Welcome to the newly launched Essentials Plan, we are glad you are here. We launched Essentials on the Thanksgiving holiday weekend and we will be ramping content on a weekly basis.
Below, I discuss our buy plan on Netflix which is briefly described in the 7-minute video below. We began building our position for our premium members around $217, and since have provided 4 buy recommendation, all of which are positive, as of this writing. We think Netflix is going to be a leading stock in 2023, which Beth outlined in the December stock pick found here.
I use a blended approach of technical analysis to determine our portfolio entries and also to pre-determine our risk management. Risk management is a key part of owning tech stocks and I share this with you in the video.
Netflix is a 10% allocation, at time of writing, which is quite high for us. We have taken some gains as we approach a pullback in the markets, and plan to buy more in the near future. In this video, I discuss the levels we plan to execute our trades in the video below.
The I/O Fund built a position in Netflix with real-time trade alerts starting with an entry at $220.71 on August 30th and at $255.08 on November 7th.
After seeing gains of 43.8% from the first entry and gains of 24.4% from the second entry, Knox then trimmed some of the position to take profits.
For our Essentials Members, Knox will release a private video next week that discusses our plan for building this position and/or our plans to take profits in the future. This video will be similar to the information provided above regarding our positioning but will be forward-looking on what entries we plan to do next OR if we plan to trim and add again at a later time.
Below, is a fundamental analysis on Netflix including the specific reason that Q1 and Q2 could be “the quarters” for Netflix to become a stock market darling.
Please note: We are not financial advisors and our disclosure regarding this is at the bottom of the article.
Our goal is to do the following:
Provide you with a December stock pick that we believe may be the top stock of 2023. We want to give you information around the specific catalysts we are expecting in Q1 and again in Q2 that has made Netflix a buy off the August lows.
We want to provide real investment tools to our Essentials members by providing the same level of technical analysis we use for our portfolio and we use on the Advanced Market Signals service to time entries and exits. This includes allocations (the #1 tool for risk management) and will be provided early next week on a recorded video presented by Knox, the I/O Fund portfolio manager.
We do not think blanket BUY recommendations are helpful as the market is tumultuous and complex. We are real investors and everything we do is actionable for stock investors. The material you receive on this site is anchored to real decisions we are making with our own portfolio. If it’s not impactful, we will not write the content or produce the video. This is different than other sites that simply fill content pipelines to “get something out” so their customers are satisfied. This is why we believe we offer some of the highest quality content across research sites — the content is being used for real investment decisions and there is zero fluff.
Background on Netflix in 2022:
Below is a brief overview of Netflix’s ad opportunity before we discuss the specific catalysts coming in Q1 and Q2 of 2023.
Netflix’s stock was down a staggering 71% this year. The stock’s fall from grace included dropping its FAANG-status as the company’s market cap has decreased from $300 billion to $75 billion. This was partly due to the company reporting it lost subscribers for the first time since 2011, with a loss of 200,000 subscribers in the most recent quarter. The company also forecast a decline of 2 million paid subscribers for the second quarter.
The earnings report caused the stock to lose 35% of its value over night. Bill Ackman sold his Netflix shares for a loss of $450 million in three months, with some critics goading him for his decision while others congratulated Pershing Capital for being bold and walking away from a losing position.
Meanwhile, our focus was elsewhere.Meanwhile, our focus was elsewhere.
In our Netflix coverage following its earnings report, we had stated “we can’t help but salivate” over which ad platform Netflix might choose to power ads to hundreds of millions of viewers. Primarily, this is because we have consistently discussed why the trend of CTV ads has plenty of runway even during an epic market selloff.
In other words, I would argue the day that Netflix’s stock price dropped 35% was consequently one of the most important days in the company’s history in terms of its chances for a boost in revenue and a renewed uptrend.
Patience, though, will be required, as Netflix has work to do. We prefer to get in front of the market instead of wait for the market to put the pieces together on what this global juggernaut is setting up to do.
The path to adding more subscribers is finally clear for Netflix and will pay off in 2023 especially during times of inflation or muted consumer confidence as it drives down household costs across fragmented subscriptions.
Ad-Supported Video on Demand (AVOD)
The acronyms AVOD and CTV ads (connected TV) should be added to your investment vocabular as this is the most investable trend in media today. Ad-supported video on demand (AVOD) refers to streaming subscription services that supplement with ads or streaming services that are entirely ad-supported. CTV ads are often synonymous with AVOD, however, it can also refer to Broadcast Video on Demand (BVOD) for when live broadcast content is streamed over the internet.
Mobile ads have flatlined yet AVOD is in its early stages of growth. This will become especially apparent during times of economic hardship as subscribers trim back on their many streaming subscriptions and turn to ad-supported content to drive down costs.
We had written an editorial a year ago on Forbes called the Crucial Difference between Netflix and Roku Stock. At the time, we pointed out that: “we believe first-party data for connected TV ads is a significant trend moving into 2021 and an important distinction from subscription-video on demand (SVOD) […] Ad-Video on Demand (AVOD) has an approximate ten-year runway as the trend began taking shape when Roku launched its ad platform in late 2018/early 2019. There were AVOD players in the space before this, but the budgets were negligible.”
Why was mobile capable of capturing such large budgets? Because of first-party data which traditional TV lacks. CTV ads are also capable of capturing large budgets because advertisers are willing to pay more for targeted ads.
Due to your viewing habits, Netflix knows a lot about you. Selling this to advertisers emulates more closely the level of ad demand a company like Facebook would see, who also powers ads with behavioral-level data.
The Market Mistakenly Thinks Netflix is Saturated
There is immense opportunity when a stock investor can prove the market is wrong about a company. With Netflix, a leading line item that investors must be confident on is that the company can grow its user base.
Netflix is tied with YouTube on total viewing time but there’s a catch. Netflix has only 223 million subscribers and YouTube has over 2 billion due to its digital video app. For most purposes, these two are not truly competitors, rather YouTube is a hybrid between a social mobile app and a CTV streaming service. YouTube TV has a mere 5 million subscribers.
What matters most to advertisers is time spent watching content and Netflix clearly wears the crown in the streaming wars.
Netflix does not believe their market is saturated, rather that advertising opens up a new, sizable addressable market. The company offered the following information: “In the 190 countries in which we operate, our $30 billion-plus of annual revenue is roughly 5% of the combined estimated ~$300 billion pay TV/streaming industry, ~$180 billion branded advertising market, and $130 billion consumers spend annually on gaming. So, we believe that we have a long runway for growth if we can continue to improve our offering steadily over time.”
We had stressed in our previous coverage that the lagging discussion on Netflix is that there was a subscriber decline in Q1 of 200,000, excluding Russia and a subscriber decline of 970,000 in Q2.
While critics believe this is due to saturation, it’s much more likely the decline is coming from a pull forward due to Covid as all media stocks – both streaming and social media – demonstrated outsized audience growth through Q2 2021.
Therefore, Netflix is lapping some tough quarters for audience growth comps and announced in April their plan to have an ad tier to help combat this.
Management’s willingness to combat subscriber falloff with an ad tier is why we entered in August prior to the subscriber beat.
Another important point we had highlighted was there is already evidence that Netflix is taking more market share than its peers. In fact, Nielsen raised Netflix’s market share earlier this year for engagement to 7.7% from 6.6%, which puts Netflix in the lead over any other competing subscription service.
Q3 Netflix Earnings Results:
Netflix comfortably beat earnings estimates with 2.4M net adds compared to 1M to 1.2M expected. Consensus for next quarter was 4.1M with Netflix guiding for 4.5M. This will be the largest account growth since Q3 2021.
Why Q1 is Critical for Netflix’s 2023 Stock Trajectory
There are two chess moves on the table that can help propel Netflix to become a leading stock in 2023. The first is the moment when Netflix simultaneously cuts off password sharing while having the ad-supported tier available to the customers being cut off from sharing accounts.
Netflix has an estimated 100 million rogue subscribers who are sharing passwords with friends and family members. It’s this cohort of 100 million password sharing fans that the ad-supported tier is squarely aimed at converting.
Let’s look at what management has said:
“Finally, we’ve landed on a thoughtful approach to monetize account sharing and we’ll begin rolling this out more broadly starting in early 2023. After listening to consumer feedback, we are going to offer the ability for borrowers to transfer their Netflix profile into their own account, and for sharers to manage their devices more easily and to create sub-accounts (“extra member”), if they want to pay for family or friends. In countries with our lower-priced ad-supported plan, we expect the profile transfer option for borrowers to be especially popular.”
Translation: In early 2023, Netflix is going to cut off the 100 million and offer them two options: 1) pay to be an extra member on the family plan or 2) export your profile, keep your viewing data, and pay for a lower priced ad-supported plan.
Patience from investors is required because Netflix is the first tech company in our universe to report every quarter. Netflix will not have this rolled out for the Q1 guide coming in mid-January but we do believe it will show up by the full quarter Q1 report in April with an informed guide for Q2.
The Second Chess Move is called The Upfront Season
Every year, advertisers and agencies negotiate and sign year-long deals with TV networks as well as connected TV platforms to commit to spend an agreed amount on ads. They call this the upfront season. Last year, NBCUniversal clocked $7 billion in the upfront season and Roku grew it’s upfront spend from$500 million to $1 billion.
The 2023-2024 upfront season will take place in the late Spring and early summer of 2023.
Netflix is a $30 billion company and so something along the lines of a $7 billion upfront may seem small. However, if you go back to the Nielsen pie chart that shows viewing time, you’ll see that NBCUniversal doesn’t even make the list, representing less than 1% of viewing time. Disney makes the list at 1.9% and had a $9 billion upfront season.
