FuboTV (NYSE:FUBO) is now clearly on track to move into positive free cash flow (FCF) next year as its number of subscribers and average revenue per user (ARPU) grow. This can be seen from the TV-streaming company’s second-quarter report, which was released on Aug. 10. As a result, expect FUBO stock to move significantly higher over the next year.
Right now, I estimate FUBO to be worth at least $6 billion or $42.35 per share. This is 45.3% higher than its price of $29.15 as of Aug. 31. I came up with this estimate by using a simple free cash flow (FCF) model. This is based on the company’s continued growth in users and the gains in its operating profits each quarter.
Here’s what you should know about FUBO stock moving forward.
FUBO Stock: Where Profits Stand
In Q2, FuboTV grew its subscribers by 138% YOY to about 682,000 users. On top of this, revenue shot up 196% over the same period to $130.9 million. This was also much higher than Q1, which saw 590,000 subscribers and $119.7 million in revenue.
More importantly, though, Fubo’s ARPU grew 30% YOY to $71.43 (i.e., on a monthly paid subscriber basis). This was even 3.4% higher than the company’s first-quarter ARPU of $69.09. Moreover, its advertising revenue per user also showed similar growth — up 62% YOY and 22.4% on a quarterly basis.
That said, this company’s costs are still higher than revenues. Its operating cash flow is still negative as well. However, the trend is improving towards profitability. For example, Q1’s operating cash flow was negative $53.9 million. By Q2, it improved to negative $33.6 million.
Clearly, this implies that, as the company posts higher levels of subscribers at higher prices and higher ad revenue, it will become cash-flow profitable. In fact, Fubo raised its prior revenue guidance for 2021, from between $520 million and $530 million to between $560 million and $570 million. That should please FUBO stock investors.
Estimating Value Using Free Cash Flow
Analysts surveyed by Seeking Alpha estimate that Fubo’s revenue next year will hit $912 million, up 61% from the midpoint estimate of $567 million for 2021. What’s more, by 2023, revenue is estimated to reach $1.39 billion, up more than 52%. But this also means that, over the next two years or so, revenue will more than double (i.e. $1.39 billion/$567 million, or +145%).
Therefore, I highly suspect that Fubo’s free cash flow (FCF) will likely turn positive of at least 10% of revenue. To be conservative, let’s assume that revenue doubles to approximately $1.2 billion and, using a 10% margin, FCF should hit $120 million.
Now we can value FUBO stock by applying a 2.0% FCF yield. So, for example, if we divide $120 million by 2% (the FCF yield), the target market value is $6 billion. Another way to see this is to take the inverse of 2% (i.e, 50 times, or 100/2) and then multiply that by $120 million (i.e., $6 billion).
Using the market value of FUBO stock on Aug. 31 ($4.13 billion), this target value of $6 billion is 45.3% higher. This means that the stock is worth $42.35 per share (i.e., 1.453 x the Aug. 31 close price of $29.15).
What to Do with FUBO Stock
Analysts tend to agree with me on this point. For example, seven analysts surveyed by Tipranks have given FUBO stock an average price target of $43.86 per share, or roughly 50% over the Aug. 31 close price. What’s more, this is the same average price target seen by both Seeking Alpha and Yahoo! Finance. It is also close to my price target of $42.35 using a simple FCF model.
My point here is that both analysts and I alike see a very bright future for FuboTV and FUBO stock. The fundamental fact is that its subscriber and ARPU growth should continue to be consistently high. One reason for this is the company’s emphasis on sports channels. On top of this, starting in Q4, Fubo will be venturing into sports betting.
Currently, FUBO stock is up just 6% year-to-date (YTD). So, now might be a good time to begin to average cost into FUBO stock. In this case, I suspect that the average cost might be at higher and higher prices. But given that it should be worth 45% more, there is plenty of room for an investor to make money when it comes to this name.
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.
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