Cord cutting disrupted the business of sports. Betting has hit the sports landscape like a meteor at a time when a pandemic has already knocked it off its feet.
Whenever I see so much run-up across so many stocks, I think we are due for a correction. So when analysts put the brakes on and bring us to reality, it’s actually a healthy sign. I bought some shares in FuboTV recently (see all disclaimers here), so take all of this with a grain of salt. Since I do this for fun and entertainment purposes, let’s see what the analysts have to say. Rich Greenfield’s Christmas Eve downgrade brought some much-needed sanity to FuboTV’s stock, which had gone up from $10 since its IPO to $60 in a year after merging with Facebank and securing $100M in financing.
"FuboTV is vying against much bigger competitors — including YouTube TV, Hulu and Dish’s Sling TV — fighting for share as the overall pay-television sector shrinks. The company reported 455,000 paid subscribers at the end of the third quarter of 2020 (up 58% year-over-year), posting revenue of $61 million and a net loss of $274 million for Q3."
But not everyone agrees to the same extent:
BMO’s Salmon, on the other hand, remains fairly bullish on FuboTV. The analyst raised his price target on FuboTV (from $33 to $50 per share), implying the stock is worth 10.3 times estimated 2022 EV/revenue and 38.1 times 2022E EV/gross profit. “We think Fubo continues to offer a more promising path to profitability than most new investors expect,” Salmon wrote. With FuboTV’s acquisition this month of startup Balto Sports, a developer of sports-fantasy gaming tools, “we expect Fubo to roll out free-to-play gaming in 2021 and we anticipate more announcements in the coming months,” according to Salmon. “Management is taking a deliberate approach toward expansion and we view its multiphase approach as prudent.”
The following is not, in any way, a commentary on FuboTV’s stock price and more of a general observation about why speculative investors are in a “giddy” phase while even value investors remain unsure how to value such stocks.
The introduction of sports betting into the mix has thrown the segment into unknown territory. Gambling and betting are huge money makers. Legalizing those in more states and countries, and blending that revenue stream into sports rights programming and sports editorial is sure to create new winners and losers.
There is already a shift of macro fundamentals with cord cutting as the rise of streaming options replaced traditional (linear and cable) programming. In Who will win the sports betting match, I discuss how “all consumers are equal, but some are more equal than others.” My version 1.0 diagram of the landscape needs some serious TLC, but it conveys that the market is experiencing a tectonic shift as these three spheres will merge into one over time.
Betting, for lack of better word, has hit the sports landscape like a meteor at a time when a pandemic has already knocked it off its feet. It’s unclear whether Access Industries / Lev Blavatnik’s DAZN or the now publicly-traded FuboTV can encroach on others’ turf, but that’s essentially what investors are betting on.
The reality is: no one knows.
History Repeats Itself
As streaming (namely, YouTube) has replaced television as the leading consumption platform, I say that WatchMojo is to YouTube what ESPN/MTV were to cable: early adopters and companies that evolved into companies around an original distinct brands. I’m not delusional into thinking WatchMojo is Viacom or Disney, of course, but that parallel isn’t crazy for illustrative purposes. As such, when I tried to size up the long-term potential of WatchMojo, I took a look at their historical deals and valuation.
Admittedly, in the context of the Fubo/DAZN’s, MTV isn’t a great comparable other than being an early pioneer into a new distribution medium, cable. While reading I Want My MTV and Those Guys Have All the Fun on ESPN, a few interesting facts and figures stood out to me:
MTV was funded with $12.5 million from Warner Communications & American Express. Incidentally, it started off playing full music videos (without a license) under promotional basis, before eventually signing commercial agreements with the labels in exchange for exclusive windows and releases. It launched Nickelodeon, VH1, Comedy Central and was acquired by Sumner Redstone‘s Viacom in 1985 for $667 million. I’m unsure if this 2015 Forbes analysis on MTV valued at $6.2 billion is accurate given the continued erosion of cable and continued rise of YouTube, but its parent Viacom is worth $22 billion today. In other words, a great acquisition by any metric.
ESPN, meanwhile, is a more interesting comparable at a high level. When Hearst was looking to buy a 20% stake in ESPN from RJR, it paid roughly $165-175 million in 1990 (incidentally, the stake had been valued internally at $200-300 million). In the 2010s, Forbes valued it at $40 billion; Bleacher Report pegged it at $50 billion. Of course, cord cutting and falling subscriber counts may have reduced that value (parent Disney, who owns 80% of ESPN, is valued now at $300 billion). But regardless, as per an excerpt from the book that stuck with me: “whatever Hearst would have paid for its 20% stake in ESPN then, it would represent a return for the ages.”
Of course, comparing ESPN to anyone is a stretch – but understanding how why the winner in this “draft class” is coveted by investors shouldn’t come as a surprise.
Rich Greenfield is a very smart analyst whom I’ve known for years. I understand why the stock tumbled and indeed, on any traditional basis and looking at it through a more narrow lens, the stock is overvalued, most share prices are these days, but when it comes to what services I will pay for, sports are unique (i.e. I paid for DAZN just to watch the Champions league final, for example.
Cable, despite its promise of unlimited channels, was still limited in terms of shelf space.
The web, of course, does not. It’s clear that there’s a game of musical chairs going on and no one really knows who will win… but the belligerent who will win may win BIG.
I’m not a gambler in the traditional sense (i.e. I gambled ample by launching WatchMojo and boy was it traumatic and exhilarating at once!), but I do like to make these long-term bets with stocks.
For a deeper dive into why the disruption is so profound, check out will win the sports betting match.
Disclaimer: Nothing here should be misconstrued as investing advice. I am NOT licensed to give any advice. These writings are intended as entertainment to put into context how a media entrepreneur and investor thinks, given my unique time horizon and risk profile. Educate yourself, read up on mistakes others have made and speak to a licensed professional who can help you based on your investment profile and time horizon. The majority of my holdings are in safer, value stocks and managed by professionals. My direct investments portfolio represent riskier investments that make sense for my time horizon.