Fox On Improving Its Revenue Streams: Investing In Blockchain And Sports Betting

Summary

• Fox is demonstrating a positive trend by relying on affiliate contract fees in addition to their advertising revenue.
• Set an all time high in total revenue and improved its bottom line over the previous year.
• Fox is also pursuing legal sports betting in the US, which has a $15.67 billion TAM, as well as exploring new cost-effective technologies such as blockchain.
• With their growing FCF and low pay-out ratio, they can maintain and grow their dividend year after year.

Sutad Watthanakul/iStock via Getty Images

Investment Thesis

Fox Corporation (NASDAQ:FOX) demonstrates that two of its significant revenue categories are improving and achieving significant synergies. FOX is also expanding its presence in sports betting, which I believe will boost its current revenue forecasts. Additionally, the company is investing in Eluvio's blockchain technology, which will enable FOX to offer NFTs to consumers to purchase. FOX's improved profitability and liquidity make it an attractive stock to invest in based on its increased revenue inflows.

Company Overview

Fox Corporation is an American multimedia company specializing in news, sports, and entertainment. They primarily operate in three segments, as illustrated in the image below, each of which contributes to the company's total revenue.

Source1: Company Filings, Prepared by the Author

FOX earns a majority of its revenue from two sources: affiliate contracts and advertising income. FOX retains a diverse customer base, with no single customer accounting for 10% or more of total revenues.

Source: Same as Source1, Amounts in Millions

FOX's management strategically balanced declining advertising revenue with affiliation contracts, which helped the company earn an all-time high of $12.9 billion in its fourth quarter. FOX owes $5 billion in future performance obligations on affiliate contracts as of June 2021, up 161 percent from $1.9 billion in 2019. These payments are likely to be recognized over the next three years.

Another intriguing catalyst for FOX is their efforts to obtain visibility in the US' legalized sports betting market. Sports betting in the US is expected to grow to $15.67 billion by the end of 2025, according to studies.

Source2

FOX Bet Super 6, a national free-to-play game, reached 5 million registered accounts as of June 2021. This was made possible through a collaboration with Flutter Entertainment (OTCPK:PDYPY).

According to a report on August 2021, FOX is suing Flutter for the overpricing of fan Dual Stake, in which FOX has the upper hand. They intend to use this type of action to exercise its option to acquire 18.6% of FanDuel Group. With the current market sentiment, this will help FOX keep its revenue balance.

Additionally, in August 2021, FOX announced a strategic investment in Eluvio to help accelerate the adoption of the latter's blockchain technology across the broader media and entertainment industry. Eluvio is a global pioneer in using blockchain to manage, distribute, and monetize premium content. The investment will enable FOX customers to purchase numerous unique collectibles and other tokens as NFTs.

Financial Overview

Source: Same as Source1, Amount in Millions

Despite lower advertising revenue over the last five quarters, FOX has managed to set an all-time high of $12,909 million in total revenue, up 5% from the peak of the pandemic in 2020 and 30% from its 2017 figure.

Source3: Seeking Alpha, Prepared by the Author, Amount in Millions

Its gross margin is relatively flat when compared to the 36.98 percent average in the last five years.

In comparison to its 2020 projections, FOX increased its bottom line by 115% and its net margin by 113%. Its earnings per share (EPS) increased by 123 percent as well to 3.64 in 2020, up from 1.63 in 2019.

We can observe a consistent upward trend in its CCE trend, as well as its FCF trend. Despite a $1 billion share repurchase, an all-time high of CAPEX of $484 million, and no debt issuance, FOX completed the fiscal year with $5,886.00 million, a 27 percent increase over the previous year. Its FCF increased by 7%, indicating that it can easily support its $0.48 annualized dividend payout forecast for next year.

With $ 5,747.00 million in growing working capital and a current ratio of 2.9x, FOX's balance sheet remains healthy. Its D/E ratio improved to 76 percent from 84 percent the year before.

A 39 Percent Upside Potential

Source4: Prepared by the Author

FOX has a 39% upside potential with an average fair price of $52.3. When FOX reaches our best price of $26.16, investors will have the opportunity to purchase it at a 100 percent profit. The images below show how I arrived at my average fair price.

To complete my DCF model, I used the analyst estimate. To be conservative, I forecasted a very minor increase in its operating margin to 24.5 percent. We may see an improvement as FOX embarks on a new blockchain venture that may reduce its OPEX spending in the future. A prolonged economic downturn could reverse its current trend, resulting in an uncontrollable drop in advertising revenue, affecting its projected top line.

I arrived at a conservative price of $52.3 using the WACC discount rate and the combined shares outstanding of FOX and FOXA.

Price Action: Potential Pullback, MACD Bullish Crossover

Source5: TradingView

FOX is in a potential wave 3 on its weekly chart, indicating bullish price action. Its MACD crossed over last week. If there is a pullback, investors can enter a position using FOX's moving average as its key levels. Additionally, I notice FOX (with voting rights) is less expensive than FOXA (without voting rights), with an 8 percent price difference.

Final Thoughts

The company's initiatives to create shareholder value through its stock repurchase program and dividend payments are another driver of value creation for FOX. It has a $2.4 billion stock repurchase authorization remaining as of June 2021. FOX can easily afford a yearly dividend hike with its current pay-out ratio of 17.37 percent. I'm also optimistic about their prospects in the sports betting industry, as well as their ability to capitalize on and create another Krapopolis, the "first-ever animated series curated entirely on the Blockchain." FOX is a stock worth keeping an eye on.

Thank you for reading. Cheers!

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in FOX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.