FuboTV (NYSE:FUBO) stock reported third-quarter 2021 results on Nov. 9. Included in the report was the news that it went over one million subscribers sometime in October or early November. You would think that would be good news for FUBO stock.
Instead, the sports-first live TV streaming platform saw its share price decline by 35% in the fourth quarter suggesting the investment thesis for buying its stock had broken down.
Is that the case? I don’t think so.
FUBO Stock Got a Little Overheated
FuboTV illustrates how difficult stock picking can be. The company reported solid results in the third quarter, including raising its guidance for 2021, yet investors immediately took its stock to the woodshed, leaving my ego battered and bruised.
A week before FuboTV released its results in November, I suggested that FUBO could hit $40 before the end of 2021. At the time, it was trading around $33. Ten weeks later, we know that didn’t come to pass. Instead, it cratered like a giant sinkhole. As I write this, it trades for less than $13.
As I said, my ego’s taking a beating on this one. I hate to be wrong, even though I know even the best investors are only right about two-thirds of the time.
Some media have suggested that FuboTVs valuation was way overblown and needed a correction before its next leg higher. That’s a reasonable argument until you consider that its stock is actually down 50% over the past year despite obvious signs its business is strengthening on both the top and bottom line.
The company’s shareholder letter for Q3 2021 stated that it expects 2021 revenue of $614.5 million at the midpoint of its guidance. That’s 3.4x its market capitalization of $2.58 billion.
In the risks section of its latest 10-Q, it lists several streaming competitors, including AT&T (NYSE:T), Comcast (NASDAQ:CMCSA), and Altice USA (NYSE:ATUS). Their price-to-sales ratios are 1.1x, 2.1x, and 0.8x, respectively.
At least from this perspective, the valuation argument holds water.
FuboTV’s Considerable Growth
Based on its 2021 guidance, revenues will grow 135% over 2020. In two years, it’s gone from $4.3 million in revenue to $614.5 million. That’s a compound annual growth rate of almost 1,100%.
Over the past three years, the three competitors mentioned above have, on average, grown by 3.8% per year. At my $40 prediction, FuboTV would have a $5.8 billion market cap or 9.4x sales.
Is that so crazy?
FuboTV is growing more than 30x faster than its competition. As it grows into profitability, its current multiple will seem ridiculously cheap.
In Q3 2021, its average revenue per user (ARPU) was $74.54, 10% higher than a year earlier and 4.4% higher than in Q2 2021. So as long as it continues to increase ARPU on a sequential basis while increasing the number of subscribers by 30%+, I don’t see how it doesn’t get to profitability sooner rather than later.
That’s especially true when considering that its Q3 2021 operating expenses fell 28% to $259.9 million, or 166% of revenue. A year earlier, operating expenses were 594% of revenue.
In the third quarter, its adjusted contribution margin was 12.4% — defined as ARPU less average cost per user (ACPU) — 410 basis points higher than in Q2 2021. If this keeps moving higher, let’s say 20%, and it holds the line on operating expenses, it will make money in 2022 or 2023, at the latest.
The Bottom Line
While FuboTV’s fourth-quarter slide might suggest its investment thesis has broken down, the evidence proves otherwise. The business model is working. It’s gaining traction with subscribers.
Growth stocks as a group had a challenging fourth quarter. As a result, investors grouped FUBO in with the rest of them.
If you’re okay with investing in companies losing money, FUBO is very attractive under $15. I’m broken but not bowed.
FUBO should return to the $30s and beyond in 2022.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.