I need to warn you, before I begin, that today might not be the most auspicious day for Gumshoeing or investing. I’m no astrology buff, and enjoy poking fun at the astrology-based investment strategies as much as anyone else (yes, they exist), but the outlook for Leo this morning (my astrological sign) caught my eye — here it is, from this morning’s Boston Globe:

So will we be dealing with confusion or deceit today, in this look at the latest pitch from the Oxford Club? Might we not have the complete picture?

Let’s find out, shall we?

The ad in question is from Matthew Carr, who edits the new Trailblazer Pro service for the Oxford Club and is recruiting new subscribers ($1,495/yr is the price, though he says it’s “valued at $4,000”, you get a free second year for being a guinea pig and signing up early — and unlike most higher-cost letters, they do promise a refund on this one, so hand claps to them for that).

And the key promise is that he’ll reveal to you his favorite pick, what he calls “potentially the biggest recommendation of my career” (if I had a buck for every time I’d seen that promise from a pundit over the past 20 years, I’d have bought an NFL team by now), and it comes in the form of a “special report” that he calls “The Future King of Streaming: My Next Record Breaker.”

So that’s our target, dear friends, we will wade through the deceit and confusion, horoscope be damned, and find out what he’s talking about for you. Ready?

I know, I know, I need an editor — six paragraphs in and he asks if we’re ready?

This is how he describes it on the order form, just to skip to the end:

“This small streaming company is compiling ALL the biggest live event broadcasts from the NFL, MLB, NHL, NBA and more.

“Its streaming service has 100-plus channels…

“And its revenue is up nearly 5,000% over last year.

“That’s BLINDING growth.

“Best of all, it’s trading for just $26 per share.

“I’m not sure when or if I’ll find another play with this much profit potential.”

Whatever could it be? I’ve got a fair idea already, and you might too, but let’s check out the other hints he drops in the ad, just to be sure we understand his pitch and prediction…

He establishes his bona fides by saying that he had the top-ranked service from the Oxford Club last year, and that one reason was his ability to pick a couple fantastic growth stocks — the one he mentioned is Sea Limited, which at the time of this pitch had gone up 316% in less than a year (he must have recorded this data at right around the one-year mark, in April, because SE has continued to soar and is now closer to a 700% gain if you bought in April of 2020 (I didn’t buy until May, personally, so my equity stake in SE is up “only” 450% or so).

Everyone had some crazy gains last year, of course, if they had any interest in technology or growth stocks at all, so we should probably clear that 300% idea from our heads for the moment… but what’s next? Here’s a bit from the ad:

“You see… I’ve found a new play that I think has the potential to be one of my best ever, along the lines of Magnite and Sea Limited.”

And he goes on to explain why he’s looking at the streaming business…

“Netflix is the #1 stock of the 2010s.

“From its IPO in 2002 to now…

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...

“It’s delivered a 45,100% gain….

“But the truly genius thing about Netflix is…

“How PROFITABLE it is.

“Every new subscriber is pretty much 100% profit.

“Yes, Netflix has to pay for new content and pay its employees, BUT…

“It doesn’t cost Netflix anything extra when you sign up.”

That’s a good concept, and it’s the heart of the reason why software companies are usually among the most profitable investments in the world — scalability. If you can make the same content (a computer program, a TV show) and sell it to 10,000 people, then double up and sell it to 20,000 people without incurring much extra cost for those additional customers, your profit margins explode higher. Growth without meaningful additional product costs is the dream.

And while we all know streaming is a big deal, Carr says he thinks it has “a lot of room to run” — he cites an expectation that it’s a $400 billion business today and will more than double to $850 billion by 2027. I don’t know where he gets those numbers or what they mean, Netflix is by far the biggest name in streaming and has only $25 billion in revenue, and even if you count YouTube as “streaming” their revenue is about the same as Netflix, but I’m sure there’s some rationale.

More from Carr…

“… the next big growth story in streaming isn’t going to be whichever huge company beats Netflix.

“All that hypergrowth is over.

“However, there is a HUGE streaming market that is virtually untapped…

“LIVE events and sports.

