%  gross margin.

Streaming is taking share from cable for a while now and it will continue to do so. There are several reasons for this trend. For starters, it is cheaper. Besides, the quality is as good or better than cable, the  viewing experience is personalized and interactive  and the share of smart TVs has skyrocketed in recent years. It has a large cost advantage over cable since it doesn't own physical infrastructure necessary for the use of the service. That cord-cutting trend is only in the early innings since roughly 75 million US households still have cable, satelite or telco subscriptions. Given the fact that just 4 years ago the figure was around 97 million households, it shows how massive shift this industry is going through.  Among streamers, Fubo has been taking a large chunk of cord cutters: in the q3 alone they took around 30% of traditional TV churn into  Fubo subscribers ( 262k vs. Youtube 225k vs. Hulu+Live TV 300k) . And Fubo doesn't plan to stop at US borders. This cord-cutting phenomenon is taking the world, so American live streamers like Fubo are in the position to compete with local players around the world who don't have as big moat as they used to in the form of infrastructure on the ground.

 FuboTV is well positioned among streamers and it branded itself well as a sports' first platform.  It covers most US sports and is very strong in international sports. One of the big advantages of sports streaming over cable is that a customer is not tied  to his regional provider. So there is no surprise Fubo is loved by customers. Its NPS score is 65, it has great reviews by customers, and by the company's data, the average customer is spending around 7 hours per day on fubo which SVOD services can only dream about  ( with Netflix they spend 3 hours per day). Fubo is not just taking share from traditional TV but also from other streamers with every quarter.

 So what about current Fubo's business? Fubo's contribution margin has been constantly increasing: from  - 3% in 2019 to more than 12% in the last quarter of 2021. Even subscription gross margin is now nearly positive. In q2 and q3 2020, subscription expenses ( i.e. content costs) were 134% and 114% of subscriber's revenue, and in the last two quarters they dropped to 105% and 104%. So we already see improved gross margin in the subscription part of the business. Operating expenses as a share of revenue are continuously decreasing, leading to significant EBITDA margin improvement: from – 121% in q3 2019 to -52% in q3 2021. With scale, this trend is going to continue. Now, the strongest argument against  Fubo is that in this industry it is harder to achieve operating leverage than in the average fast growing tech startup with huge fixed costs like R&D, sales and marketing. That is true, for now. Variable costs represent a big chunk of Fubo costs in the form of content costs. As a distributor of content, it doesn't have the pricing or bargaining power of the content creator but with every new subscriber its power somewhat improves. Since subscriber numbers for fubo rise dramatically, this will eventually translate to meaningful leverage in negotiations with content providers. The current trend in gross margins clearly shows that. In 5 or 6 years, Fubo might reach as many as 5 million subscribers. That would shift the balance of power significantly. Not to make  Fubo a new Netflix ( even though Netflix originals make only 40% of its library), but a higher margin business. This is already happening. Furthermore, the case can be made that the whole virtual MVPD industry will have a nice tailwind as DTC and SVOD services became too numerous and expensive for consumers to keep track, so they'll shift back to aggregators, making the full circle. But this time to asset-light streamers, not cable any more.

Valuation

More than a year ago,when it was a $6bn company, a short case for Fubotv was written by Kerrisdale Capital. They bundled all the negatives they could find. And added some. Yet, Fubo beat most of their forecasts since then: they severely underestimated the number of subscribers  ( 679k vs. 1.1m), ad spending ( $47 m vs. $73m), they thought Fubo will never run a sports book.....  Interestingly, the fair value they attributed to Fubo was $10 per share, which is roughly the current price. 

What about risks? Fubo is still burning cash and it is not going to be profitable for a while. That's why the stock didn't do well  in 2021 and early 2022 when the market realized there will be several interest rate hikes. Like many  high-flying  and cash-burning growth stocks with profitability far in the future that were beaten by the market. With less liquidity in the market, these kind of companies might face financing issues, but the market won't freeze. There will be some stock dilution for sure, but taking all that in, I still believe this is a good long. Fubo is not Netflix,  but it doesn't have to be to earn nice return given where it is coming from. Netflix is $180bn, Fubo is $1.5bn.

 To sum it all up: one should not forget that Fubo is still a very young company when profitability is not the key metric.  This is a growth company and should be valued as such. Currently, Fubo is trading at 1.4x EV/2022 sales. I believe there is a good chance Fubo might have between 4 and 5 million subscribers in 2027. With $90 in ARPU that is roughly $4.3 to $5.5bn in revenue. Long term, Fubo's management is targeting 30% overall gross margin, which they won't reach by 2027, but till then margin improvements should give enough visibility for the long run and the stock will be trading much higher than now.

Catalyst

Revenue growth, margins improvement, ad and betting revenue