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For fuboTV Stock, What's the Winning Edge?

By Chris Hill - Mar 8, 2021 at 12:01PM

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Should you buy this stock with an acquisition in mind?

Nordstrom's (JWN 4.83%) fourth-quarter results were (on the surface) much better than those of Ross Stores (ROST 0.08%), so why are both stocks falling the same? Dollar Tree (DLTR -0.14%) adds $2 billion to its stock buyback plan. In this episode of MarketFoolery, join host Chris Hill and Motley Fool analyst Emily Flippen as they discuss those stories, plus fuboTV's (FUBO 8.57%) 300% rise over the past year (and 15% drop today).

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on March 3, 2021.

Chris Hill: It's Wednesday, March 3rd. Welcome to MarketFoolery. I'm Chris Hill. With me today, the one and only, Emily Flippen. Thanks for being here.

Emily Flippen: Thanks again for having me.

Hill: We have a quartet of fourth quarter earnings reports in entertainment and retail. Let's start with this interesting duo, Nordstrom's profits and revenue came in solidly, higher than expected. Ross Stores, a discount retailer, their profits and revenue were solidly lower than expected and yet both stocks are down 4% this morning, and I think if I'm Nordstrom, I am a little miffed at this. Take those in any order you want.

Flippen: Well, I think the key word there is, "Expected." Because what was expected for Nordstrom is different from what was expected for Ross. Nordstrom has been a challenge to business to say the least and despite revenue and earnings coming in higher than what was expected, those expectations still represented a double-digit, 20% decrease year-over-year in terms of their top line. So Nordstrom right now is in a really different position than Ross. Ross being a business that is mostly physical, very, very little, if any, online presence. The expectations there, again, were lower, but still represented only a 4% decrease year-over-year. So it's a story of two retailers here; a high-flying discount retailer that has struggled in the midst of COVID with very little digital footprint, against this legacy retailer that has been in the process of really downsizing its business. Trying to get more into the discount retailers, just trying to prove that it's business isn't going to zero or at least isn't going to zero as quickly as some people believe.

Hill: Added context around Ross Stores, as you said there. So heavily leveraged to physical locations, a bunch of which are in California and they essentially had a bunch of stores closed for this quarter, so not all that surprising. Nordstrom stock, both these stocks are barely in the positive column over the past year. Nordstrom as you said, they're trying to really push that digital. The digital sales in the fourth quarter were better. They were moving in the right direction. But it really seems like, as you said, this is a legacy retailer, it has a good reputation in terms of the quality of the stuff it sells. Yet, I'm sitting here looking at Nordstrom wondering, why haven't they made this push sooner? Why haven't they pushed to make the e-commerce operations even more robust?

Flippen: It's a challenging position for Nordstrom to be in. Because in comparison to businesses like Ross they have a co-fundamentally different business model. They can push to e-commerce, they can push to online. But ultimately, what sets them apart and what is the most challenging aspect is the fact that they own the inventory that they have to sell through on a periodic basis whereas Ross is simply getting leftover inventory. They own less inventory, they have that quicker turnaround than in Nordstrom's. Nordstrom is trying to sell online but ultimately they're still making purchasing decisions for their own inventory, for their own brands, based on expectations of what's going to sell-through. It's that merchandising model that has been so challenging for traditional retailers. Even though their digital revenue now makes up more than 50% of total revenue at Nordstrom, and that was up 24%, it's not really making up for the lack of physical retail stores. The good news there for Nordstrom is that they're guiding for sales to grow around 25% this year, picking up some of that in-store traffic. The same is true for Ross, they both expect the tail end of 2021 to be substantially better. But it's a little bit of an unfair comparison because what is substantially better for Ross has much less to do with the merchandising and inventory than when compared to a business like Nordstrom.

Hill: Yeah. I'm not looking to add either one of these stocks to my portfolio. Yet I think about where America is right now, particularly in the wake of the news from Johnson & Johnson, the partnership with Merck. Again, this is not how we invest, but if you ask me to essentially bet on one of these two stocks just for the next 12 months, I think I'm picking Ross Stores just because of the potential for the stores to be opened in a way that they haven't been.