“It’s BIG, BIG money….

“The NFL generated $4.5 billion in broadcasting revenue in 2019…

“The English Premier League produced $3.83 billion…

“The NBA clocked in at $3.12 billion…

“And Major League Baseball brought in $1.65 billion.”

So that’s his idea… starting to have a guess?

Here’s another clue:

“The money that other streaming platforms like Netflix, Disney+ and HBO Max are leaving on the table by not having live sports…

“This $26 stock is aiming to grab it all.”

And then we get into some specific clues…

“… it’s already making money – RIGHT NOW.

“At the end of the first quarter of 2021, this company had 590,000 paid subscribers, who streamed 228 million hours of content.

“As a result, this stock pulled in $119.7 million in revenue in that quarter alone.

“Its net profit margin is up 67% over the past year…

“And its revenue is up – get this – FIVE THOUSAND PERCENT.”

And it looks like Carr also recommends leverage in these positions, so he throws an options bet on top of the stock…

“I expect the stock gain to be a giant winner.

“And the options play I’m recommending with it, although higher risk, also comes with 7X potential in the next five months.”

(And yes, we just started seeing the ad recently and it’s dated August, so it should still be pretty current — which means he’s very likely pitching January 2022 call options).

What, then, is this secret stock? Thinkolator sez he’s touting FuboTV (FUBO).

How does this jibe with Carr’s clues? The 590,000 paid subscribers was accurate at the end of the first quarter, and they did stream 228 million hours of content. They added 43,000 net subscribers that quarter, so their total subscriber number rose 105% over that year, and streaming hours grew a little faster, up 113%.

And yes, they did have $119.7 million in revenue, which was 135% growth — and importantly, $12.6 million of that is advertising, which is the part that’s somewhat scalable (ad revenue depends not on how many subscribers you have, but on how many hours they watch and what advertisers are willing to pay — FuboTV presumably has to pay the content creators per subscriber, like a cable distributor does, but not per hour).

This is really a baby company, with a market cap of about $4 billion (though that’s about 10X what EchoStar paid to buy competitor SlingTV back in 2007, just for some context). They’ve only been around for about five years, and traded over the counter for a while after merging with another firm called FaceBank last year, so they do have some history — but if you look at the stock price charts or financials going back before mid-2020 they refer to FaceBank, not Fubo, the history before last year doesn’t really mean much or reflect FuboTV’s operations.

FuboTV really started to scale up and get investor attention when they raised a big chunk of cash in their IPO on the NYSE late in 2020. Revenue was really up 5,000% in 2020, though that was from starting at an extremely low level and they’re certainly not going to show that kind of percentage growth again.

“Making money” doesn’t have a legal definition, and Carr can get away with the term, but I think of “making money” as profits, not sales. Maybe that “they’re already making money” line from the ad is what my horoscope was warning me about this morning :). And, frankly, that “net profit margin is up 67% in the past year” bit sticks in my craw — there is no net profit margin for this company, and never has been, so how can it be up 67%? I expect that he’s using the metric they call Adjusted Contribution Margin, which subtracts variable per-user costs from average revenue per user, and that did rise by about 67% in the first quarter, from 3% to 5.3%. That’s a positive underlying sign of the value of users versus the variable cost of those users, which gives some hope to future scalability, with ad revenue probably the most hopeful part of that (ad revenue per user went from $4.54 in Q1 of 2020 to $7.11 this year), but if this is the sign of scalability for the business it’s only the very first, most tentative sign right now. That’s where to hang your hat if you want to be optimistic about FUBO, that Adjusted Contribution Margin margin jumped again in the second quarter to 8.3%, and the advertising ARPU jumped to $8.70. (They highlight those numbers in their Shareholder Letters, Q2 is here and Q1 is here).