I won’t give you an exact number on what this upfront season will pull for Netflix as their AVOD subscriber base will not be mature yet. Meaning, it may be more in the category of the lower percentage streaming services on the ad-supported side. What matters is that even a $7 billion or $9 billion up front (let’s think positive here based on the comps) would result in a 20%+ boost in revenue.
If the two chess moves line up, they will both be a strong statement the market is wrong on Netflix’s saturation. the market is wrong on Netflix’s saturation.
Netflix is trading a historic low on both its sales valuation and earnings-based valuations. However, is now the time to buy or is it better to wait for a renewed uptrend? We fully believe the single most important time to buy is when the broad market participates (Nasdaq, S&P 500).
Next week, Knox Ridley will record a special Netflix webinar for you as part of your Essentials package going over Netflix’s technical setup in detail so our Essentials Members are as informed as possible.
As you know, we can’t control the market – what we can do is tell you what we do with our money including when we buy/sell/add/trim and why.
Look for that YouTube video published on our Essentials site next week.
Thank you for being a Founding Member to our Essentials Plan. We officially launched the plan last week are excited for this new tier to our analysis.
Disclosure: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. The I/O Fund owns Netflix at time of writing.
Q3 was strong in terms of beating on the top and bottom line whereas the Q4 guide was very weak.
In the September quarter, Roku reported revenue of $761 million compared to $696 million expected. This represented 12% growth compared to 2.5% growth expected. On the bottom line, EPS of ($0.88) beat estimates of ($1.29). The company was expected to report adjusted EBITDA of ($75M) and instead reported ($34.4M)
In Q3, Platform revenue was up 15% and player revenue was down (7%). Strangely enough, Player revenue was stronger in Q3 compared to the two previous quarters when it was down (19%).
ARPU grew 10% to $44.25 and the company added 2.3M users. These two key metrics were strong compared to what other ad-tech companies have reported.
Despite the Q3 beat, the Q4 guide was troublesome. Roku was expected to report revenue of $906.6M for growth of 4.77% yet came in over $100M low with a guide of $800M. This represents growth of (7.6%). The adjusted EBITDA guide of ($135M) compares to Q3 adjusted EBITDA of ($34.4M).
I believe this statement is Roku’s admission they got the timing wrong on increasing opex:
“Our significant Q3 OpEx (operating expense) YoY growth was largely the result of robust hiring in late 2021 and early 2022 when we believed that the economy was emerging out of pandemic-related disruptions, and we were accelerating investments that we had previously deferred. We started taking steps to significantly slow the rate of hiring and other OpEx growth in late Q2, however, it will take a few more quarters for this YoY OpEx growth rate to normalize. We will continue to slow headcount and OpEx growth in response to the macro environment, while continuing to make disciplined investments in our most strategic projects that will increase both the market penetration of our platform and long-term customer value.”
Roku believes the scatter market is dropping quickly and they clearly stated it was not unique to them and was industry wide. They stated that advertisers lack confidence in the economy. This is affecting the Q4 guide on revenue. What you see below has essentially worsened for Q4, per Roku’s management.
Here is what was stated:
Anthony Wood
This is Anthony. So we are seeing – like Steve said, there's a lot of uncertainty. It's hard to say exactly what's going to happen in Q4, but we are seeing signs that Q4 is going to be worse in terms of the ad market than Q3 was, I mean we're seeing lots of big categories, pull back telecom, insurance. We're even seeing telemarketers planning on reducing their spend in Q4.
I think traditionally, Q4 is a very – the holiday season is typically the strongest period for a lot of companies, including Roku. But companies are pulling back their ad budgets because they're uncertain if there will be a recession or not. And so a lot of Q4 ad campaigns are being canceled. And so that's why I think this holiday season, given the unique set of environments and characteristics, is probably going to be different than the typical holiday season.
Conclusion:
Due to EBITDA issues, which management has stated “it will take a few more quarters for this YoY OpEx growth rate to normalize” we are looking for an exit. It will be Knox’s choice on how/when this happens given the valuation is already quite low.
When Roku opens tomorrow, it will be a 2 P/S. This is the type of valuation a company has that is going bankrupt or has a near-zero risk. Meanwhile, Roku has $2.02 billion in cash and is reporting ($91.9M) in free cash flow in the first 9 months. It’s unlikely Roku will need to raise next year or the year after. It’s also not isolated in its issues with ad budgets as we’ve seen the concerns around Q4 echoed across nearly every ad-tech company that has reported. The 2 P/S is more reflective of a company that needs to raise cash soon or a company that may go out of business or even a company that has inherent issues not reflected widely in its industry.
I believe we will buy this company again in the future if active accounts and ARPU continues to grow. These are leading indicators for media companies, and Roku will be on our radar quarterly to see when adjusted EBITDA gets sorted.
Please note, we will be writing up pre-earnings notes on the forum for the stocks we own. You can access Netflix’s pre-ER here.
Highlights:
No major flags in the earnings report
For Q3, the company beat on subscribers, revenue, operating margin and free cash flow
Q4 guide is in-line across the board. Next quarter will see lower operating margin due to seasonality
The new ad supported tier rolls out in two weeks; we believe this is an underappreciated catalyst. The ad supported tier will monetize at the same rate or even higher than legacy tiers with $6.99 monthly subscription combined with $10 ARPU over time (needs time to ramp to reach this ARPU).
High probability of revenue acceleration from ad tier combined with improved cash profile combines for an attractive stock for 2023. Not only will Q4 and Q1 provide some clues around the new trajectory but we will also keep an eye on the upfront season in April/May.
The company is still trading well below its 5-year historic valuation
Financials:
Netflix had a sizable beat on subscribers and the stock is breathing a visible sigh of relief as the company comfortably beat with 2.4M net adds compared to 1M to 1.2M expected. Consensus for next quarter was 4.1M with Netflix guiding for 4.5M.
The largest contributor to growth is the APAC region at 1.4M new subs followed by EMEA at 0.6M subs and LatAm at 0.3M subs. United States and Canada reported 0.1M subs whereas in the past this region saw churn.
Revenue was up 5.9% compared to 4.7% expected. On a constant currency basis, revenue grew 13% YoY. There is a miss on revenue for next quarter due to FX headwinds. The company guided for 1% growth versus 3.5% growth expected. On a constant currency, Q4 is expected to grow 9%. This creates a slight miss on FY2022 revenue at $31.5 billion guided versus $31.6 billion expected. As was the case last quarter, the market is willing to overlook FX headwinds.
As we’ve covered in the past, I continue to believe revenue growth is too low for the upcoming ad tier and the roll-out of how to phase out password sharing.
Here was the update from Netflix regarding the new ad-supported tier from the Investor’s Note:
“As we’ve been discussing over the past few quarters, improving our pricing strategy is an important near-term focus. Last week, we announced that we’ll be launching an ad-supported subscription plan on November 1 in Canada and Mexico; November 3 in Australia, Brazil, France, Germany, Italy, Japan, Korea, the UK, and the US; and November 10 in Spain. Cumulatively, these 12 markets account for ~$140 billion of brand advertising spend across TV and streaming, or over 75% of the global market.
To start, we’re keeping it simple by offering one low-priced ad plan – Basic with Ads – at a price that’s 20%-40% below our current starting price. So in the US, for example, Netflix will now start at $6.99 per month (compared to $9.99 today). The Basic with Ads plan will have ~5 minutes of advertising per hour, frequency capping and strong privacy protections.”
Per our Pre-ER notes, analysts are expecting $10 ARPU from the 5 minutes of advertising when it’s fully rolled out, which puts this tier on par with other tiers for revenue growth.
Password sharing is being leveraged by 100 million viewers. Here was Netflix’s update on how they plan to monetize these users:
“Finally, we’ve landed on a thoughtful approach to monetize account sharing and we’ll begin rolling this out more broadly starting in early 2023. After listening to consumer feedback, we are going to offer the ability for borrowers to transfer their Netflix profile into their own account, and for sharers to manage their devices more easily and to create sub-accounts (“extra member”), if they want to pay for family or friends. In countries with our lower-priced ad-supported plan, we expect the profile transfer option for borrowers to be especially popular.”
Operating margin came in higher than expected at 19% versus management’s previous guidance of 16%. There was a 4% decline from the previous year due to FX. The company is guiding for an operating margin of 4% to 8% next quarter, or 10% on a constant currency (CC) basis. This is due to seasonal spending on marketing and content, and on a CC basis, will be higher than last year’s 8.20%.
The revenue and operating margin beats flowed through to a net income beat of $1.39B compared to $961M expected. Operating cash flow was at $557 million and free cash flow came in at $472 million. This means management has made good on its promise to see $1 billion FCF this year. It also implies FCF could be ($287) million next quarter as we are at $1.287 billion for the year.
For our position, this being reiterated regarding FCF next year is key: “We continue to expect FCF of +$1 billion for the full year 2022, plus or minus a few hundred million dollars and substantial growth in FCF in 2023 (assuming no further material appreciation of the US dollar).”
There was a minor improvement in Netflix’s cash and debt levels with cash increasing to $300 million to $6.18B with net debt of $7.98B. This is down from net debt of $8.5B in the previous quarter.
The company had a big beat on EPS of $3.10 versus $2.17 expected. This included a $348 million non-cash unrealized gain from FX remeasurement on Euro denominated debt.
A Few More Points:
Netflix does not believe their market is saturated, rather that advertising opens up a new, sizable addressable market. The company offered the following information: “In the 190 countries in which we operate, our $30 billion-plus of annual revenue is roughly 5% of the combined estimated ~$300 billion pay TV/streaming industry, ~$180 billion branded advertising market, and $130 billion consumers spend annually on gaming6. So, we believe that we have a long runway for growth if we can continue to improve our offering steadily over time.”