Let's move onto Dollar Tree. Fourth quarter revenue was light, but that is not stopping Dollar Tree from adding $2 billion to their stock buyback plan. This is another discount retailer. The shares have done pretty well over the past year. I understand the mindset around the share buyback plan. I'm a little surprised that it's $2 billion, but look, it's their money, not mine.

Flippen: Dollar Tree has definitely focused on trying to provide shareholder value in whatever ways possible over the past year or so. Part of that is this humongous share buyback plan. But another part of it is just reforming their stores. They made this acquisition a while back of Family Dollar, and many investors will remember it. It wasn't perceived very well by investors because the Family Dollar brand in particular was a low end brand targeting rural communities. Whereas Dollar Tree had made a name for itself as being a little bit, I'd say nicer place to shop. All these in the sense that it was this treasure hunt experience. Dollar Tree is, in addition to their share buybacks, this quarter really focusing on the strong performance from their combination stores. These stores that they're building out which are half Dollar Tree, half Family Dollar. In the past quarter, they mentioned that the same-store sales, the comparable store sales for these 50 combination stores is 20% on average. That will obviously naturally falloff as consumers become accustomed to these stores. But even if that falls off substantially, it's still much better than what their core stores are doing, which is right now around 5%.

Hill: So is this setting up? Because if you're just thinking in terms of locations, Dollar Tree and Dollar General are pretty comparable. Dollar Tree has a little over 15,000 locations. I think for Dollar General, it's somewhere between 16,000 and 17,000. Is the thing to watch with Dollar Tree over the next year not just the buyback plan, but really, this investment in the locations? Because if they really go further into that, it seems like it is setting up essentially a clash of two Dollar stores that could be pretty interesting to watch.

Flippen: Yes. Store build-out is critical to watch, especially in these new communities, specifically communities that have 3,000-4,000 residents are the areas that Dollar Tree is looking to expand with these combination stores. They think that they can get from 50 combination stores today to 3,000 separate locations over a pretty quick timeframe. That's aggressive. We're talking about brands that as you mentioned, already have 15,000 stores across the world. Already a huge business. But the good thing is that Dollar Tree generates a substantial amount of cash as they proved in this most recent quarter with core same-store sales, again, up 5%, pretty average for this business. 7% increase in sales year-over-year. That's impressive because we're coming into the comps now where we're comparing against COVID when these businesses were essential businesses. It'll be critical to watch both their same-store sales for existing locations, but also their ability to eventually scale up to this 3,000 number of combination retail stores.

Hill: Yeah, that 20% comp number you mentioned, [laughs] that starts to get much more compelling if we're talking about 3,000 locations or even 1,000 locations as opposed to 50.

Flippen: But there's a novelty aspect there [laughs]

Hill: No, absolutely. I think it's the thing that can provide a blueprint. Gillies and I were talking about this in a similar vein yesterday with Zoom Video. I looked at Zoom's most recent quarter and I thought, I get what's happening with the stock just in terms of this trading day. But if you're a Zoom shareholder, you're hopefully heartened by the fact that there's room for improvement. It's not like Zoom is a business that is operating at perfection right now. They now want that. It's the same thing with Dollar Tree. You look at it and it's like, all right, a lever that they are pulling. If it works and they can steadily improve on that and roll that out over the next few years, then it makes the investment opportunities that much more attractive.

Flippen: If I was Dollar Tree, I'd be having Zoom in my comparable businesses, and citing you, Chris, for making that connection [laughs].

Hill: The Zoom Video of discount retail. [laughs] Let's move on to fuboTV. Fourth quarter revenue passed the $100 million mark for the first time ever. FuboTV, for those unfamiliar, is in the business of streaming live sports, and all the numbers are going in the right direction. I get that the stock is down 15% today. But that's probably because over the past year, it's up 300%. But the revenue is going in the right direction, and subscribers too.

Flippen: Yes. They passed a milestone this quarter with more than $100 million in quarterly revenue, with nearly 550,000 paid subscribers, which is a 73% increase year-over-year, and a 20% increase quarter-over-quarter. That combined with that 83% growth in terms of revenue, this quarter, held in isolation, was pretty strong for Fubo. Part of the reason why you might be seeing some of the pressure in the market today is that they provided some guidance that was probably scary to a lot of these high-growth investors, and it's largely due to the fact that there's a seasonal aspect of Fubo's business due to sports schedules. When they were guiding, they actually said, "Hey, we're probably going to have some contractions in terms of total subscriber numbers." But even with that, even with this contraction and only guiding for around 40% subscriber growth in 2021, which would be a substantial slowdown for them. Even guiding that, there's still eyeing upwards of 80% revenue growth for the entire year.