FUBO has great revenue growth but, even with those improvements in contribution margin that do justify the fact that they’re continuing to spend on growth, is probably a very, very long way from being profitable — continuing to grow at this pace is going to continue to cost them, big time. The biggest problem they face is scale, since they need either enough hours viewed for their share of ad revenues to be meaningful (or to help them build a personalized ad platform for their viewers), or they need enough subscribers for them to have some influence over content creators (some of whom, like Comcast and Disney, also own competing distribution), hopefully getting them to some economies of scale in packaging and dealign with content costs. The growth dream beyond that for FuboTV right now is integrating sports betting with the TV experience, and that’s a good idea that might work out eventually, too, but is not going to impact their bottom line anytime soon (lots of large companies are spending like mad to try to take online sports betting market share as states legalize, this is the “costs be damned” phase of growth for sports betting companies).

And though Carr’s tease cuts off with the first quarter, growth did continue nicely in the second quarter — the company is optimistic, of course (good quick interview with the CEO here, FYI, or the full call transcript here), and the growth numbers look even better than the first quarter, with 196% revenue growth and another 92,000 subscribers added (682,000 now) and only a tiny tick down in viewership as the world opened up a little more and people went back to work and school (down from 7.2 hours/day to 7 hours). The stock was a little soft in the weeks following the quarter, partly because they also announced another big capital raise, but they are continuing on their path, with a vision of increasing their subscriber count to 3-5 million by 2025 or so.

What’s the context? Well, some of those users are coming from other services, probably — the biggest one is Hulu+Live, and that has reportedly lost some subscribers in recent quarters, but there are a bunch of competitors similar in size or larger than FuboTV. A lot of the over-the-top players (multi-channel video programming distrubutors, or MVPDs, in industry parlance) don’t regularly report their subscriber numbers, but here’s a little summary from whattowatch back in the Spring:

And, coincidentally enough, I looked into FUBO as part of last week’s Friday File in response to a reader question — the story has changed slightly since then, with the first approvals for their sports betting forays in a couple of states over the weekend that has helped the shares bump up a little (it’s around $30 right now), but here’s what I wrote, in case you’d like my opinion on the company:

8/27/21: As I watch Roku (ROKU) and the other streaming giants do well, I’ve also often been at least a little tempted by FuboTV (FUBO), and have been asked about it a few times, so let me lay out how I’m thinking about that one right how.

FuboTV is a streaming service that focuses on sports and live events, relieving some of the cord-cutting anxiety that many sports-loving cable customers might otherwise feel at giving up their live access to the offerings from Comcast, Charter and the other traditional video distributors. In effect, really, they offer essentially the same thing that SlingTV or YouTubeTV or Hulu+Live do, a pretty full slate of broadcast networks that covers most of the live sports available on television, and most of the live offerings of the popular basic cable networks, and at a pretty similar cost, so a lot of the sports focus is just marketing — but, of course, marketing is a big deal.

These kinds of services are really “cord cutting” in name only, in many cases you’re still paying close to as much for live TV as you did to Comcast, you just get an (arguably) higher quality experience, depending on the customer interface and add-on services you might prefer (and, of course, on the quality of your internet connection)… but you don’t have to have the big clunky box, the cable interface, or a long-term contract, you can swap in and out of all these services from month to month, maybe sign up for FuboTV or YouTubeTV during the parts of the year when you want to watch live sports, and otherwise cycle through HBOMax or Netflix or Hulu depending on which shows you want to watch at that time, and that is certainly attractive to a lot of people, even if the typical savings might be minimal in any given month.

As with all subscription services, they add up and often exceed the payments you thought you hated back when you had the cable bundle, but they also show up at different times and click in at $10 a month or $60 a month for different services, so they don’t jolt the eye as much as a $180 cable bill. And, of course, if you call Comcast and cancel your cable TV, your high speed internet will suddenly go from being $70/month to $110/month, since you’ve lost that “bundling” discount — Comcast has been at this a long time, they ain’t dummies and they don’t care if we hate them.

Last quarter, FuboTV had 682,000 paid subscribers, with the company guiding that they will top 910,000 by the end of the year. With an enterprise value of $3.8 billion, they’d better grow at least like that — they’re being valued at something like $4,000 per subscriber, and each new subscriber currently contributes nothing to the bottom line (just like Comcast, FuboTV has to pay the cable channels they carry a big chunk of those monthly subscription fees — one way Fubo is growing is by subsidizing that cost a little, so even their gross margin is negative (meaning they pay more for the content and distribution then they can charge their customers, even before you consider overhead or R&D or other operating costs). It is possible to grow into this business, but it’s not easy for a small player because they don’t have much power over the content creators, and until you can get your gross margin to be consistently positive there’s no real opportunity for “economies of scale” to kick in and give you some visibility on possible profits someday in the future.

