When we invest in stocks, we aren't seeking out hot names and tickers. Rather, we're buying a small slice of a business that operates in the real world. And since stocks represent real businesses, knowing how a company generates revenue is one of the most fundamental components of researching a stock.
Long term, stocks go up and down based on business results, further underscoring the need to know how a company makes money.
Sports-centric streaming platform fuboTV (NYSE:FUBO) is one of the market's hottest stocks, making it worth a closer look. As we'll see, fuboTV generates revenue in three ways right now, but there's a vital need to add a fourth revenue stream in the near future.
1. Streaming subscriptions
The primary way fuboTV generates revenue is by selling streaming subscriptions. The company has several packages allowing users to stream live TV from over 100 different channels, including a lot of sports channels. So subscribers can cancel their cable or satellite service and still have access to all the channels they love. In fact, fuboTV may even be a better option since you can gain access to hard-to-find options like European soccer.
FuboTV had 455,000 paid subscribers as of the third quarter, which was a 58% year-over-year increase. These subscription packages aren't cheap, contributing to an impressive $67.70 in average revenue per user (ARPU) per month. Because of the high cost of subscriptions, subscription segment revenue has accounted for 82% of fuboTV's total revenue through the first three quarters of 2020.
Just because fuboTV subscribers have to pay, that doesn't mean they're offered an ad-free experience. Advertising is a key component in the company's revenue. It works with top ad-tech companies like The Trade Desk and Magnite, and these partnerships are helping it with growth. In the third quarter, ad revenue grew 153% year over year.
Growth for fuboTV's advertising segment looks impressive. Third-quarter ad revenue was only 12% of total revenue, making it seem insignificant. But investors should avoid making that wrong assumption.
In fuboTV's third-quarter conference call, management said just more than $7.50 of its monthly ARPU came from advertising, about $22.50 per quarter. Compare that to a company like Roku, which is far more dependent on ad revenue. Roku's trailing-twelve-month ARPU was $27 as of the third quarter, or about $6.75 per quarter.
As you can see, fuboTV's ad business is already far ahead of Roku's, perhaps demonstrating the greater monetization potential of live sports and TV compared to on-demand streaming. This is a promising sign for fuboTV. But long term, the company believes it can further improve. It thinks it can generate more than $20 in ARPU after paying the third-party vendors it works with.
3. Sublicensing broadcast rights
FuboTV also generates a little bit of revenue by sublicensing some international sports events to other companies, allowing them to broadcast events it has the rights to. This isn't a meaningful revenue stream. For the first nine months of 2020, it's only generated $586,000 through this source, and it doesn't prominently figure into the company's plans. It's there, so it's worth mentioning. That said, shareholders can afford to overlook this insignificant revenue stream.
Previously, fuboTV generated revenue through software licensing as well. But this part of the business was discontinued in March 2020 as the company restructured to go public.
The pressing need for something else
As my Motley Fool colleague Timothy Green pointed out recently, there's a big problem with fuboTV's revenue, specifically with its subscription revenue. The company has recorded a net loss of $402.5 million through the first nine months of 2020. Perhaps you shrug. After all, many growth stocks are wildly unprofitable.
But you won't find many companies with a negative gross-profit margin. Often, growth companies have stellar gross margins while spending to pursue top-line growth. Eventually, when aggressive spending stops, it allows this intentionally suppressed profit potential to finally shine through. By contrast, the cost of fuboTV's subscription revenue is greater than what it generates. Furthermore, the cost is variable: It will go up as its subscriber count grows. There's little operating leverage with scale.
To me, it's abundantly clear that fuboTV's largest revenue source, subscription revenue, won't create long-term shareholder value. For this reason, the company needs another part of the business to take center stage, and the sooner the better! Ad revenue could play a part in this. However the company is also pursuing sports betting as a new revenue source.
Sports betting has captured the imaginations of investors even though the company doesn't generate a dime from this source yet. Consider that the stock trades at a pricey price-to-sales ratio of 19, and most of these sales are hopelessly unprofitable. That's a lot of faith placed in the profit potential of future revenue sources. And in my opinion, that makes an investment in fuboTV stock a risky bet.