Early next month, Netflix goes live with its new ad-supported tiers. Netflix has been able to launch its ad platform within 6 months of the announcement. The announcement earlier this month was good news for Netflix investors who entered early despite many institutional analysts predicting it would be six months into 2023 before it rolled out.
Here is what we had stated: “It’s certainly feasible that strong ad partners can get Netflix’s global rollout accomplished in a year’s time – which is why I believe we will hear who Netflix has chosen as soon as Q2 earnings or by Q3 earnings. I don’t think we will need to wait until Q4 2022 as testing is likely to happen sooner.” — this timing is important not only because as investors we don’t have to wait too long to get a glimpse of the impact of the new ad tier (Q4 earnings) but also because this sets up Netflix for next year’s upfronts.
I foresee Netflix doing quite well during next year’s upfront season, which is when prepaid inventory is contracted between high-paying brand advertisers and media companies. Assuming there are no changes, we fully expect to hold our position well into this time frame (Q2 2023). This is primarily because Netflix has very high-quality content and because Pay TV advertisers are in some pain right now with the need to find strong content to place ads.
On the earnings call, management discussed the “collapse of Pay TV” stating they had underappreciated the effects that the Pay TV migration is having on advertisers. They specifically pointed to the 18-49 year old demographic.
Also on the earnings call, management stated they are not expecting any material financial impact this quarter from ads due to the intra-quarter launch. However, over time, the company expects the ad tier to be margin accretive. My personal take is that it can produce a nice boost in subscribers and this glimpse is going to be one that I am very much looking forward to. Management has no visibility at this time as it launches in two weeks so it’s prudent to not guide beyond the visibility they currently have.
Management could not be more clear in their Investor’s Letter or on the earnings call that having the streaming best content in the world is their #1 strategy for success. That is one reason I track statistics such as Netflix’s share of TV time very closely. There was discussion that Netflix fully accepts the cost of the creating content and is instead more focused on getting more value from $1 billion in content than their competitors.
Conclusion:
Given the new ad tier and the popularity of password sharing, I believe Netflix’s revenue estimates over the next few quarters and next fiscal year are quite low. When you combine this with a new cash profile for Netflix, this stock may be entering the perfect storm. Netflix has only been FCF positive in 2020, and has not been FCF positive in any other previous year. We will now be entering two years of FCF positive between 2022 and 2023.
According to Fubo’s recent earnings call, a free-to-play app is scheduled to launch in Q3 and a sports betting app is scheduled to launch in Q4. As we stated over the past two quarters, owning a live sports audience will convert for a lower customer acquisition cost and better lifetime value on both free-to-play fantasy and sports betting compared to the competing sports betting companies who must find media partners. Fubo management refers to this as a flywheel, and we agree there is substantial potential for a flywheel effect specifically due to the enthusiasm of sports fans.
Below, we review the company’s record-breaking audience growth, the much-debated gross margins, the likelihood that Fubo will have to raise money (and when this might occur), plus what we hope to see in Q3 from the company.
Perfect 10.000 on Audience Growth
We had made the point that short sellers were exploiting the one-time event of live sports being canceled last year. The results of a live sports comeback are seen clearly in Fubo’s results with 196% growth year-over-year in revenue to $130.9 million, beating analyst estimates by $9.46 million. Subscription revenue grew by 189% YoY to $114.4 million and advertising revenue grew by 281% YoY to $16.5 million.
The most important number was the sequential growth, as Fubo certainly had tailwinds from low Covid comps. In this case, sequential revenue grew QoQ by 9%. This is key because Q2 is a seasonally low quarter for sports. My first guess was that this was due to the NBA playoffs. However, according to management’s earnings call, it was due to “engagement reach[ing] record highs as we added exclusive sports streaming rights with CONMEBOL and began beta testing predictive, free-to-play gaming integrated into our streaming platform ahead of our expected launch this fall.”
Going into Q3, we had published Apptopia data showing that the company was already illustrating strong downloads and DAU growth, likely from the Olympics. The return of sports events is a major boost for the company’s year-over-year top line growth, yet the sequential strength is where Fubo provides a glimpse of a more sustainable trajectory. The management now expects the fiscal year 2021 revenue from $560 to $570 million, which represents an increase of 116% at the mid-point. Previously, it had estimated revenue to be $520 to $530 million.
The monthly average revenue per user (ARPU) increased by 30% to $71.43; this was one of the key drivers for the increase in margins. The adjusted contribution margin came in at 8.3%, up from -4.4% in the same period last year. This is a step in the right direction, although there’s more work to be done on profitability before we see institutional interest pick up.
Fubo is in a high-growth phase. It’s not uncommon for a rapidly growing company to show losses; however, we want to see a deceleration of these losses as the company scales. Fubo’s gross losses shrunk from $4 million in Q1 to $2 million in the recent quarter. Considering that their gross losses were $18 million in the year-ago quarter.
It’s also important to point out that Fubo’s cash balance of $400 million supports about 9 quarters of operations ($406 million in cash / $47 million in Q2 adjusted EBITDA). Therefore, it’s reasonable to expect the company may raise money in the near term, which can dilute shareholders. As an investor, I am not too concerned about this (Tesla did it many times), although my preference would be that Fubo raises cash in Q1 or Q2 after the launch of its betting app so the market can understand and assess the company’s full potential.
Source: Fubo Investor Relations
As seen above, the advertising revenue growth was the best ad revenue quarter in the company’s history. Advertising ARPU grew by 62% YoY to $8.70, up 22% on a QoQ basis. The company has a goal to double the advertising revenue this year.
My main contention is that as long the company can grow its audience, the market will reward it in the long-term. Our previous analysis was focused on the microtrend of live sports OTT and we think these users are stickier than Wall Street realizes.
Source: Fubo Investor Relations
The company has successfully been able to increase its paid subscribers. The customers continued to prefer fuboTV over legacy pay TV services due to the unique customer experience, innovative product experience, and bundled wide premium content. The company added 91,291 net subscribers in the recent quarter bringing the total to 681,721. This beat the analysts’ estimate of 602,000 and the management guidance of 600,000 to 605,000.
The company also increased the full-year subscriber guidance to a range of 910,000 to 920,000, from previous guidance of 830,000 to 850,000.
It’s crucial to not only grow the audience but also retain them. The company has been able to improve the churn rate by 203 basis points year-over-year. The company’s investment in subscriber intelligence and insights helps to lower the churn rate. Management points towards its first-party data for reaching household income above $85,000 and mainly males. This can help the company reach its target of $35 CPMs with current CPMs in the low $20s.
Fubo users streamed over 245 million hours which is an increase of 148%. The company’s monthly active users (MAUs) watched 134 hours per month on average, demonstrating strong customer engagement – we hope this engagement translates well for the free-to-play and sports betting app.
Improving Bottom Line Already with Sports Betting on the Way
The company’s margins are improving with increasing revenue and the management expects this trend to continue. Operating expenses as a percentage of total revenue were 155% compared to 252% in the Q2 2020. Subscriber-related expenses, primarily include content cost, accounted for 92% of total revenue compared to 120% in 2Q 2020. Sales and marketing expenses were 16% compared to 18% in Q1 2021.
We think the market has over-penalized the company for its gross margins with evidence that DraftKings’ sales and marketing costs exceed Fubo’s subscriber costs & broadcasting and transmission fees (when we compare operating margins). Meanwhile, DraftKings trades at a 300% higher valuation. Therefore, if Fubo can illustrate its sports betting capabilities, it should fetch a higher valuation.
Net loss per share was ($0.68) compared to ($2.08) in 2Q 2020. Adjusted net loss was ($51.3) million compared to ($51.5) million in the 2Q 2020. The adjusted EBITDA improved from (95%) to minus (36%) in Q2 2021.
The launch of the company’s Sportsbook is an important driver of the overall strategy as it aims to develop a flywheel that turns passive viewers into active participants. The monetization here can be substantial if Fubo sees cohorts spending more than $100 on their platform. As stated, the income of over $85,000 and persona of their viewing audience lends itself perfectly to sports betting, which is men watching sports. You really can’t get a better audience than that to target a sports betting app.
Fubo Sportsbook will represent an industry-first live sync integration between video and the Sportsbook. Recently, the company has released a short video presentation that is worth watching. The short sellers accused Fubo of buying a headline with Balto Sports, which was surprising to me to find out these analysts don’t know that YCombinator often incubates small teams. This is common knowledge in tech.
The unique feature is that FuboTV’s sports betting app will allow its users to watch and bet from the same platform. Fubo announced last month that it had completed a market access agreement in Pennsylvania with The Cordish Companies. Currently, the company has market access deals in 4 states, namely, Pennsylvania, Iowa, New Jersey, and Indiana.
FUBO commands about 6% of the virtual MVPD space. So, it’s very likely that over the long-term, the company is aiming between 3% and 6% of the total betting TAM. Right now, sports betting is expected to be a $218 billion market globally.
In the words David Gandler, “The secular decline of traditional television; the shift of TV ad dollars to connected devices; and online sports wagering, a market opportunity which we believe complements our sports-first live TV streaming platform.”
Analyst views
Evercore ISI analyst Shweta Khajuria responded to the results by repeating her Outperform rating and lifting her target price to $40 from $33.90. “We continue to view Fubo as a key beneficiary to three industry trends,” she writes in a research report. “Cord cutting, as viewers shift away from linear TV to streaming; mix-shift of advertising dollars from linear TV to [streaming]; and growing demand for online sports betting.”
