It's not a secret: fuboTV (FUBO +0.00%) is one the most volatile stocks on the market. From Jan. 1, 2020, to late December, the stock price was up about 600%. From late December to early January, it tanked roughly 60%. It's whipsawed since then, and is still down 42% from its December highs but up roughly 300% from where it traded this time last year.
The roller-coaster ride continued when fuboTV reported full-year financial results for 2020. The stock sold off roughly 15% after the company's guidance disappointed investors and fears grew about increasing competition.
Investors are probably wondering what's next for fuboTV stock. Questions remain, but there's something I'm not questioning at all. Indeed, I'm confident there's one thing that would make fuboTV shares go back up for good.
Image source: Getty Images.
Why was it up in the first place?
A little context is helpful. fuboTV stock started exploding higher as it made plans to launch sports betting on its platform. According to a 2018 report from The American Gaming Association, an estimated $150 billion is wagered illegally on sports annually in the U.S. alone. However, as legalization grows across the U.S., it presents a massive market opportunity for companies in the space. After fuboTV announced its plans, investors were quick to bid the stock up.
There's only one problem: Of the ways fuboTV makes money, sports betting still isn't one of them. For 2020, the company generated almost 85% of its revenue from selling subscription streaming packages to its customers. And while it did a good job growing total revenue (it more than doubled year over year), these subscription packages carry a negative gross profit margin. In other words, investors are paying a high premium for a money-losing venture now in hopes of a more profitable revenue stream at some point in the future.
The market is forward-looking -- I'll give you that. However, there's a difference between this and expecting to be rewarded right now for some unproven future business opportunity. Based on how quickly some traders are bailing on fuboTV stock, I'm betting the majority weren't actually committed to seeing sports betting become a reality. They're merely buying and selling in hopes of quick profits, giving no regard to underlying business fundamentals.
Image source: Getty Images.
What would make it stay up this time
In the short term, the stock market is almost always volatile. It's more pronounced with polarizing investments like fuboTV, but it's normal. However, long-term, revenue growth and profitability propel stocks higher. Companies can literally create shareholder value over time as they execute on their business plans. What feels like a roller-coaster now could look like a staircase in hindsight.
Even though fuboTV's subscription packages aren't profitable and sports betting isn't a reality yet, the company still has a big, valuable asset. It ended 2020 with 547,880 subscribers, which represented a whopping 73% year-over-year increase. And for 2021, management is guiding for 760,000 to 770,000 subscribers, or 39% to 41% annual growth.
More than half a million fuboTV subscribers are nothing to sneeze at. And it gives the company great optionality -- going forward, management can improve the business by better monetizing its base. To an extent, this is already happening. Consider that advertising revenue was up more than 90% year over year in 2020, and this revenue stream has much better margins than its subscription packages.
As long as fuboTV is executing when it comes to user growth, I wouldn't want to bet against this company. And if ad revenue keeps growing and management successfully launches a popular sports-betting service (recently named fubo Sportsbook) as an embedded part of the streaming experience, I could see the company's profitability improving in a hurry. This could very well create shareholder value.
However, it won't happen overnight. I fully expect 2021 to be filled with more ups and downs for fuboTV shareholders. Furthermore, fubo Sportsbook isn't even expected to launch until the fourth quarter. Therefore, investors need to invest with a long time horizon. I don't know where the stock will trade tomorrow. But I'm confident that if offerings like fubo Sportsbook eventually lead to profitability, then fuboTV stock will be a winning investment.
A final caveat
For me personally, fuboTV isn't a stock I'm buying today. Its subscription business isn't something I want to own, and its other revenue streams are still too unproven for my liking. That said, I give this company credit for its user growth thus far and management's ambitious vision. It's one to watch for now and I could change my opinion in coming years as the business evolves.
