What Is the Market Missing on fuboTV?

fuboTV's (FUBO +0.00%) business is growing rapidly. The sports-focused streaming TV company is gaining market share and building a loyal customer base of highly engaged viewers. Yet 2021 has not been kind to fuboTV investors, with shares down about 75% since its all-time high in December 2020 as analysts and investors fret about the company's path to profitability. While the company still faces real challenges, critics may also be overlooking its considerable opportunity.

What's fueling fuboTV's growth 

fuboTV established itself in 2015 as a sports-first online streaming service. Since then, the company has expanded its programming become a viable alternative to traditional cable, both for sports fans and the entire household.

CEO David Gandler believes 40 million-50 million of the 72 million households that currently pay for cable or satellite TV will sign up for internet-based content aggregating services like fuboTV over the next five years. Gandler predicts that fuboTV will grab about 10% of that market -- roughly 5 million customers, compared to the 1 million it reached in November.

Image source: Getty Images.

fuboTV recorded astonishing triple-digit growth in subscribers and revenue in each of the three quarters in 2021:

Source: Company earnings releases.

According to Nielsen Media Research, overall subscribers grew 34% overall in fuboTV's sector of the TV business, suggesting that fuboTV has been gaining market share from its competitors. Furthermore, fuboTV was able to attain this growth while spending proportionally less on sales and marketing: just 32% of revenue, from 36% a year ago.

Viewers streamed a total of 245 million hours of content, up 113% over the third quarter of 2020. Hours grew slightly faster than the growth of subscribers, implying fuboTV subscribers are really using and enjoying the service. More viewers, watching more TV, also means fuboTV can rake in more high-margin ad revenue and boost its profitability. Though overall ad revenue grew more slowly than other third-quarter sales, the company did post 10% year-over-year growth in the average amount of monthly ad dollars it's bringing in per subscriber.

How fuboTV's tech helps keep viewers happy

fuboTV gathers data to figure out what its customers are watching -- and what they aren't. Analysts criticized its decisions this year to cut costs by not carrying the March Madness college basketball tournament, and dropping Turner Networks' slate of well-known channels. But subscribers surged anyway, even as the company cut its content costs. fuboTV also uses data to see where customers get stuck or frustrated in its web and mobile apps, so that it can quickly fix or improve those issues.

Unlike its streaming or pay-TV rivals, fuboTV now offers viewers opportunities to play free games – like competing against other viewers to guess how quickly a player or team will score next – or place wagers on live games. fuboTV is backing up its conviction in interactivity with the recent acquisition of Edisn.ai, whose video recognition technology will allow fuboTV's viewers to track players in a live game, and view statistics for players on the screen. 

fuboTV's recently launched sports betting service will be another key catalyst for the company's future growth. It lets viewers place bets from their mobile device for the live games they're currently watching on fuboTV's video stream. Global sports betting is expected to grow at about 10% every year from 2021 to 2028, when it's estimated to reach $140 billion. Even a very small sliver of this large market will greatly benefit fuboTV. 

fuboTV is not profitable yet 

Many investors and analysts are concerned about fuboTV's current and future profitability. The company's still spending significantly more money than its sales are bringing in:

Source: Company earnings releases.

The company's also burning increasing amounts of cash as it invests in its own expansion. fuboTV's free cash flow, barely positive at $1.5 million at the end of 2019, plunged to -$149.2 million at the end of 2020, and -$223.5 million for the trailing-12-month period through September 2021.

Despite these dire-looking figures, the company's losses are narrowing in proportion to its fast-growing sales. As a percentage of revenue, here's how much the company's key losses shrank year over year in each of the past three quarters:

Source: Company earnings releases.

Going forward, fuboTV needs to demonstrate that it can grow at gradually lower costs for extended periods. A big chunk of its costs come from subscriber expenses – how much it has to pay content owners for the rights to stream their shows. 

Source: Company earnings releases.

Content providers charge fuboTV by the subscriber. How will the company get ahead of these costs even if it continues to grow subscribers? First, continued viewer growth and engagement will drive high-margin advertising and wagering revenues for fuboTV. As we saw in the revenue metrics above, advertising revenue grew faster than subscription revenue in two of the three quarters in 2021. Second, the more subscribers it attracts, the more leverage fuboTV will have to negotiate cheaper rates with its content partners. Both of these factors have likely already helped year-over-year subscriber expenses grow more slowly than fuboTV's revenue for the second and third quarter of 2021.

So what should investors do?

FuboTV's heavy investments in its own growth may come at the cost of short-term profitability. But with fuboTV shares trading at their lowest price-to-sales multiple over the past 12 months, the sell-off in fuboTV stock looks overdone:

Image source: YCharts.

fuboTV is a relatively risky investment. Share prices may remain volatile if investors keep worrying about its profitability, and any hiccups in the company's growth trajectory could lead to major pullbacks in share price. 

Investors interested in streaming services, especially those with greater risk tolerance and a long-term investing horizon, may want to take advantage of the current share dip and consider a small position in fuboTV in a diversified portfolio. Over the next five years, fuboTV could produce handsome returns from current levels if it continues to execute.