Likewise, Oppenheimer analyst Jed Kelly reiterated his Outperform rating, while lifting his price target to $42 from $32. Kelly cited stronger-than-expected subscriber growth, driven by a “strong sports calendar,” and improved churn. “Most OTT providers have focused on low-cost entertainment offerings, forcing sports fans to remain tethered to pay TV,” he writes. “FuboTV is exploiting the opportunity in sports by providing a comparable viewership experience at a lower cost than its pay TV counterparts.”
What’s next for Q3
We have already published Apptopia data that shows July was strong in terms of audience growth. You can view the full article on Forbes here.
Source: Apptopia
Also, the company’s exclusive rights to South American World Cup Qualifiers is a game-changer as it helps to solidify the company’s brand ahead of next year’s FIFA World Cup. The company was also able to increase the number of consumers in the recent quarter through the launch of LG Smart TVs. It has also partnered with Vizio to launch on their popular SmartCast platform.
Additionally, with the NFL football season, we would expect the growth in the DAUs to continue in the second half of the year. If the company can launch the free-to-play soon, then we may see the flywheel effects of this as soon as Q3.
I/O Fund has partnered three times now with Apptopia to deliver pre-earnings numbers – twice for our free newsletter subscribers and once for premium. Stay tuned for our next pre-earnings coverage next quarter.
As stated in the article, Beth Kindig and I/O Fund currently own shares of FUBO. This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.
Royston Roche contributed to this article.As stated in the article, Beth Kindig and I/O Fund currently own shares of FUBO. This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.
This article was originally published on Forbes on May 21, 2021,12:31am EDToriginally published on Forbes on May 21, 2021,12:31am EDT
FuboTV has been dismissed by quite a few analysts and investors for its negative gross margins. This dismissal, that leans heavily on the lagging financials, is reminiscent of the many times that tech stocks have been misunderstood.
As a tech analyst who is trained in product, I see a sizable runway in live sports OTT and sports betting with Fubo having key advantages over DraftKings. The management has to execute, and while the market calls this speculation, I call it a product road map.
First, FuboTV must continue to grow its audience. I made the argument that this is the most essential piece over the coming quarters when the shorts attacked this company. The bearish reports ignored the most important piece to a media company: audience growth. Fubo has handily overcome the challenge of growing its audience year-over-year regardless of the seasonality in sports. The last two quarters could not have gone better in this regard.
Second, FuboTV must execute on launching a sports betting book. This is easier than the public markets think as Fubo has every required ingredient. Most importantly, competitors such as DraftKings do not have all of the essential ingredients that FuboTV has, and we expect Fubo will see a healthy uptake for this product launch.
Financials do matter, of course, and as mentioned Fubo is the ultimate challenge for those who rely on financials alone and ignore product. This is because live sports were canceled last year. Short seller reports that dissect a live sports company following covid are exaggerating the effects of a lagging, one-time event. Forward-looking, we have an ad rebound in digital ad spend from 5% last year to 17% this year. Plus, the World Cup is on deck (and hopefully the Olympics) which bodes well for point #1 – audience growth.
The more popular bet is to go with DraftKings. However, DraftKings is a well-known story that is fully priced. We like the risk/reward of Fubo better due to the fact that this particular company is capturing the live sports OTT trend and will be able to convert high-value users for the sports playbook because they own their audience.
Audience Growth
FuboTV put quite a few triple digits on the scoreboard in the last earnings report, which was the strongest first quarter in company history. Due to the seasonality of sports, Q1 is typically lighter in terms of growth for Fubo, yet the company reported sequential revenue and subscriber growth.
GAAP of -$0.59 missed by $0.03 and included -$0.02 from expenses associated with the launch of sports betting and -$0.02 due to paying off debt related to senior convertible notes.
Prior to the earnings report, we reached out to Apptopia to check the app data on Fubo. Apptopia is a provider of competitive intelligence on mobile applications.
With the information, we issued the following note to our subscribers on April 20th: "Fubo guided to end Q1 with subscribers of 520,000 to 530,000, representing growth of 82% YoY at the midpoint. Data from Apptopia shows that Fubo ended March with approximately 585,000 daily active users (DAU) versus the Q1 guide for 525,000 paid subscribers at the end of Q1Fubo ended March with approximately 585,000 daily active users (DAU) versus the Q1 guide for 525,000 paid subscribers at the end of Q1."
On May 11th, the company went on to report 105% year-over-year growth and 8% sequential growth for 590,430 MAUs with subscription revenue increasing 131% YoY to $107.1M. Therefore, we were within 6K subscribers on the estimate.
Net subscriber additions were approximately 43,000 versus a loss of 28,000 in the same quarter last year, which the company achieved while reducing sales and marketing as a percentage of revenue. Monthly ARPU increased 28% year-over-year and advertising ARPU was up 57%.
Paid and trial users streamed more than 228 million hours, up 113% YoY. MAUs on average watched 129 hours per month, up 8% YoY.
This is the second time we accurately tracked Fubo’s audience growth with Apptopia data. The first was when we pointed out during a flurry of short reports that the audience growth in Q4 was quite healthy.
According to Q2 data from Apptopia, as of May 12th, Fubo’s growth remains strong on a year-over-year basis. We are currently seeing app downloads tracking at 181% YoY against weak Q2 ’20 comps due to the cancellation of sporting events last year.
Please note that we have extrapolated the data through May 12th to the end of Q2 and we were roughly 46% through the quarter as of last week.
Note: this data is not for earnings calls and readers must do their own due diligence. We are simply sharing information from a mobile analytics firm, which is one of the many channel checks we do when looking at tech stocks.
Fubo is tracking for a sequential QoQ decline in downloads in Q2, but it should be noted that Q2 is historically a weaker quarter than Q1 for Fubo, as evidenced by 2019 pre-pandemic data.
We are seeing similar trends in average daily active users (DAUs) thus far through Q2, with Fubo on pace for 172% YoY growth and a modest decline sequentially.
Total time spent in the Fubo app is currently on pace for a large YoY increase of 237%, with another modest decline sequentially from Q1. This helps support how sticky Fubo’s product is to its audience.
Fubo raised guidance and expects Q2 revenue of $121M at the midpoint, up 174% YoY, versus consensus of $98.37M, and FY2021 revenue of $525M at the midpoint, up 101% YoY versus consensus of $472.69M.
The company also raised guidance for subscribers. For Q2 the company expects 600,0000 to 605,000 subscribers, up 111% YoY and for the full year expects 830,000 to 850,000 subscribers, up 53% YoY at the midpoint.
Live Sports OTT
Not surprisingly, we saw the biggest drop ever in households with cable packages this past year with a record 7.5% decline. Tech Crunch recently stated the 2020 pandemic accelerated the projected cord cutting rate to 31.2 million households last year and is expected to reach 46.6 million households by 2024.
Even more pertinent, according to a survey compiled by Parks Associates, 55% of cable subscribers state that live sports is an important factor in why they are staying with expensive cable packages. That means of the 77.6 million currently subscribing to cable, satellite and telecom packages, 42 million are live sports fans. This is 10 million more than the size of the current cord-cutting audience, which has taken nearly 15 years to amass (circa 2007).
In September of last year, AT&T paid $3.75 billion for the exclusive rights to segments of major league baseball. This is a renewal of prior contracts and is a 65% increase from their prior exclusive price tag. The fact that ATT is willing to pay a 65% premium from their last contract shows the importance placed on live sports.
We can see a similar evidence as to the value placed on live sports with Amazon’s purchase for the exclusive rights to the Thursday night NFL games through 2033 at an astounding $100 billion.
As an investor, I understand FuboTV will not stream every game in every league, and I am aware exclusive rights to various sports may shift through negotiations. In fact, the Tokyo Olympics may be canceled. However, FuboTV is offering me a pure play and the company only needs to corner a percentage of live sports cord-cutters in order to be successful. FuboTV could end up owning 5% of the market or 20% of the market – both look good from this market cap.
When asked about competitors, Anthony Wood of Roku has stated a few times that any cord-cutting is a windfall for their platform. Similarly, I believe that any NFL fans cutting the cord will be a windfall for Fubo.
On that note, Fubo offers comprehensive sports coverage. According to a March 2021 press release, Fubo offers “42 of the top 50 Nielsen-ranked networks across sports, news and entertainment channels,” plus more than 30,000 movies and TV shows on-demand.
It’s also important to note that Fubo has the exclusive streaming rights to the South American Qatar World Cup 2022. When you consider there are 3.5 billion soccer fans globally, suddenly Amazon’s Thursday night NFL deal doesn’t seem so make or break (far from it, Thursday is the least popular night).
Sports Betting
In the United Kingdom, sports betting is a $20 billion industry today. There are projections that sports betting will be a $155 billion industry by 2024. To find an opportunity with exposure to this market at a $3 billion market cap is worth a closer look.
Fubo acquired Balto Sports on December 1st in the company’s first strategic move to launch free-to-play games this year. Balto Sports develops tools and contest automation software for users to organize and play fantasy sports games and is a Y-Combinator graduate.
There was criticism from the short sellers that FuboTV had bought a headline. Yet, there is nothing unusual about a stealth product that needs to attach the technology to an audience. In fact, Fubo plans to beta test its free gaming experience in the next few weeks and this rapid release is likely due to the incubation period that Balto Sports underwent beginning with its time at Y Combinator.
In Q1, Fubo acquired Vigtory, a sports betting and interactive gaming company, for $37.2 million. The company was founded in 2019. The company is co-founded by a former gaming executive at MGM Resorts and has regulatory approval in New Jersey. Notably, the app has not gone live which is reflected in the price.
