Fox Corporation (FOXA 0.99%) (FOX 0.72%) isn't exactly a widely held stock, and understandably so. Television was never a particularly high growth business. Now cord-cutting has the industry on the defensive.
There are pockets of investment-worthy strength within the video entertainment arena, however. Fox is one of them. The combination of its network broadcast and its cable-only channels consistently boasts some of the highest-rated (read: "revenue-bearing") programming within the TV market.
Meanwhile, its 2020 acquisition of ad-supported streaming platform Tubi is increasingly looking like a genius move. It has quadrupled its revenue since then, yet has only scratched the surface of what it could become.
Reliable ratings drive reliable revenue
Say what you want about some of its on-air personalities and their commentary -- just don't deny that the company enjoys its fair share of the television advertising market. While its network broadcast's overall ratings consistently rank fourth out of the nation's four major names, nine out of 10 of last year's most-watched cable news shows were Fox programs, according to numbers from TV ratings company Nielsen. Combining its news reach with the draw of Fox's hit network-broadcast shows like animated sitcom The Simpsons, The Masked Singer, and 9-1-1 makes the company's programming some of the most collectively watched on TV.
Then there's sports. Fox aired this year's Super Bowl and it clearly did something right. Its 113 million viewers represents the best crowd the big game has drawn since 2017, which, by the way, was also a Fox production. The company also led viewership of this past regular season of college basketball, and it isn't doing too shabbily with baseball, either. Last year's World Series was -- you guessed it -- a Fox broadcast as well.
Access to top-rated television content doesn't come cheap, mind you. Fox pays for the rights to broadcast the World Series and the Super Bowl. It also pays a hefty sum for the notable names behind its popular news shows.
It's worth the cost, though. Fox is one of the TV business's most reliable revenue and profit producers, with its fiscal results largely unfazed by the ebb and flow of the overall advertising market.
Data source: Thomson Reuters. Chart by author.
Connect the dots: While it's not the industry's biggest player, it's clearly proficient at finding advertisers for the top-tier content it's paying dearly for. There's no reason not to expect more of this sort of consistent fiscal success from the company's cable television operations going forward.
Fox's cable cash cow, however, isn't the whole reason this stock is an overlooked gem.
Tubi is too big to ignore
If you think $440 million was too much for Fox to pay for streaming service Tubi, think again. The platform's ad revenue grew 25% year over year during the second fiscal quarter ending in December -- eclipsing $200 million -- en route to what CEO Lachlan Murdoch believes will be something in the ballpark of $1 billion a year for the free-to-watch service. Analysts with MoffettNathanson agree with this outlook, adding it's on its way to becoming a $1.7 billion brand by 2025.
For perspective, Tubi was only doing about $150 million in ad sales when Fox acquired it just three years ago, when the service was only serving on the order of 30 million viewers. Now it's keeping more than 60 million regular watchers entertained.
Data source: Tubi/Fox Corp. Chart by author.
What's not necessarily reflected in the stock's current price is the increasing likelihood of the company reaching its expected goals (and exceeding them).
One of the chief impediments to Tubi's growth thus far has been a lack of assurance that its audience was as big as Fox says it is, or that its viewers are as tuned in as the company suggests. That's no longer the case.
Ratings company Nielsen reports that in February, Tubi finally broke into the top echelon of the United States' streaming platforms, accounting for 1% of the market's total time spent watching streaming content. That's still miles away from Netflix's 7.3%, but it is in line with Warner Bros. Discovery's HBO Max's 1.3% of total U.S. streaming-viewing time and Comcast's Peacock's 1%.
And, Tubi is by far now one of the nation's most-watched free ad-supported television (FAST) platforms -- a significant achievement that forces advertisers to take the platform seriously.
In this same vein, just within the past few days, Tubi further directly bolstered its appeal to prospective advertisers. Its tech now integrates with VideoAmp's Premium Video Planning Tool, as well as LiveRamp TV Activation's platform, both of which help advertisers plan their spending and forecast results of ad campaigns. Tubi is also expanding its compatibility with Comscore, which helps companies better measure the true reach of their advertising.
With this latest round of evolution, Tubi looks and feels more like the bigger television channels and ad-supported streaming services it's competing against. That's why the expected doubling of revenue by 2025 doesn't seem unrealistic. Indeed, if anything the growth outlook seems modest in light of Omdia's expectation that the world's yearly FAST market will triple between now and 2027, reaching $12 billion by the end of that period. The vast majority of this growth will materialize in the U.S. too, where Tubi is already a dominant name.
Fox's solid foundation offsets Tubi risk
The big unknown here is profitability. Fox can draw a crowd to Tubi, but at what cost?
Given that the streaming operations of Walt Disney, Warner Bros. Discovery, Comcast, and Paramount (just to name a few) are all still losing money, it's not exactly a stretch to assume Tubi may be operating in the red as well. It remains to be seen when -- or if -- there's going to be any actual money made with the service.
It seems unlikely it won't eventually do so, however, particularly in light of how well Fox Corporation manages its traditional television business, and how savvy it is when it comes to picking or producing content it will need to find advertisers for.
It's a bit unusual to see a media company developing a promising new business that won't cannibalize an established one. With Fox, however, you can have both in one single package, balancing its growth potential with its proven value, and balancing its risk and reward.
