Streaming service company fuboTV (FUBO -4.82%) is trying to put itself at the intersection of streaming and sports betting, two growth industries in the U.S. A smaller competitor in a crowded field, fuboTV is a high-risk, high-reward stock that could be a home run for long-term investors. Here are two reasons to like the stock and one big catch that investors need to know about.
Streaming growth leaves room for fuboTV
Ditching traditional cable for streaming services has become the new normal for consumers, and it's a trend that is still gaining momentum. As of 2020, Statista estimates only one-in-four households have cut the cord, and that number will likely continue to grow over time. As a result, advertisers are dedicating an increasing share of their budgets to streaming television with total connected-TV ad spending expected to more than double from its 2020 sum of $8.1 billion to $18.3 billion by 2024, according to eMarketer. That is a ripe market for fuboTV to dip its toes into.
However, the company is competing in a crowded U.S. field that includes a range of competitors such as Netflix, Peacock, HBOMax, Hulu, and more. To stand out, live sports are a focus for fuboTV, and they're why 27% of households pay for TV services, according to a Parks Associates study.
In the first quarter of 2021, fuboTV had 590,000 subscribers, an increase of 43,000 from the previous quarter and up 105% year over year. As a competitor in the streaming space, fuboTV lacks original content -- it licenses programming like a traditional cable provider would. This puts pressure on the company, which needs a "mousetrap" to help draw and retain viewers on its platform.
Sports betting plans could help fuboTV stand out
The company's plan to grow and monetize its service is to launch an in-house sportsbook for fuboTV customers to bet on sports seamlessly. Management has been busy putting the pieces in place to make this happen.
fuboTV acquired Balto Sports in late 2020 for an undisclosed sum, a deal that gave it the software to handle sports wagering events. Then, in early 2021, it acquired sportsbook Vigtory (again with undisclosed terms). fuboTV now plans to pull these assets together to launch its betting service by year-end.
The company began experimenting with this opportunity over the summer, offering non-cash prizes to participants answering questions from an on-screen dashboard within fuboTV. Management is using these free contests to test and learn, while the company works around the regulations behind actual sports betting. Management hopes the end result will be an ability for viewers to place bets while watching content, all on the same screen.
Fantasy sports and online betting company DraftKings estimates the emerging market for online sports betting is worth at least $22 billion in the U.S. alone. Offering a betting service in conjunction with its programing could be an effective way to draw subscribers to fuboTV.
Financials are the biggest risk to investors
The betting service plays another role besides attracting viewers -- it'll also help monetize fuboTV's subscriber base. Programming costs make it very difficult for the company to turn a profit. In the first quarter, programming alone cost 95% of total revenue, resulting in a net loss of $70.2 million against a top line of $119.7 million.
The question of whether fuboTV can turn a profit is the biggest risk to investors. It seems the service will struggle to be profitable without additional, higher-margin offerings complementing its programming business.
As the subscriber base grows, fuboTV can raise more advertising revenue, but this remains a small piece of the current business. Advertising revenue grew 206% year over year to $12.6 million in the first quarter, but that is still just over 10% of the top line. The good news is advertising revenue helps grow average revenue per user, which increased from $4.54 to $7.11 year over year.
Investors will need to keep an eye on fuboTV's financials, which will make or break the stock over the long term. The sports betting book should also help improve margins for the business, almost making it necessary for the company to survive as a competitor in the streaming space.
Is fuboTV a buy?
The stock has a market cap of just $3.7 billion, a fraction of the size of its competitors. This small size may make the stock volatile, but it also offers investors much more upside if fuboTV can execute at a high level in the quarters ahead.
Management is guiding for full-year 2021 revenue to grow 101% year over year to $525 million, and its subscriber base should reach 840,000 by year end. Continued growth at this pace could help make advertising a bigger contributor to revenue and profitability, while a successful sportsbook launch would be a catalyst beyond 2021. fuboTV is a very risky stock at this point but one with lots of potential.