Is Hulu Undervalued?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Earlier this year, Disney (NYSE: DIS  ) and Twenty-First Century Fox (NASDAQ: FOXA  ) backed out of a sale of their joint-venture streaming video service Hulu, of which Comcast (NASDAQ: CMCSA  ) also owns a one-third share. The company reportedly garnered bids around $1 billion.

It's likely that amount undervalues Hulu, as the company reported that it expects revenue to top $1 billion in 2013 -- up 44% from 2012. There were numerous factors pushing the price down, but a price to sales ratio of 1 doesn't seem right, especially compared to its closest analog Netflix (NASDAQ: NFLX  ) , which sells for over 5 times its expected 2013 revenue.

What kept the price down?
There's a large discrepancy between Hulu's and Netflix's price partially because Netflix has several valuable content deals locked up for the future. Hulu was offered with just two years of content rights guaranteed from Fox and Disney. There's a fair amount of risk in video streaming services especially considering the rising price of content.

In fact, Netflix has focused on locking up big deals well into the future with the big names including Disney, DreamWorks Animation, and Warner Brothers. While these deals come with hefty price tags, they provide a hedge against the rising cost of content for video streaming companies.

It shouldn't be a surprise then that the owners decided not to sell Hulu. The company is more valuable in the hands of the content producers than nearly anyone else, because it inherently holds less risk. It's not like Disney will refuse to license its content to itself.

Potential for growth
Of course, revenue isn't the only thing that ought to determine the value of a company. Investors also need to factor in potential future sales and profits.

Netflix is expected to grow its sales 20.9% this year and 18.8% next year off a base of $3.61 billion last year. Comparatively, Hulu expects revenue growth of 44% this year off a base of $695 million. If we assume the company can continue to add subscribers at the same pace as the last year and a half (2 million per year) and that subscription revenue accounts for 40% of total revenue (which appears higher than historical averages), Hulu should expect another 40% increase in revenue in 2014.

Hulu's sales ought to continue growing at a faster rate than Netflix considering its smaller base, although Netflix is making lots of headway internationally. There's no reason Hulu can't follow the same route.

More importantly, Hulu ought to become profitable more easily than Netflix can maintain its current profitability. Hulu's parent companies hold the fate of Netflix in their hands. Should the companies one day find more value in keeping the streaming rights to their content away from Netflix, they could do so. They could also hold out for more money as Netflix's revenue grows. Perhaps, if Hulu Plus sees slowing revenue growth, the owners may begin streaming additional content on the platform, which may compel subscribers to switch.

This is likely a reason Netflix has gone the way of contracting original programming -- as a hedge against the competition pulling the rug out from under it. In working directly with production companies, Netflix is better able to control its access to the content rights, but is not necessarily an exclusive licensee past the first window -- as is the case with House of Cards, now available on DVD.

Is the market undervaluing Hulu?
I certainly believe Hulu is worth more than $1 billion, especially in the hands of Disney, Twenty-First Century Fox, and Comcast. Even $5 billion -- nearly the same price-to-sales ratio as Netflix -- might be undervaluing the property.

Of course, in the hands of these three media giants each valued between $79 billion and $135 billion, $5 billion split three ways is not a significant portion of their market cap. But Hulu has the potential to grow into a much larger and more profitable revenue stream than it is currently, and investors may not be valuing that properly.

Who will win the battle for your living room?
Television, as we know it, is on the verge of a transformation. The companies that prevail in this epic disruption could go on to earn their shareholders untold sums of money. And the companies that lose could very well end up in bankruptcy court within a matter of years. With this in mind, our top technology analysts created a groundbreaking free report that sorts out the likely winners from the losers. In doing so, they reveal the handful of companies that are best positioned to make their shareholders exceptionally rich over the next few decades. To download this invaluable free report before the rest of the market catches on, simply click here now.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2776348, ~/Articles/ArticleHandler.aspx, 7/24/2016 10:38:42 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,570.85 53.62 0.29%
S&P 500 2,175.03 9.86 0.46%
NASD 5,100.16 26.26 0.52%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

7/22/2016 4:00 PM
CMCSA $67.46 Up +0.44 +0.66%
Comcast CAPS Rating: ***
DIS $97.71 Down -0.30 -0.31%
Walt Disney CAPS Rating: *****
FOXA $27.11 Down -0.07 -0.26%
Twenty-First Centu… CAPS Rating: ****
NFLX $85.89 Down -0.10 -0.12%
Netflix CAPS Rating: ***