There’s some good potential to grow this business as a sports-focused streaming services, but given the cost of sports content and the highly competitive environment, it won’t be cheap and it’s hard to justify the investment they’re making unless you have some great confidence that they’ll end up being a market leader (and they’re competing both with the big cable systems and with Alphabet’s YouTubeTV and Disney’s Hulu+Live among many others, so that confidence might be hard to come by unless you’re a FuboTV customer and are convinced that their product is a dramatic improvement).

If you want to buy FUBO here, I think you either have to really embrace the vision of them becoming a major provider in five years and building enough scale to become sustainable, with the increasing size of the business either giving them some pricing power or making their platform more attractive to advertisers… or you have to believe that their so-far-very-early plans to become a player in the sports betting business will bear fruit. That’s two different high-growth businesses they’re competing in, and both of those businesses are so competitive that they’re also very low-margin right now, so it’s not going to be easy, but I’ll admit I’m impressed with their growth rate as they’ve come out of nowhere to maybe hit close to a million subscribers by the end of this year. If they can really define their sports niche in cord cutting and establish a brand, maybe it will work out.

I’ll stick with Roku for now, which helps distribute FuboTV so will participate a little if all goes well… and that’s mostly because of the clear double leverage to streaming growth that Roku’s platform business provides (getting more ad revenue as more customers join the platform and watch more hours on the ad-supported networks, and more promotional and commission revenue as streamers compete for Roku customers and Roku processes subscription fees). Growth is great, but getting some leverage to increasingly profitable growth that you don’t have to pay for is a lot more compelling. You have to have something in the numbers that helps you to see where profitability could emerge, and i don’t see that with FUBO yet. Perhaps it’s a failure of imagination on my part, if you want to make the case for FUBO I’d love to hear it.

And that’s where I still come down — yes, there’s a potential for FuboTV to create transformational change in the video streaming business as they compete with Sling, YouTubeTV, Hulu+Live and whoever else tries to replace the existing cable feed with a more interactive and “smarter” multi-channel live TV experience. Maybe they’ll win. I’m just not convinced enough yet to risk my money. Your opinion, of course, might well differ — please do share it with a comment below.

P.S. I mentioned options — yes, FUBO has options trading available, and Carr says he recommends options speculations to leverage returns from his ideas. He doesn’t hint at which specific options he likes, but if Carr thinks the shares will hit $50+ in short order and is recommending January call options, as seems likely (he did say five months), then the most likely candidates are the January 2022 calls at $30 (about $5.75), $40 ($2.75) or $50 (1.50), those are the contracts that have the largest open interest and have recently traded in pretty high volume. The most popular contract is the $40 call for this expiration date, so at $2.75 you’d need the stock to be at $43 or above by mid-January (a 35% jump for the stock) for your position to generate a profit at expiration… if FUBO hits $50 in January, you’d likely have a return of 300% from that option contract ($2.75 becomes $10) or 60% from the stock ($30 becomes $50). Of course, if the stock dips again and never gets close to $40, that $2.75 can become zero very quick — as a lot of new investors have learned over the past year, options speculation is fun but dangerous, the likelihood of 100% losses is much, much higher than with conventional equity investments, so most of us would probably be wise to keep those speculations to a minimum (I do options speculating, too, and it works out nicely on average — but I keep that to only a couple percent of my portfolio, at most, because those gains depend on the occasional 1,000%-10,000% gain to offset lots of 100% losses… honestly, part of the value of options speculation for me is as a betting outlet for my animal spirits, as it keeps me from doing larger and dumber things with more meaningful amounts of money).

Disclosure: Of the companies mentioned above, I own shares of and/or options on Sea Ltd., Alphabet, The Trade Desk and Roku. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.