At the pandemic's onset, businesses went into survival mode, conserving cash wherever they could. One of the first expenses to get cut was advertising. That makes sense intuitively. There is no need to attract customers when you don't even know if your doors will be open to them.
Since then, governments have found ways to allow businesses to reopen as safely as possible. Assisted by the administration of billions of doses of vaccines against COVID-19 and safety precautions, economies are reopening. Now, advertisers need to let prospective customers know they are open. For instance, cruise ship operators need to inform folks that voyages are restarting.
All that is great news for the streaming version of pay-TV service fuboTV (FUBO +0.00%). The increase in higher-margin ad revenue will help supplement its subscription revenue nicely.
Ad revenue tripled year over year for fuboTV. Image source: FuboTV.
Ad spending is bouncing back
The quarterly reports of public companies in the last couple of weeks show evidence of a strong rebound in advertising. For instance, Amazon reported that revenue in a segment that mostly consists of advertising increased by 83% from the same quarter last year. Moreover, Pinterest, which generates all its business from advertising, reported revenue that more than doubled from the year before.
In fuboTV's first quarter, it reported similarly bullish results in advertising. Revenue in the category increased by 206% year over year. That was for the time between January and the end of March 2021. Given what Amazon and Pinterest reported late in July, it's likely that fuboTV's second quarter will also include robust growth in ad revenue.
Subscriptions remain a bigger source of fuboTV's overall sales. In its most recent quarter, the average revenue per user (ARPU) was $69.09, while advertising ARPU was $7.11. Interestingly, however, the advertising ARPU is growing faster than overall ARPU, at 57% versus 28%. If it remains on that trajectory, advertising will become an ever-increasing part of fuboTV's business.
What it means for fuboTV's overall business
Importantly, ad revenue comes with a higher profit margin compared to the rest of fuboTV's business. That's evident in the company's overall expense breakdown in the most recent quarter, where 95% of its expenses were subscriber-related. As more subscribers are added to fuboTV, the company needs to pay media companies like Disney for the right to carry their channels.
Therefore, ad revenue scales better. As more subs are added, that's more eyeballs that marketers want to pitch their products to. The ensuing increase in ad revenue will not bring with it a rise in expenses, at least not a meaningfully substantial rise. In the longer run, the bigger percentage ad revenue makes up of overall revenue, the higher the potential becomes for overall profit margins. The company is a long way out from becoming profitable, but a boost in advertiser spending can propel it forward.
That can do wonders for this supercharged growth stock that's estimating revenue growth of over 100% in 2021.