Fubo Sportsbook is expected to launch in Q4. The company has $400 million cash and is planning to spend less than $50 million to launch sports betting, per the Q1 earnings report. Fubo plans to deliver streaming and gaming in one data analytics platform, offering users a seamless experience. We expect the company will see lower customer acquisition costs as a result of owning the audience. Fubo’s CEO, David Gandler, said during the most recent earnings call that 30% of users are willing to participate in free-to-play, according to surveys done on the platform, while 22% of paid subscribers are willing to place bets on Fubo.
Despite short sellers not seeing how or why a sports betting app could merge with live sports content, we now see DraftKings partnering with Sling/DISH. I guess content and sports betting does go together, after all (yes, I’m being sarcastic!) It’s surprising that the critics said it cannot be done despite Sky Media having the most successful sports betting model globally.
From purely a user acquisition standpoint, in-app ads with your own content is nearly frictionless and you have a mountain of data to effectively target. Fubo’s ability to gather audience data and appropriately market them, with a deep understanding of preferences, is an advantage that is currently understated. Fubo has first-party data and can specifically tailor an experience, which will either result in higher ARPU from betting or higher ARPU from ad spend.
DraftKings, meanwhile, has partnered with the number six over-the-top provider, DISH Network/Sling. We think DraftKings sees the potential threat in Fubo having access to first-party data and a closed-circuit loop for user acquisition in sports betting. Notably, DraftKings faces friction here when introducing a new brand name that is not DISH/Sling. Essentially, whatever DraftKings can do with the #6 partnership, Fubo can do better. For example, Fubo can give free sports content away to high value users who spend over $100 on sports betting and offer other rewards that are not possible unless you own the audience. The CEO talks about this here.
Fubo is already on par with DraftKings in terms of ARPU and has not added sports betting yet. These numbers show that with sports betting, Fubo could potentially see $100 ARPU or greater.
Notably, DraftKings spends an exorbitant amount on sales and marketing at 82% of revenue. This reflects the cost of acquiring users when you don’t own an audience. It’s interesting, of course, that the critics of Fubo do not look at the $1.5 billion in net losses that DraftKings accrues on its bottom line. On a forward basis, DraftKings is estimated to report ($2.82) EPS for fiscal year 2021 compared to Fubo’s estimated ($1.96) EPS.
Notably, despite having 1/3 the revenue and audience size of DraftKings, Fubo is trading at 1/6 the market cap. It’s not hard to see the potential here, and clearly a healthier bottom line isn’t the reason that DraftKings trades at a 300% higher valuation.
Conclusion:
We officially recommended FuboTV in October and did not hesitate to challenge the shorts in January before the last two earnings reports confirmed the company’s strong growth. We specialize in spotting opportunities in tech growth based on product and we were the first analyst (anywhere) to recommend Roku, we were very early to call Nvidia the future for AI during the crypto bust nearly two years before AI drove the data center segment, and we said Zoom’s product would go viral six months before covid.
We are not concerned with broader market weakness that affects short-term price movements. Instead, we look for companies that are executing on a product road map, are capturing a microtrend and are able to scale. Not only do we think Fubo can do this, but we think Fubo will overtake DraftKings in the next 2-5 years.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
When Beth Kindig first wrote about Roku in 2018 (here and here), sentiment towards this then-unpopular stock was not in line with her primary thesis. At best, investors were hesitant. The primary arguments against her thesis were: 1) Roku will get eaten alive by Big Tech, 2) The company is undercapitalized to expand, 3) It’s a glorified hardware play, 4) Roku has no moat.
Here are some examples of the comments made on her analysis back in 2018, which characterized the prevailing sentiment at the time:
“ROKU's model doesn't make money. The minute they try to force others to pay a fee, Google's android system will take their customers. And don't forget, Google, Amazon and Apple have voice control of the tv and can search the web for weather and sports. ROKU cannot beat these big boys.”
“The problem I see with ROKU is that they have yet defined how exactly they are going to differentiate themselves from the big boys. If push comes to shove and my amazon prime membership gives me a free firestick or my 5 apple devices means I get 50% off apple TV why on earth would I choose a stand-alone platform? Assuming they will be able to drive margins up through advertising is a tough sell for me.”
“I love Roku, but right now, it is a hardware company on par with Sonos, while Netflix is a content provider that is spending $12bn on content. Netflix needs to be looked at as a tech company though.”
After the March 2020 selloff, hesitation resumed around the Roku Channel and the company’s earnings. Investors now complained that Roku’s earnings were moving in the wrong direction due to lower margins and its OTT channel was no competition for the already popular and crowded space in OTT.
Today, some investors are worried that the stock’s best days are behind it. Below we reexamine our long thesis for Roku, and look at the technicals to determine what might be next for the stock.
The Future of Connected TV
Beth firmly believes Roku is benefitting from a trend that has more room to run: OTT and Connected TV Ads. In the U.S., connected TV ad spending is projected to increase from $8.11 billion this year to $18.29 billion in 2024, according to eMarketer.
Normally, it would be a concern that the overall growth is declining – yet Roku owns the majority of programmatic connected TV market with 46% of ad spend on Roku connected devices. This is followed by about 10% market share Samsung, Apple and Amazon each. There is also a 47% increase in Roku apps that support programmatic compared to 13% in Amazon Fire TV apps.
We believe Roku’s leadership will continue on a global scale, which is not accounted for in these statistics.
The power of these misunderstood microtrends are the reason why many investors missed out on Netflix and can’t understand how a company with such “terrible fundamentals” isn’t collapsing. The market simply doesn’t understand tech and that’s to our advantage.
The OTT/Connected TV ad microtrend is what propelled Roku to a recent high of $486 on Feb.16, and it’s the reason why we identified several buying opportunities within this correction.
We think the strength of an analyst is determined by how accurate their thesis is and the sooner they get the thesis right, the more likely they will continue to get it right. Our original thesis continues to play out today: an agnostic, ad platform that supports the migration of Pay-TV ad dollars through first-party data and a strong operating system. The company is also expanding globally which will be its first attempt at doubling TAM.
I have personally watched Beth hold her original thesis through many bouts of investor doubt and market volatility, as is common with the tech growth stocks she builds a conviction around. Her conviction regarding Roku is how we were able to build the bulk of our position with a cost basis of $28. Her conviction is also how we have been able to weather the volatility to be up more than 1000% as of April 1.
Today, some investors are worried that Roku’s best days are behind it. We believe it’s best to follow the analyst who got it right from the beginning.
Below we go over current technicals, where you’ll see we are well aware of when a stock is extended and also when it’s bottoming, which can provide a good opportunity to build a position. While many traders attempt to sell at the top and buy at the bottom (wash and repeat), we prefer to remain steady with our convictions so our readers trust us and can rely on our convictions. We think trying to squeeze out gains by trading a stock rather than investing can send mixed messages and lowers the accessibility for investors who don’t trade daily. We think it is easier for our readers if our positions are clear and predictable. Very few of our readers have time to trade actively and we want to be a calming force in what can be a turbulent process.
We also take our role seriously in that we disclose our entries and exits in real-time while also being audited by a third-party for full year performance. Below, we illustrate how the I/O Fund works by looking at our current analysis of Roku and the levels we are watching.
Relative Strength
More often than not, the leaders out of a large correction tend to lead in the next leg up. Our system is setup to identify sectors and stocks that exhibit this relative strength to help guide our allocations.
However, there are exceptions. Roku is currently trading under its 50-day moving average, which is hovering around $390. Since the March 5th bottom, Roku has shown weaker relative strength than the NASDAQ100 (NDX). NDX is up ~5% while Roku is down ~5%).
It’s worth noting that Roku is up 1% over the last 3 months, and up 305% over the last year, compared to the NASDAQ100, which is down about 12% over the last 3 months and up about 78% over the last year.
Time frames are important. In fact, the relative strength of the OTT/Ad Tech world has fallen dramatically and is ranked dead last in our screens over the last 4 weeks.
Usually, when we see this level of poor relative strength potentially coming out of a correction, we take note.
However, there is more to this story than a fading trend. Note the ranks and returns of this microsector further out. On a 3-month and 6-month basis, it’s ranked in the top percentile. This includes the recent selloff.
The level of strength is further shown in its YTD returns of around 8%, second only to semiconductors, around 11.5%. Once again, this includes the recent bout of weakness.
What changed was Bill Hwang’s leverage bets in Chinese and American media stocks, which caused a $20 billion forced liquidation of his portfolio. Since then, we have seen a fast to slow unwind of many OTT/Ad-Tech names, which has skewed the relative strength of this microsector.
Prior to the forced unwinding, this microsector was ranked in the top decile of all the tech sectors we track. Because of this, we believe that the opportunity to accumulate specific stocks in this field is unique.
Roku’s Opportunity
Regarding Roku, we outlined the potential 4th wave drawdown and warned our readers of a top forming. On February 11th when Roku was trading around $475, within our forum, we stated
“Note all the sell signals – overbought (check), Demark 9 signal (check), RSI and MACD are showing negative divergence (check). I believe we are coming to the end of a minor degree 3rd wave (pink), which will set up a great buying opportunity.”
We later outlined potential tragets for a bottom on March 1st in one of our premium webinars, by stating “I believe Roku has topped out in its 3rd wave. The 4th wave targets are $335 to $265.”
Again, on March 30th, we reaffirmed our target region by stating “We are square in the 4th wave target box. The $300 level is very strong support. Below that is $275 and then $265. I doubt we tag $265 with the internals where they are.”
Today, we think the evidence supports a bottom in Roku for this correction.
For one, the price hit a wall of support at the $300 region, which is square in the middle of the most probable 4th wave target zone. The CCI, which is a momentum oscillator, tagged the same region we saw at the bottom of the March 2020 low. This is classic uptrend behavior, where we see momentum hit major support or lower while price is higher.