So, this is really showing a level of scalability and how they monetize their users, because in addition to getting that subscription style revenue from people who are paying for Fubo, just having access to the platform, they also have additional ad revenue on top of it. What I thought was particularly good about this quarter was looking at their average revenue per user. That grew 17% year-over-year to over $62. That's notable because it's now surpassing their average monthly cost per user, which is just around $60 right now. That shows some level of scale. This is a low-margin business right now. When you add in all the corporate costs, they are losing money hand over foot. But assuming that at some point in the future, they can reach scalability, these numbers are definitely trending in the right direction.

Hill: This is a business that is valued at roughly $2.5 billion, which when Tim Cook goes through the sofas at Apple's headquarters, you probably come up with $2.5 billion. There has been so much talk over the past few years about the big players in streaming video, particularly Netflix. But now you can add in Apple, you can add in Amazon. Disney obviously owns ESPN, so we'll leave them out of the conversation here. $2.5 billion, that seems if Netflix or Amazon, and especially Apple, wanted to, in one fell swoop, make a big swing at streaming sports, they could do it by buying fuboTV. How much should shareholders or prospective shareholders think about that? We talk all the time about, look, you never want the No. 1 reason you buy a stock to be, "Someone's going to buy them." That can be on the list. But if that's No. 1 on the list, that's probably not a stock you want to buy? But where do you think that is on the list for fuboTV?

Flippen: I wouldn't rank it very highly about an investor. I don't think it's impossible, but I think given the regulatory hurdles that large businesses have gone through, it would be challenging for businesses to essentially roll up another streaming service just when the market is getting a little bit competitive. For that reason, I wouldn't buy shares of Fubo expecting some acquisition. In fact, I think the biggest concern I have with this business is where they fall in the value chain in comparison to other streaming giants. Fubo is a licenser of content, but also uses platforms like Roku and Samsung to access their consumers. They are paying a middleman at every point in the value chain. That makes it a really, really low margin play on streaming. It's part of the reason why they haven't generated a single quarter of positive operating cash flows since being a public company. It hasn't been that long. But the point being that they lose money for a reason and their subscription prices because they have to pass on the increasing cost of content production. They're not the generators of the content. They pay what they're asked. They have a really high price point that can be isolating to a lot of consumers. The product itself is not differentiated right now. There's nothing that Fubo is really offering what you can't get on a different stream service.

If I was an investor, I'd be thinking a lot less about the potential for an acquisition and much more about how they're going to differentiate their platform. Right now, it seems like their sports first approach is going to be differentiated through sports betting and free-to-play gambling software, which will be right on the screen. They're the only business that's going full in on sports betting and integrating that experience. If you're a shareholder, I think you're buying it for that level of optionality, not for being acquired.

Hill: Emily Flippen, always great talking to you. Thanks so much.

Flippen: Thanks for having me.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show was mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.

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Stocks Mentioned

Nordstrom, Inc. Stock Quote
Nordstrom, Inc.
JWN
$26.02 (4.83%) $1.20
Apple Inc. Stock Quote
Apple Inc.
AAPL
$148.24 (3.10%) $4.46
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$108.09 (2.35%) $2.48
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$92.18 (-0.14%) $0.13
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$179.32 (-0.08%) $0.14
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$193.91 (1.31%) $2.51
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,264.08 (1.91%) $42.53
Ross Stores, Inc. Stock Quote
Ross Stores, Inc.
ROST
$87.06 (0.08%) $0.07
Dollar Tree, Inc. Stock Quote
Dollar Tree, Inc.
DLTR
$162.57 (-0.14%) $0.23
Roku Stock Quote
Roku
ROKU
$92.99 (5.03%) $4.45
Zoom Video Communications Stock Quote
Zoom Video Communications
ZM
$108.81 (1.70%) $1.81
fuboTV, Inc. Stock Quote
fuboTV, Inc.
FUBO
$3.48 (8.57%) $0.28

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