Two adversaries are coming together, but which stock is right for you?
FuboTV(NYSE: FUBO) has always been the David to Disney's (NYSE: DIS) Goliath. Fubo's flagship platform is a fledgling live TV streaming service with a heavy emphasis on sports programming. Disney's Hulu + Live TV is the country's second-largest player in this niche, but it's the undeniable sports content leader with its majority stake in ESPN.
The two came together -- in an unexpected way -- in January after Disney agreed to combine its live TV streaming service with Fubo's namesake offering. Disney would own a 70% stake in Fubo after the combination, which is expected to close in the first half of next year. You can buy Disney, a media giant that should own eventually a majority stake in Fubo. You can buy Fubo, a pure play on the live TV streaming space that will be second only to Alphabet's YouTube TV in subscribers once the deal is complete.
Each stock has its own bullish merits and potential pitfalls. Let's try both media companies on for size.
The case for Fubo
Fubo has had a wild first four years and change as a public company. It went public at $10 in fall 2020, and within two months was peaking north of $60.
A short-lived push into online gambling got investors initially excited about the streaming cable TV alternative, but it was a small player at the high-stakes poker table of aspiring sportsbook operators. The stock began this year barely trading for more than a buck, but it's one of the few stocks that have gone on to more than double this year after Disney provided an infusion in more ways than one.
Disney was hoping to launch the ultimate sports bundle, packaging its market-leading streaming offerings with two other media giants. Venu Sports would cost $43 a month as the definitive subscription for sports fans, but Fubo crashed the party by winning a legal injunction to block the new service on anticompetitive grounds.
Fubo became a popular four-letter word in the first week of this year, announcing the unexpected pairing. In exchange for a 70% stake, Disney would contribute its Hulu + Live TV streaming platform, reaching 4.6 million subscribers to Fubo's audience of 1.7 million accounts. Disney, along with its Venue Sports partners, would also pay a $220 million cash settlement to Fubo in exchange for the smaller platform dismissing its legal complaint. In another shocking twist, Venu Sports dismantled its proposed offering just days after the settlement was reached.
Image source: Getty Images.
Fubo won everything. A major threat to its business was vanquished. It collected a settlement that is a healthy 18% of its current enterprise value of $1.2 billion. It struck a top-line accretive deal where Disney contributes 73% of the subscriber base and more than 75% of the revenue for a smaller 70% interest in the partnership.
Fubo is already generating nine-figure free cash flow. Analysts see a stand-alone Fubo turning a profit by next year. The stock is trading for 13 times what analysts see Fubo's organic business earning come 2027.
If it all falls apart, Fubo loses all that Disney can do to improve its exposure and the model scalability it brings to the table, but Fubo would have both the $220 million settlement and a $130 million termination fee from the House of Mouse. It would be a riskier play on its own, but still leave Fubo in a better position than it was three months ago with a $350 million infusion.
The case for Disney
Let's cut to the chase: You will get exposure to Fubo if you go with Disney, but even with Fubo's market cap more than tripling in the realization of the deal to give Disney its 70% stake, it won't move the needle. Disney's value of the partnership at today's price would be $2.4 billion. Disney's enterprise value is $226 billion.
If live TV streaming is what you believe in, just buy Fubo. If you want a safer entertainment play, Disney is the obvious choice. The appreciation ceiling may be lower on a percentage basis, but there's a lot more downside protection.
Live TV streaming services may prove transitory, but Disney's not going anywhere. It's been around for 100 years. Can you believe the original Snow White animated classic came out 88 years ago?
Disney offers what is now a growing dividend. Its business is also expected to pick up in the next couple of years. Disney's latest guidance calls for adjusted earnings to rise in the high single digits in 2025 before accelerating to double-digit gains in the next two years.
With Disney, you get the world's top dog in theatrical releases, theme parks, and one of the few profitable studios in the streaming space. You get a stock that has historically traded at a market premium, now fetching just 16 times next fiscal year's projected earnings.
Both stocks should fare well. Disney offers far more stability for risk-averse investors. Fubo offers more upside, but also materially more downside. I own both, so naturally I think both will beat the market over time.
In baseball terms, Disney is a solid contact hitter. Fubo is a slugger that swings for the fences with a stronger chance of striking out. Choose your fighter.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Rick Munarriz has positions in Walt Disney and fuboTV. The Motley Fool has positions in and recommends Alphabet, Walt Disney, and fuboTV. The Motley Fool has a disclosure policy.