Also, note the positive divergence with RSI, another popular momentum oscillator. RSI is making a lower high while price makes a lower low. The two of these indicators are providing classic bottoming signals.
Learn more about the crucial difference between Netflix and Roku here, and why Beth is confident that Roku’s best years are still ahead. Find out what levels we are watching on NDX to confirm an end to the correction here.
Roku: Levels to Watch
We expect the uptrend to continue to all new highs as long as the $292 low holds. Below $292, and we will look next for a bottom around the $280-$275 region, before the uptrend resumes. We think a test of the 200-day SMA ($265) to be less probable based on how oversold the momentum-based internals are with Roku.
In conclusion, the more probable scenario is that the bottom is in.
Disclaimer: Knox Ridleyand the I/O Fund is currently invested in ROKU. The content in this article is intended to be used for informational purposes only. The author has not received any compensation from any third party or company discussed in this article. The content is the expressed opinions of the author and is intended for educational and research purposes. Any thesis presented is not a guarantee of any particular stock’s future prices, so please factor this risk into your own analysis. It is very important that you do your own analysis before making any investments based on your personal circumstances. The author is not a licensed professional advisor. Please seek counsel form a licensed professional before acting on any analysis expressed in this article, to see if it is appropriate for your personal situation.
This article was originally published on Forbes on Jan 21, 2021,11:20pm ESTForbes on Jan 21, 2021,11:20pm EST
Netflix came in strong with the recent earnings and there is no reason to expect Roku will not also come in strong especially as Covid and stay-at-home orders have accelerated the shift towards Connected TV.
It's easy to compare Roku's roughly 50 million users to Netflix's 200 million and to assume Roku is a much smaller company or lagging the subscription behemoths, such as Disney Plus. This is a mistake as the ad-based video-on-demand (AVOD) market is a newer market than subscription-video on demand (SVOD). The AVOD market is distinguished from SVOD because it's primary driver is pay-TV ad dollars rather than the cord-cutting trend or subscribers.
About $10 billion is spent on Connected TV ads compared to $70 billion on pay television ads in the United States alone. Pay-TV ad spend is now expected to decline by 15% to $60 billion this year due to the postponement of live sports and also due to an increase in cord-cutting from covid.
Here's something to consider – cord-cutters aren't going back to cable, and this places Pay TV ad budgets in a dilemma. These budgets have not cared much for mobile or desktop. Despite the sheer number of data scientists and (frightening) level of behavioral targeting used by Google and Facebook, Pay TV has held on to an impressive level of ad spend at about $70 billion in 2019 compared to $87 billion on mobile. One reason is that advertising on the television is more effective – no amount of data collection can change the video completion rate achieved when you're sitting in your living room.
Although these budgets have not migrated to mobile or desktop in the past, those advertisers now have an opportunity to use data to personalize the advertising while viewers are in their living rooms. Roku and AVOD are the best of both worlds – combining data for targeting and high completion and viewability rates — and this creates a unique market from SVOD. For reference, completion rates on Connected TV ads are as high as 97% with 100% viewability, according to a study by Benchmark.
Below, I review Netflix's earnings as it's essential to keep an eye on exactly how long a winner can run in the OTT media category. I also review Roku's upcoming earnings and what to look for.
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Review of Netflix Earnings:
Netflix surpassed expectations again in Q4 despite many believing the increase in Disney Plus subscribers and HBO Max would weigh on Netflix's subscriber results.
To be fair, the real test is yet to come as dining out, travel, and return-to-work patterns begin to normalize. Netflix is guiding conservatively for Q1 with 6 million net additions.
Revenue grew 21% YoY to $6.6B, topping consensus estimates by $20M. Net adds of 8.5M came in well ahead of expectations calling for 6M. Netflix now expects 2021 free-cash-flow to be “around break-even” versus previous guidance of -$1B. The company also intends to explore a share repurchase program moving forward:
“Combined with our $8.2B cash balance and our $750M undrawn credit facility, we believe we no longer have a need to raise external financing for our day-to-day operations…As we generate excess cash, we intend to maintain $10B-15B in gross debt and will explore returning cash to shareholders through ongoing stock buybacks, as we did in the past (2007-2011)."
Competition has been one of Wall Street's primary concerns regarding Netflix. In Q4, Netflix maintained a healthy lead over the competition with 29% market share. In Q4 2019, Netflix had 31% share of the streaming market. Keep in mind, the market is growing overall so a smaller percentage can still represent subscriber and revenue growth.
Q4 US Video Streaming: Share By Brand – NIELSEN, CREDIT SUISSE
Despite the modest decline in the share of minutes watched, it is evident that competition did not bite into Netflix’s net adds in 2020.
NETFLIX SHAREHOLDER LETTER
This supports the thesis that other streaming services, namely Disney+, are complementary to Netflix. Netflix just completed its best year in history while Disney+ and other new streaming services became available. Consumer behavior is showing that consumers prefer to have multiple subscription services.
In Q4, Netflix had 57.2M global app downloads versus 53.5M for Disney+. In Q4 '18 and '19, Netflix had 53M and 58M global app downloads, respectively. These numbers indicate that the success of Disney+ is not coming at the expense of Netflix. Instead, Disney+ is a complimentary service helping to further the acceleration of streaming to the TV.
Streaming to the TV gained significant market share versus all other TV usage during the pandemic.
NIELSEN
Streaming to the TV now owns over a 20% share of the market. The increased demand for streaming during lockdowns represents the acceleration of a trend that was already in progress.
Although I do not own Netflix stock, I track the company closely as I’m invested in other opportunities in this space. I’ve remained bullish on this stock when others doubted its position as new competitors came on the market.
I have also written extensively about why Roku is one of the best ways to play AVOD market growth. Our first entry in ROKU came in the $30 range in 2018, and we remain bullish on the name moving forward. You can read my first article covering Roku in 2018 here.
An investment in Roku does not force investors to choose which streaming service will be #1, as Roku benefits from the success of a broad range of AVOD publishers. Advertisers are planning out strategies to reach cord-cutters effectively, and Roku stands to be a main beneficiary. Roku is positioned to capitalize on AVOD market growth and has now launched an omnichannel marketing platform to extend first-party data for mobile and desktop targeting. This last part is key because Roku can now capitalize not only the $10 billion currently spent on CTV ads and the soon-to-migrate $70 billion from Pay TV – but Roku will offer additional targeting on mobile and desktop with first-party data – opening up the entire $200 billion+ ad market.
For Q3, Roku reported 73% year-over-year revenue to $452 million. Platform revenue increased 78% YoY, and gross profit was up 81% YoY.
In the past, investors have been critical of Roku for dipping sub-60% on margins. I defended the company, stating margins are rarely an issue for an ad-tech company. Roku added 2.9 million incremental accounts with average revenue per user (ARPU) up 20% to $27.00.
Roku is guiding low for a quarter when most people were stuck at home. In general, this management guides low, stays focused, and is out of the limelight. Q4 guidance is for revenue growth in the mid-40% range with a breakdown of platform revenue at 2/3. My guess is Roku will handsomely beat this guidance.
In December, AT&T announced that customers could watch HBO Max on Roku. Part of our early analysis on Roku pointed towards agnosticism working in Roku's favor and the strength of the operating system and number of channels. This was a timely boon as HBO Max had become the fastest-growing major streaming service recently per data from Apptopia with 1984 Wonder Woman being released on Christmas Day.
APPTOPIA
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Conclusion:
Over a year later, my statement on why no streaming company will be able to dethrone Netflix in October of 2019 remains true. Disney Plus and HBO Max are great services, as well, but they are not mutually exclusive.
Regarding Roku, we believe first-party data for connected TV ads is a significant trend moving into 2021 and an important distinction from subscription-video on demand (SVOD). Therefore, the main takeaway is that AVOD has an approximate ten-year runway as the trend began taking shape when Roku launched its ad platform in late 2018/early 2019. There were AVOD players in the space before this, but the budgets were negligible. Therefore, the cord-cutting trend is secondary for Roku, whereas Pay TV ad budgets' migration is the primary trend.
There are other reasons that I like Roku, such as owning the whole stack including the operating system, the management, it’s global opportunity, the agnosticism, etcetera– which I have covered in previous analysis. However, I try to keep things simple when discussing my thesis, and the migration of Pay TV ad budgets combined with Roku’s first-party data is why this stock has its best years ahead.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
This article was originally published on Forbes on Dec 31, 2020,11:45pm ESTForbes on Dec 31, 2020,11:45pm EST
Recently, FuboTV has been hit hard by short sellers. The criticism is based on FuboTV’s trailing financials and negative gross margins. We recommended FuboTV at $16 and have a blended cost basis of $20.10 and want to take this opportunity to connect a few dots on this company for anyone interested in hearing why we remain long.
Our analysis starts with audience growth because this is the predominant key metric in media. We also discuss the financials including the forward guidance. Lastly, we discuss why live sports OTT is a unique opportunity and why we think FuboTV is positioned well for free-to-play fantasy games and sports betting.
The main argument against FuboTV is the negative margins. This is a lagging argument as the company has laid out a path to increase monetization through sports betting. We are in a speculative period for this, however, we spell out a few key reasons we think the company can execute on this new path for monetization.
Key Metrics and Financials:
Fubo TV announced Q3 results on November 10th, the company’s first earnings report since its October IPO. Management described the quarter as the “strongest in company history.”
Revenues of $61.2 million increased 47% YoY on a pro forma basis, or +71% excluding 2019 licensing revenue from the FaceBank AG business, which was sold in July 2020.
Subscription revenue increased 64% YoY to $53.4 million, while advertising revenue increased 153% YoY to $7.5 million. Paid subscribers grew 58% YoY and totaled 455K at the end of the quarter, an acceleration from the 42% subscriber growth the company posted last quarter.
