Despite triple digit year-over-year revenue growth driven by an influx of paid subscribers, fuboTV (FUBO 3.36%) is piling on the losses. While management explains that these losses are driven by heavy investments in new product specifically related to sports wagering, the company's stock has declined 41% since Jan. 1. Is fuboTV positioned to evolve as an innovative leader in the streaming wars? Let's dig in and find out.
What makes fuboTV different
The multitude of streaming services that are available today can be overwhelming for customers. For investors, it can be challenging to discern which companies are offering the most popular streaming services. One thing that could help investors is that when looking at the major streaming providers, most of them have other business lines, with content serving as a tangential revenue stream. Major technology leaders such as Apple, Amazon, and Alphabet all offer streaming services in addition to their legacy hardware, software services, and e-commerce businesses. In addition to its theme parks, Disney launched its own service, Disney+, and has an ownership stake in Hulu, while internet service provider Comcast launched Peacock and media conglomerate ViacomCBS launched Paramount+. Then, of course, there's Netflix. With all of these options available, what makes fuboTV different?
On the surface, fuboTV appears similar to many of these other streaming services as it offers several of the same channels and programs. However, the company is marketing itself as a sports-first offering. Many of the streaming services mentioned above are focused on either original content or archiving classic television programs for exclusivity. On the other hand, fuboTV is making sports streaming the focal point of differentiation. fuboTV's platform offers programing from all major sports leagues including the NFL, NBA, MLB and international soccer leagues.
The sports-first focal point has been resonating with a broader audience. The company delivered triple-digit year-over-year growth during Q3 2021 in total paid subscribers (up 108% to 945,000). Additionally, since the quarter ended, fuboTV announced that it reached a significant milestone of one million total paid subscribers. With this level of growth, some investors may be surprised by the company's mounting losses.
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Is the business model broken?
For the third quarter ended Sept. 30, 2021 fuboTV reported total revenue of $156.7 million, which represented 156% year-over-year growth. Advertising revenue was $18.6 million, which represented 147% year-over-year growth.Although this is very impressive, the cost of this growth may be a cause of concern for investors.
fuboTV reported a net loss of $105.9 million in Q3 2021, and its net loss through the first three quarters of the year is $270.8 million. The reason behind these losses are attributable to the company's subscriber-related expenses. Through the first nine months of 2021, fuboTV has spent $377.1 million on subscriber-related expenses, which represents 93% of year-to-date total revenue. These subscriber-related expenses consist primarily of affiliate distribution rights and other distribution costs related to content streaming. One positive thing to note is that these expenses are getting smaller for fuboTV. Subscriber related expenses were over 100% of total revenue for the first nine months of 2020. However, investors should not take this dynamic at face value. This is because the costs of affiliate distribution rights is incurred on a per subscriber basis and recognized when related programming is distributed to subscribers. For each new subscriber that fuboTV gains, it needs to pay distribution partners like Disney. This dynamic makes it difficult for the company to achieve operating efficiencies, hence, it continues to lose money.
Is sports wagering the answer?
Certain industries have thrived during the pandemic, and sports wagering was definitely one of them. The American Gaming Association estimated that Americans placed over $4 billion of bets on Super Bowl LV in February 2021, which made it the largest single-event legal handle in American sports betting history. This statistic is even more impressive when considering this was the lowest attended Super Bowl since its inaugural game in 1967 due to the pandemic. One factor that has served as a catalyst for the increase in sports betting is the rising popularity of online sportsbooks. Goldman Sachs projects that online sports betting could grow 40% annually over the next decade.
The explosion of sports wagering has not gone unnoticed. fuboTV is taking its sport-centric approach to the next level. In November, the company announced that its first effort to enter the mobile sports betting market by launching Fubo Sportsbook. Fubo Sportsbook serves as more than a traditional waging platform or mobile application, as the company is attempting to bridge the demand for interactivity through a sports wagering platform with a live TV streaming experience. By integrating with fuboTV's streaming service, the sportsbook app creates an experience whereby passive viewers are now active and more engaged participants with the content. Fubo Sportsbook also leverages the company's user data to allow subscribers to view wagering content based upon what they are streaming.
fuboTV is wagering its future on the boom in sports betting. The company's management believes that these product enhancements will create a flywheel, thereby improving engagement and retention in the subscriber base. As a result, it can be argued that this increased engagement will lead to further growth on the advertising side of the business, as advertisers continue to migrate from traditional linear tv and onto streaming platforms as stated in J.P. Morgan's latest analyst report on fuboTV. Unlike subscriber revenue, advertising does not come with as heavy associated costs. By bolstering its advertising revenue, the company should be able to trim its losses and form a viable path to profitability.
Now what?
When it comes to streaming, fuboTV is an interesting case study. The company does not necessarily offer differentiated programing or original content. However, by focusing on live-streaming sports, it has created a unique position for itself against other legacy streaming platforms. The key thing for investors to look out for is the company's profitability profile. If fuboTV continues to gain subscribers and increase revenue, it may not tell the full story of what direction the company is going. It is important that investors look at the engagement and retention metrics such as number of hours streamed and total paid subscribers. Additionally, investors will need to exercise some patience when it comes to reaping benefits from the company's new sports book features. Should these features resonate with existing subscribers and help attract new ones, it is possible that fuboTV will be able to command more meaningful revenue from advertisers, thus driving margin expansion and forming a path to profitability. I do not view fuboTV as a risk-free investment; however, I also would not call it a total gamble.
