Why FuboTV Is Still on Sale After Posting Strong Subscription Growth

Stocks to buy

When fuboTV’s (NYSE:FUBO) shares rapidly broke out of its  trading range last November 2020, investors should have known not to chase it. Indeed, after the Nasdaq broke down in early February, FUBO stock also entered a bearish downtrend.

Source: monticello / Shutterstock.com

With FUBO stock sporting a short float of almost 15% and an unsustainable price-sales ratio of 13 times, is the outlook of the shares positive after the firm’s strong first-quarter earnings report

FUBO Stock Rebounded on Q1 Results

For the first quarter, fuboTV reported record revenue and strong subscriber growth. It also lifted its full-year 2021 guidance. In Q1, the company’s revenue jumped 135% year-over-year to $119.7 million. Fubo’s ad revenue soared  206% YOY to $12.6 million.

In its earnings slides, fuboTV highlighted the rapid growth of its advertising revenue  and its average revenue per user. The increases of both metrics was indeed respectable. Yet its bottom-line loss of $70.2 million was disappointing. But its subscription growth will eventually lead to quarterly profits, creating an opportunity for growth investors.

Co-founder and CEO David Gandler pointed to the company’s focus on customizing its product for customers. The marketing team targeted higher quality subscribers, leading to better customer retention rates.

Looking ahead, cord cutting and sports betting, which the company plans to offer directly through its streaming service,  will be  positive catalysts for FUBO stock. fuboTV is a small fish in a large ocean. Its competitors include Disney (NYSE:DIS), Amazon (NASDAQ:AMZN), and Roku (NASDAQ:ROKU), all of which have much stronger brand names and much larger market capitalizations than Fubo.

fuboTV is in the virtual multichannel video programming distributors market. With vMVPD, companies provide many TV channels through the internet. Fubo has around 5% of the vMVPD market.

Opportunities and Risks

Fubo’s acquisition of Vigtory, “a sportsbook operator,” will help enable Fubo to launch its own sportsbook more quickly.

Meanwhile, Fubo is about to roll out free-to-play games in beta, but that will not lead to immediate revenue in the next few quarters. So investors need to decide if the company’s subscriber growth rates justify the stock’s market capitalization of nearly $3 billion.

Momentum investors, however, will have to take a pass on FUBO stock. With markets already fretting about  unsustainable valuations, the shares, which lack positive momentum,  are unlikely to revisit their 52-week high.  Chances are high that any rally will lead to selling, as investors look to break even.

After the subscription growth of Disney’s streaming channel lost momentum, fuboTV faces similar risks.

Fubo’s advertising revenue is unlikely to slow as many consumers continue to embrace fuboTV’s platform. But ad sales are still a very small contributor to Fubo’s total revenue.

Strong Forecast

fuboTV expects to have 840,000 subscribers at the end of 2021, up from 540,000 at the end of last year.

After Fubo’s earnings report, all but one analyst who covers the stock had price targets for it in the $25 – $60 range. Their average price target is $38.86, according to tipranks. The 5-year discounted cash flow EBITDA exit model below uses an EBITDA Exit multiple to calculate the stock’s Terminal Value in five years.

Metrics Range Conclusion
Discount Rate 10.0% – 7.0% 9.00%
Terminal EBITDA Multiple 20.0x – 22.6x 21.6x
Fair Value $23.41 – $25.36 $24.03

Model courtesy of finbox

In the chart above, you can change the multiples and discover how such changes alter the stock’s fair value.

The Bottom Line on FUBO Stock

Markets lifted fuboTV’s shares due to investors’ enthusiasm about sports betting, the subscription growth of streaming television, and high demand for hot technology stocks. That frenzied buying, however, appears to have been short-lived. And despite its decline, the valuation of FUBO stock is still unattractive.

Speculators need to weigh the risks of buying fuboTV’s shares without any hedges. There is a chance that the company’s entrance into sports gambling could re-ignite the stock.  Such a rally would give investors who are now losing money on the stock an opportunity to break even. Those who did not buy the shares at higher prices should consider purchasing them now, as fuboTV’s prospects for 2021 appear to be very encouraging.

On the date of publication, Chris Lau 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.