Fubo Press Release
Average Revenue per User (ARPU) increased 14% YoY to $67.70, while total content hours streamed by FuboTV users (paid and free trial) in the quarter increased 83% YoY to 133.3 million hours. Monthly active users (MAUs) watched 121 hours per month on average in the quarter, an increase of 20% YoY.
Operating margins were -145.9% and gross margins currently stand at -16%. This would be a concern if FuboTV had not outlined a new path for monetization (see below). Related expenses and sales & marketing expenses increased by 20% and 60% respectively in Fubo’s latest quarter.
Management noted that they use adjusted contribution margin to measure variable costs against subscriber revenue. In Q3, adjusted contribution margin was positive 16.1%, up from 0.5% in Q3 2019.
The company is expecting margin improvement over time, as discussed in its Q3 Shareholder Letter:
“We expect margin improvement to continue over time, aided by a number of initiatives. This includes the growth of advertising on our platform along with strong attachment rates on value-added services, such as cloud DVR storage and the ability to stream on multiple devices.”
The company also raised Q4 and FY guidance significantly. Management now expects Q4 revenues to be $80-85 million, a 51% to 60% increase YoY. They also expect to end Q4 with 500,000-510,000 paid subscribers, an increase of 58% to 62% YoY.
As a result, FY 2020 revenue is expected to increase 65% YoY to $246M. Most impressively, management is guiding for an acceleration of revenue growth in 2021 to 70% YoY, with total revenue reaching $415-435 million.
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FuboTV App Downloads and Sessions:
The short seller report from Kerrisdale Capital did not name the source of the app intelligence it was quoting. There is no reason to not name the source as app download and session data is factual and inherently unbiased. This is the first I’ve seen data referenced in any article or report without the source being named.
There are three main providers for app intelligence: Apptopia, AppAnnie and SensorTower. Apptopia has provided the following data showing that downloads are up for the quarter from 1.16M in Q3 2020 to 1.53M in Q4 2020.
Apptopia
According to Apptopia, FuboTV is up about 50% year-over-year on downloads from 1.001 million in Q4 2019 to 1.53 million in Q4 2020 and up about 70% in sessions from 84 million in Q4 2019 to 143.7 million in Q4 2020.
Apptopia
There is a dip in December when broken down monthly on downloads but sessions remain strong. This does not include a full month as the data was pulled through December 29th.
Apptopia
Despite downloads being lower on a monthly basis, we see sessions are higher in December than September. Downloads could also be affected by new subscribers joining for football at the start of the season, therefore, these fans already having the app downloaded. For this reason, sessions are important to cross-reference.
Apptopia
We think the dip in December downloads should recover with the start of the basketball and hockey season to create a new seasonal spike in downloads. The NFL Network is a competitor and has exclusive content while basketball does not.
SensorTower data does not raise any flags either although it appears the viewership is lumpy with more popularity on the weekends. In this picture, Fubo is green, Youtube is blue and Sling is red.
SENSORTOWER
FuboTV looks similar on the iPhone where weekends are more popular.
SENSORTOWER
Here’s more information regarding how FuboTV’s website traffic has recovered nicely since April when there were no live sports. We see no issues here. Notably, this does not include December.
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Live Sports:
Live sports is known as the “holy grail” because it’s the last stand for cable television. Loyalty to live sports is the primary reason as to why customers have not cut the cord with 81% of sports fans subscribing to pay-TV and 91% stating they subscribe to pay-TV for access to games. According to Pricewaterhouse Coopers, 82% of live sports fans have stated they would cut their subscription if they could access live sports elsewhere.
This is substantiated by the fact FuboTV – a relatively unknown name —- can command a high fee for its content of $65. This is three times more than Netflix. We are less concerned with the margins at this time and more interested with how Fubo has been able to compete with the largest MVPDs on price – Comcast, Charter, Hulu+ and YouTube — and most importantly, what the willingness to pay a high subscription fee could mean for free-to-play fantasy games and sports betting in the future.
Sports Betting:
FuboTV has stated they will first go into fantasy league free-to-play games and then move into sports betting. FaceBank is a company that is known for its animated digital humans, such as Tupac Shakur during Coachella. However, more importantly, the merger gives FuboTV access to the Facebank Group’s Nexway e-commerce and payment platform with a presence in 180 countries.
We think this payment platform will be useful for global sports wagering and will help FuboTV scale for sports wagering quickly.
fuboTV intends to continue its global expansion with FaceBank’s Nexway AG, a global ecommerce and payment platform with a business presence in 180 countries, accepting payments in roughly 140 currencies.
Please note: This article is updated to reflect that Nexway was sold and is no longer part of the merger with FuboTV, per a disclosure on November 16th. The tool that FuboTV will use to expand into fantasy games is Balto Sports, acquired in early December by FuboTV. Balto Sports is a graduate of Y Combinator, the incubator that has worked with many startups including Stripe and AirBnB in their early days. Balto Sports is co-founded by Joe Montana’s son and has the ability to become a sports book.
Over the past few years, Sky Media led investment rounds in FuboTV along with Fox for a 39% stake. This investment round was increased in late 2017/early 2018 with Sky Media holding Board positions. The former NBA commissioner was also part of the last $15 million round. Media has gone through some very big M&A shifts at the top-level with Comcast acquiring Sky and Disney acquiring 21st Century Fox. However, for FuboTV’s formative years, the company was influenced by arguably the top sports betting company in the world – Sky Media from the UK. The Comcast-owned Sky Media is still a backer for FuboTV along with Disney.
We think FuboTV is an excellent route for these more traditional media companies to have exposure for free-to-play games and sports wagering without involving their mainstream entities, like Hulu. Sports betting can be controversial and FuboTV allows the content to be funneled to another MVPD. We see the same thing happening with DraftKings – where Fox was a backer, and now through acquisition, Disney.
There are debates on who will dominate the free-to-play fantasy and wagering market in the United States but the successful model to replicate is nearly unanimous – which is Sky Media’s model. The company has numerous brands for betting and fantasy football (soccer) and is the largest betting organization in the UK by number of subscribers. Perhaps it is simply a coincidence that Sky Media has been the largest stakeholder in FuboTV along with Fox over the past few years — and now FuboTV is pursuing a similar monetization path as Sky Media – but we don’t think this is a coincidence. We like this synergy and the direct access Fubo has had to Sky in its formative years.
Analysts:
Perhaps the most compelling thing about the market’s reaction is how quickly short sellers with less of a track record were listened to over sell-side analysts who must maintain a high level of credibility. (In one case, the short seller has a #17,000 rank on TipRanks!)
If the company is going bankrupt soon, then the following analysts have produced the first goose egg in their careers.
BMO Capital (12/23):
BMO Capital Markets analyst Daniel Salmon downgrades from Outperform to Market Perform. The big move had taken the stock well north of his $33 price target, which is now lifted to $50. Salmon says FUBO offers "a more promising path to profitability than most new investors expect," but secular and execution tailwinds are already included at this valuation. His raised price target remains lower than last night's close, with Salmon saying the downside "is more a reflection of recent volatility than an incrementally negative view.
Wedbush (12/16):
Wedbush analyst Michael Pachter initiated coverage of FuboTV with an Outperform rating and $40 price target. The rating is initiated as the analyst expects cord-cutting and cord-shaving to continue for the foreseeable future, and thinks that a sizeable portion of the population will grow up as 'cord-nevers', preferring customized content.
Needham (12/22):
Needham boosts its rating on FUBO to Buy from Hold off the 2021 upside drivers it sees for the company. "We believe FUBO will continue to have strong upside momentum into 2021 owing to: a) FUBO is taking share from competitors; b) its Hisense partnership lowers SAC; c) upside from sports betting; d) OTT multiple expansion; e) short covering; and, f) CTV upside," sums up analyst Laura Marting on the bull case. Despite the huge runup in share price since fuboTV's debut in October, valuation is called inexpensive in comparison to OTT comparables.
Roth Capital (12/22):
FuboTV price target raised to $55 from $36.50 at Roth Capital. Analyst Darren Aftahi raised the firm's price target on FuboTV to $55 from $36.50 and keeps a Buy rating on the shares. Recent market research from Antenna suggests FuboTV gained share from larger virtual multichannel video programming distributors Hulu and YouTube TV in the months of October and November, growing 100 and 200 basis points, respectively, from September to 19% in November, Aftahi tells investors in a research note. While part of this gain can be attributed to seasonality around the launch of the football season in the United States, the overall market trend of cord-cutting, along with FuboTV's growth initiatives, should lead to a higher subscriber outlook for the first half of 2021, says the analyst. Aftahi says share gains, categorical growth, further implementation of artificial intelligence to aid acquisition and retention, and the rollout of an initial entree into sports betting expected in fiscal 2021 substantiate his "bullish thesis" on FuboTV.
Oppenheimer (12/7):
FuboTV price target raised to $30 from $21 at Oppenheimer. Oppenheimer analyst Jason Helfstein raised the firm's price target on FuboTV to $30 from $21 and keeps an Outperform rating on the shares after hosting meetings with the company's CEO and CFO. While management sounded confident in its ability to meet near-term targets for core subscription/advertising, the majority of investor focus was on the recent acquisition of Balto Sports, marking FuboTV's first move toward online sports betting, the analyst notes. While there are clear synergies between live sports content and OSB, Helfstein acknowledges that there are significant hurdles to enter this market. However, he is taking a first "stab" at sizing the OSB opportunity at $742M, assuming $295M in 2020 revenue based on a 16% attach rate and comparable margin structure to OSB leaders.
Is FuboTV the next Roku?
