fuboTV's (FUBO 4.08%) stock has fallen off a cliff over the last year, as investors worry about its profitability in this rising-interest rate market. fuboTV didn't do itself any favors when advertising, its only source of high-margin revenue, underwhelmed in its first-quarter earnings report. The advertising underperformance has some investors wondering whether the results were only an aberration, or whether they foreshadow significant problems moving forward. Here are two things investors should watch to determine whether fuboTV's ad business sinks or soars.
1. fuboTV's ad business is dealing with the initial impact of inflation
In its first-quarter earnings, fuboTV management blamed reduced TV ad spending from consumer product goods (CPG), finance, and technology companies for the poor results. Also, some experts believe reduced ad spending is a reaction to inflation and supply chain disruptions. As a result, fuboTV's advertising average revenue per user (ARPU) declined 4.5% year over year in the first quarter of 2022, hurting fuboTV's contribution margin, which the company uses to measure its progress toward profitability. As a result of fuboTV's profitability setback, the stock dropped over 20% the day after it released earnings.
Although experts expect ad spending in the U.S. ad market to increase by 14% in 2022, elevated inflation and supply chain issues in the automotive, consumer packaged goods, and electronics could cause ad growth to continue to underperform. Consequently, investors must accept the risk of poor economic conditions persisting before they invest in fuboTV.
2. fuboTV has yet to show any competitive advantages in advertising
First, the streaming ad market is highly competitive, and fuboTV has little to differentiate itself from YouTubeTV or Hulu Live.
Second, fuboTV is still only a relatively small player in an ad industry dominated by much larger platforms -- which means it lacks the heft to charge advertisers higher prices.
Third, marketers tend only to pay up to advertise on platforms that have modern ad-targeting technology and can provide good analytical tools for showing ad effectiveness. Unfortunately, fuboTV recently announced a delay in rolling out improvements in its ad technology. Without them, it can't command higher ad prices. fuboTV blames the delay on difficulties in hiring people with the expertise to build advertising software. Consequently, fuboTV is now trying to create its advertising capabilities with in-house employees -- one reason why it's behind schedule. Whether fuboTV can get its technology up to the level of its larger competitors without hiring outside experts is a critical question; the announcement of delays in rolling its ad network out doesn't inspire much confidence that the company can match its competitors any time soon.
Why fuboTV's ad business can still succeed
All isn't lost for this streaming service. First, fuboTV expects a rising tide of advertisers to shift ad budgets from traditional cable TV to streaming platforms. As of the fourth quarter of 2021, viewers in the prime advertising demographic of 18-49 spent 45% of their TV time streaming. However, advertisers have only shifted 18% of their ad budgets to streaming. At some point, the large gap between streaming consumers and ad budgets should close, benefiting fuboTV and its rivals in the industry.
Second, despite delays, fuboTV plans to have its ad technology available to roll out at the end of the second quarter. fuboTV's new technology will enable it to sell its ad space more effectively on different ad exchange platforms -- which should improve what fuboTV can charge advertisers in the second half of 2022.
Third, up until recently, fuboTV has focused more on increasing subscribers rather than building up advertising, but that has now changed. Although fuboTV had recent difficulties in hiring, it has now built up its ad tech team from six people to 17 in the last 18 months. In addition, fuboTV is still filling out its sales team, which currently stands at only four people.
What to watch for
fuboTV management has targeted positive cash flow and adjusted EBITDA by 2025, and growing its high-margin advertising revenue is the company's best chance of getting there. While the advertising opportunity has much promise, fuboTV is only at the early stages of scaling its ad business in a challenging market. If you decide to invest in this high-growth streaming company, you would be wise to monitor its advertising average revenue per user for signs of progress from its current status under $7 toward its goal of $15 to $20.