Streaming has become a staple of entertainment. More than 113 million U.S. households -- almost 9 out of 10 -- subscribe to streaming services. That should continue pulling advertising dollars away from other formats like print and legacy cable to digital platforms.
Streaming companies like fuboTV (FUBO -3.50%) and Roku (ROKU 0.15%) have been volatile investments after a couple of years of pandemic ups and downs, followed by a fierce bear market that continues today.
Which one is the better buy? While both have strong growth potential, a closer look identifies a big potential winner. Here is what you need to know.
How Roku works
Roku is an electronics company building an ecosystem around smart televisions as the home entertainment hub. The company sells hardware like TV dongles and Roku-branded smart TVs (first-party sets and by licensing its software to other brands), which are essentially customer acquisition tools.
The company loses money in this business but is OK doing so because it can monetize users once they begin using its products.
ROKU revenue (TTM) data by YCharts. TTM = trailing 12 months.
The platform segment is the more significant portion of Roku's business, and generates the company's profits. It includes an ad platform, which collects data on its 70 million active accounts, then sells ads based on what they watch.
Streamers can integrate all their streaming services into the Roku home screen, making it a (mostly) neutral platform. The company began dipping into original content to help grow its Roku Channel, an ad-supported free-content service.
You can think of Roku as a gatekeeper to streaming. It doesn't compete directly with streaming services like Netflix. Instead, it is competing against the platform operators like Amazon (with its Fire TVs) and Apple (Apple TV), as well as TV manufacturers that provide their home-screen software.
How fuboTV works
Many people don't want traditional cable TV but still want live programming and sports. That's a niche that fuboTV has filled. It's a livestreaming service where users can subscribe to local news channels, live sports, and other pay-TV channels.
The channels are a customer acquisition tool, since fuboTV doesn't make money on the programming itself. Rather, it's monetizing users through advertising. It tried a gaming division before canceling it several months ago.
FUBO revenue (TTM) data by YCharts.
The chart above shows how fast fuboTV's business has grown. The company cleared $1 billion in revenue for the first time in 2022, including $100 million in ad revenue. It ended the year with 1.44 million subscribers, a 29% increase year over year.
FuboTV's growth shows that there's still demand for live sports, further evidenced by companies like Amazon and Alphabet spending billions for broadcasting rights to National Football League games.
Cable and other traditional providers still account for about 65 million households in the United States. So fuboTV could benefit from millions of cable-cutters as that secular trend continues.
A crucial difference between the two
The financial innards of the two companies are where the winner becomes clear. Roku's platform business has become large enough to outweigh the money lost on hardware sales. As the chart below shows, it is at a 46% gross profit margin.
On the other hand, fuboTV's programming and broadcasting costs exceeded revenue, putting the business at a negative 4% gross margin.
ROKU gross profit margin data by YCharts.
Factor in overhead -- the stuff that costs money but isn't directly related to broadcasting -- and fuboTV is burning a ton of cash. Whereas Roku has nearly $2 billion in cash on hand against only $150 million in debt, fuboTV has roughly $337 million, roughly a year's worth of cash left (assuming 2022's cash burn), and another $401 million in debt already.
Roku's growth slowed as ad spending declined in 2022, but the company can financially endure the pain and continue growing over the coming years.
While fuboTV's top-line growth is encouraging, ugly margins and dwindling cash make it a potential trap that investors should think twice about before buying. Roku is the hands-down winner for long-term investors.
