FuboTV (NYSE:FUBO), the sports-oriented TV streaming subscription service, is going from strength to strength each quarter. Last quarter, the company’s subscribers grew to 682,000 from 286,000 a year ago. In fact, according to its latest slide deck, fuboTV added 92,000 in the past quarter, up 15.6% quarter over quarter. If fuboTV can keep this growth rate up, FUBO stock could be higher by next year.
In fact, FUBO stock is up slightly from a recent trough when it hit $22.89 on Sept. 29. As of Oct. 1, the stock was at $24.41. But I still think it is set to go much higher, as I wrote last month.
Based on analysts’ estimates of its fast revenue growth rate, I estimated that FBUO stock is worth $42.35 per share. However, I am now lowering my target price estimate to $38.67, or 58.4% over Friday’s closing price of $24.41. This article will explain why I decided to do this.
Where Things Stand at fuboTV
On Aug. 10, fuboTV released its shareholder letter and slide deck showing that revenue jumped 196% year-over-year (YoY) to $130.9 in Q2 from $44.2 million a year ago. Moreover, the prior quarter revenue was $119.7 million, so its quarter-over-quarter (QoQ) growth rate was 9.36%.
This implies that on a compounded basis, its annual sales growth rate will be 43%. Although that is slower than the present YoY rate, it is still a very fast growth rate going forward.
In fact, analysts surveyed by Seeking Alpha forecast that revenue will jump about 60.8% next year. It will jump from $568 million in 2021 to $912 million by the end of 2022. And by 2023 revenue is forecast to reach $1.39 billion. This implies that revenue will more than double (i.e. $1.39 billion/$568 million, or +145%).
FuboTV has also provided guidance both for its third quarter and for the full year. Its guidance for Q3 was for revenue between $140 million and $144 million. For the full year, it estimates revenue slightly lower than analysts at a peak level of $570 million. This was raised substantially from $520 million and $530 million last quarter.
But it is clear that the market values FUBO stock based on its future sales prospects, given its high growth rate. For example, its advertising revenue is skyrocketing.
Subscription revenue accounts for the vast majority of its revenue. For example, last quarter’s subscription revenue was $114.4 million, or 87.4% of its total $130.9 million in sales during Q2.
However, advertising revenue is growing more quickly. For example, page No. 4 of its slide deck shows that ad sales grew 281% from $4.3 million last year to $16.5 million in Q2 2021. This kind of underlying growth is what the market is focusing on with its high valuation of fuboTV stock.
What FUBO Stock Is Worth
At Friday’s close, FUBO stock had a market capitalization of $3.458 billion. This is despite the fact that the company is still making net income, EBITDA (earnings before interest, taxes, depreciation, and amortization) losses. It is also burning through cash as it has a negative free cash flow (FCF) rate.
The market is overlooking all that. It’s focusing on fuboTV’s strong subscription and advertising revenue growth, as mentioned above. The idea is that at some point there will be a breakeven as revenue rises, and then operating leverage will cause huge gains in net income and FCF.
For example, by 2023, it is highly likely that with sales at $1.39 billion, up 145% from this year, the live sports streaming company’s FCF margin could hit 10%. In fact, that is probably going to be too low an FCF margin estimate, but to be conservative we can use it. This implies that FCF will reach $139 million by 2023.
Since the 2023 sales estimate is two and a half years from Q2 2021, we can use a 10% discount rate to bring the revenue to its present value. Using a mathematical formula, the amounts to a discount factor of 78.8%. So applying that factor to the 2023 $139 million FCF estimate lowers it to $109.5 million.
We can use that present value FCF estimate to value FUBO stock. For example, using a 2% FCF yield metric, the stock will be worth $5.477 billion. This is seen by dividing $109.5 million by 2%. The result is a target market cap of $5.477 billion for fuboTV stock at present value.
This is 58.4% over Friday’s market cap of $3.458 billion. It also implies that FUBO stock is worth $38.67 per share using this method. That is 58.4% over today’s price (Oct. 1) of $24.41 per share.
Where This Leaves Investors In FUBO Stock
I lowered my price target since I used a present value method to lower the FCF estimate. This had the effect of lowering the base FCF by discounting it for the time value of money. But I did not lower my growth estimate or the multiple used to value the FCF. Therefore, I think this is a stronger price target than before. I have more confidence in it.
In fact, even it takes two years for FUBO stock to rise 58.4% to $38.67 from today’s price of $24.41 the implied ROI is still high. It works out to a compounded rate of growth of 25.86% each year for two years. That is an excellent ROI for most people. Therefore, growth-oriented investors may want to take a stake in FUBO stock at today’s prices.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in any of the securities mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.