Markets

2 Reasons Investors Should Pay Attention To FuboTV's Advertising Business

fuboTV's (NYSE: FUBO) stock has fallen off a cliff over the last year, as investors worry about its profitability in this rising-interest rate market. fuboTV didn't do itself any favors when advertising, its only source of high-margin revenue, underwhelmed in its first-quarter earnings report. The advertising underperformance has some investors wondering whether the results were only an aberration, or whether they foreshadow significant problems moving forward. Here are two things investors should watch to determine whether fuboTV's ad business sinks or soars.Family watching TV

Image source: Getty Images.

1. fuboTV's ad business is dealing with the initial impact of inflation

In its first-quarter earnings, fuboTV management blamed reduced TV ad spending from consumer product goods (CPG), finance, and technology companies for the poor results. Also, some experts believe reduced ad spending is a reaction to inflation and supply chain disruptions. As a result, fuboTV's advertising average revenue per user (ARPU) declined 4.5% year over year in the first quarter of 2022, hurting fuboTV's contribution margin, which the company uses to measure its progress toward profitability. As a result of fuboTV's profitability setback, the stock dropped over 20% the day after it released earnings.

Although experts expect ad spending in the U.S. ad market to increase by 14% in 2022, elevated inflation and supply chain issues in the automotive, consumer packaged goods, and electronics could cause ad growth to continue to underperform. Consequently, investors must accept the risk of poor economic conditions persisting before they invest in fuboTV.

2. fuboTV has yet to show any competitive advantages in advertising

First, the streaming ad market is highly competitive, and fuboTV has little to differentiate itself from YouTubeTV or Hulu Live.

Second, fuboTV is still only a relatively small player in an ad industry dominated by much larger platforms -- which means it lacks the heft to charge advertisers higher prices.

Third, marketers tend only to pay up to advertise on platforms that have modern ad-targeting technology and can provide good analytical tools for showing ad effectiveness. Unfortunately, fuboTV recently announced a delay in rolling out improvements in its ad technology. Without them, it can't command higher ad prices. fuboTV blames the delay on difficulties in hiring people with the expertise to build advertising software. Consequently, fuboTV is now trying to create its advertising capabilities with in-house employees -- one reason why it's behind schedule. Whether fuboTV can get its technology up to the level of its larger competitors without hiring outside experts is a critical question; the announcement of delays in rolling its ad network out doesn't inspire much confidence that the company can match its competitors any time soon.

Why fuboTV's ad business can still succeed

All isn't lost for this streaming service. First, fuboTV expects a rising tide of advertisers to shift ad budgets from traditional cable TV to streaming platforms. As of the fourth quarter of 2021, viewers in the prime advertising demographic of 18-49 spent 45% of their TV time streaming. However, advertisers have only shifted 18% of their ad budgets to streaming. At some point, the large gap between streaming consumers and ad budgets should close, benefiting fuboTV and its rivals in the industry.

Second, despite delays, fuboTV plans to have its ad technology available to roll out at the end of the second quarter. fuboTV's new technology will enable it to sell its ad space more effectively on different ad exchange platforms -- which should improve what fuboTV can charge advertisers in the second half of 2022.

Third, up until recently, fuboTV has focused more on increasing subscribers rather than building up advertising, but that has now changed. Although fuboTV had recent difficulties in hiring, it has now built up its ad tech team from six people to 17 in the last 18 months. In addition, fuboTV is still filling out its sales team, which currently stands at only four people.

What to watch for

fuboTV management has targeted positive cash flow and adjusted EBITDA by 2025, and growing its high-margin advertising revenue is the company's best chance of getting there. While the advertising opportunity has much promise, fuboTV is only at the early stages of scaling its ad business in a challenging market. If you decide to invest in this high-growth streaming company, you would be wise to monitor its advertising average revenue per user for signs of progress from its current status under $7 toward its goal of $15 to $20.

10 stocks we like better than fuboTV, Inc.
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and fuboTV, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of April 27, 2022

{%sfr%}

Fool contributor Robert Starks owns shares of fuboTV. The Motley Fool has positions in and recommends fuboTV, Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

FUBO

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More