I was the first analyst to cover Roku at $30 and to discuss its story at length. While the market argued it was hardware; I detailed how it was an ad exchange and why that was important. This was before Roku reported any ad revenue in its fundamentals. Now, as you know, Roku has more ad revenue than hardware revenue and the market now “likes” Roku for Connected TV ads.
One argument I’ve continually made is that SVOD (subscription video on demand) is a mature market while AVOD (ad video on demand) is many years behind because Pay-TV advertisers had not migrated. This is why Roku was a developing story while Netflix is a mature story. The market has had a very challenging time understanding where Roku is in the hype cycle.
Of course, FuboTV is not like Roku because it is not an operating system or ad exchange. However, it’s important to know that FuboTV is in the most nascent area of OTT and the peak growth will be years behind Roku due to live sports being the last content type to convert to linear OTT.
Therefore, to require a perfect story and fundamentals right now in linear OTT for live sports is incredibly myopic. Investors will need to come back in two years to find a better fundamental story in linear OTT live sports — and they must be willing to have fewer gains for a surer thing. What short sellers are calling a dumpster fire is actually a market in its infancy. We are not dealing with just a general linear OTT channel. The product is live sports and this was the last to convert for cord cutters.
What Roku and FuboTV do have in common is solid subscriber growth and high ARPU. They’re also both continually under pressure from the market due to margins. Netflix, for that matter, has also been continually attacked for its free cash flow margin. We understand that licensing and distributing sports content has created an issue with margins but we also know that small companies with loyal audience can (and do) successfully pivot frequently.
Although we agree with the short sellers that the gross margins need improvement, that is the only thing we agree with them on. The rest of the reports were opinions that offered no citations on the data. The quotes and sources “from experts” were also unnamed. Finance is a regulated industry and we feel any data or interviews that cause people to lose money should be sourced.
Notably, the shorts had great timing. There was a run-up in price and an over-extension on the technicals and the reports came out during a period of low volume over the holidays (one report came out on Christmas Eve). The reports were also timed to the lock-up expiring. As far as timing goes, it was a perfect storm.
Regarding valuation, there are concerns about the number of shares that have become available which stands between 140 million, according to Oppenheimer. Keep in mind, DraftKings has a similar subscriber number in the 500,000 range and FuboTV makes similar revenue as DraftKings did in 2019 — yet DraftKings trades at a high valuation of 36 with a $18 billion valuation. If Fubo cracks sports betting on the same size audience (that is growing at and proven to already spend a sizable $65 for month for their content) then we think it could end up there.
Conclusion:
We believe the company will be successful in its pivot to a new monetization method as pivoting is something that nearly every small company does as they look for product-market fit. What matters for a pivot is the audience. This is the core strength to any media company and FuboTV’s key metrics are strong. If the audience continues to grow, then FuboTV has a high likelihood of delivering its new path of monetization which is free-to-play fantasy to maintain growth and reduce churn, and later, sports betting to increase revenue and improve margins. As stated above, sell-side analysts believe sports wagering could come as soon as fiscal 2021.
To conclude, we are long FuboTV and our thesis is not changed at this time.
This article was originally published on Forbes on Apr 25, 2020,11:30pm EDTForbes on Apr 25, 2020,11:30pm EDT
In October, many analysts predicted Netflix would be crippled by the launch of Apple Plus and Disney Plus. The new over-the-top services were called “Netflix-killers.” Around this time, I published a series of analysis on Netflix that discussed why competitive over-the-top applications would not be able to dethrone the original streaming media company even after Netflix had missed on subscriber numbers both domestically and globally.
Now that Netflix is up 32% while the broader market is down 13%, it’s important to discuss valuation and the longer-term prospects for this high-yielding growth stock.
Netflix is Unshakeable: Macro Overview
There are key reasons as to why Netflix is able to maintain its lead despite there being over 190 OTT providers in the United States.
The main reason is that Netflix is a global media company whereas the majority of OTT providers are domestic. Netflix has over 60 million subscribers in the United States compared to 128 million households. Of the households that subscribe to OTT services, 87 percent have a Netflix subscription.
At the time, I had stated that the market had been myopic with Netflix by overlooking broadband penetration rates and the lack of viable competitors on a global scale. For instance, outside of the United States, Netflix outperforms globally with 70-87% of subscription OTT video service users in European English-speaking countries using the service and 55-64% of non-English speaking countries.
The global user data helps cut through the speculative noise as to whether Apple Plus or Disney Plus could dethrone Netflix. While many analysts were busy considering the domestic competition, they missed how little competition there is globally.
Asia-Pacific and India remain growth opportunities for Netflix, although pricing could be an issue due to high rates of piracy. For entry into China, Netflix secured a licensing deal with iQiyi, which is owned by Baidu.
Netflix’s Covid-19 Opportunity:
Currently, filming has been halted globally. There is not much impact on new releases in the second quarter as the production is already complete, with the exception of dubbing options for certain titles. With the shutdown, movie studios like Paramount have sent theatrical releases to Netflix.
Netflix management has mentioned that since the company has a large library with thousands of titles for viewing, member satisfaction may be less impacted than with competitors, who have a shortage of new content. Some of the recent shows like the Tiger King, Love Is Blind, and Money Heist have been very popular.
The company did see some disruption in customer service. It has now hired 2,000 agents who are all working remotely. Customer service levels are now fully restored in spite of increased demand.
Using the Open Connect Technology the company was able to reduce network use by over 25 percent upon the request from a number of governments worldwide.
Challenges: Global Streaming Speeds
While traditional fundamental analysis would point towards debt and lack of free cash flow as the major risks for Netflix, I believe both will be greatly improved upon as broadband penetration rises globally. Broadband is slow to non-existent in many countries. For instance, Brazil reports a 20% annual improvement in households with 4 Mbps (megabits per second) or more. Netflix requires 3 Mpbs. Japan and South Korea have 50 million people with speeds of 100 Mbps or higher.
Fiber technology and broadband are prominent in Japan and South Korea, along with Australia, Hong Kong, Malaysia, Singapore, Taiwan and Vietnam. There is room for growth once higher broadband rates are achieved in New Zealand, Indonesia, Thailand, India and the Philippines.
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Overall, OTT video is projected to grow to 6.4% of emerging market households, or 103 million, by the end of 2019. That is up from 19.4 million in 2014. By 2025, digital growth will add over 1 billion middle-tier consumers for telecom companies, which will help open up the market for OTT players.
Another challenge for Netflix will be growing subscribers after the lockdowns are lifted. As stated in the most recent earnings report, if a person didn’t join Netflix during the confinement, then the person is unlikely to join Netflix after the confinement.
Current Valuation
Netflix currently trades at a PE ratio of 85. Despite being high relative to most stocks, Netflix’s PE ratio has a five-year average of 212. EV/EBIT is also low in terms of it’s five-year average. Meanwhile, forward price-to-sales is revisiting early 2019 levels at 7.5 and the current price-to-sales is higher than the five-year average at 9.
As recent as January, Netflix was undervalued relative to its peers. The company had posted 0.17% returns — or nearly 0% — over the past 12 months, while Disney and Comcast were up 30% and 31%, respectively.
Therefore, one could argue that Netflix was undervalued in January and more accurately valued now in terms of comparables with the 32% YTD gains from $323 to $426.
Revenue increased 28% y-o-y to $5.77 billion. Net income more than doubled to $709 million from $344 million in the same period last year. Diluted EPS was $1.57 compared to $0.76 for the same period last year. The revenue beat analyst’s estimates by $22 million and EPS missed estimates by $0.07.
The company has added 15.8 million new paid memberships beating its own guidance of 7 million new users for the 1Q 2020. The total paid memberships at the end of the quarter were 182.86 million. However, the management is cautious for Q3 and Q4 as the growth in the first half may be a “pull forward” of the rest of the year. The management used the words guess and guesswork for the next quarter guidance, which it places at 7.5 million new memberships.
About the Debt Load …
Clearly, Netflix has had to pay huge bills for becoming a global streaming service. The company spent $8.9 billion on content in 2017, $12 billion in 2018 and will pay a projected $15 billion in 2019.
Reed Hastings, one of the best entrepreneurial tech CEOs of the past decade, is clearly gunning for global territory. Naysayers may be right about high-risk debt becoming an albatross for the company, but the first-mover advantage that Netflix has secured is going to be hard to shake. In this way, the barriers to going global is protection from other competitors, albeit at a cost.
The company has cash and cash equivalents of $5.2 billion. Long-term debt was $14.2 billion at the end of the 1Q 2020. Netflix announced yesterday its plan to raise $1.0 billion in debt.
Interestingly enough, the criticism towards Netflix’s debt has now turned into a positive as the company has an arsenal of content at a time when many studios are closed for production.
For the full-year 2020, due to paused productions, there will be a push in spend to next year. The management had previously estimated negative free cash flow of $2.5 billion and now it expects to be around negative $1.0 billion. Despite the “lumpiness” in free cash flow, management still believes 2019 will be the peak in annual FCF deficit.
Conclusion:
I believe Netflix’s addressable market stands at 50-70% of the developed world and 20% of the developing world based off of 1.6 billion television households worldwide. This puts the blended rate at 35%, or 560 million on the low end and 720 million on the high end. In order to achieve this number, broadband penetration must become a tailwind rather than a headwind in the regions where growth opportunities remain.
Covid-19 is an unfortunate circumstance that has revealed which technologies are essential. Gene Munster, an analyst at Loup Ventures, told CNBC that “Netflix is not going to make a dramatic change to our lives in the next decade.” He missed the point entirely that Netflix made this dramatic change in the United States and is set to make an even more dramatic change for the remaining 6.5 billion people globally.
