On April 15, AT&T (NYSE:T) sold its 9.5% stake in Hulu back to the company for $1.43 billion. Prior to the sale, the company was 60% owned by Disney (NYSE:DIS) and 30% by Comcast (NASDAQ:CMCSA), which will now grow to two-thirds Disney, one-third Comcast. Eventually, it's very possible Disney will own all of Hulu. After all, Comcast has already announced that it would unveil its own over-the-top streaming service sometime in 2020, and, like AT&T, Comcast also has a lot of debt to pay off after its $39 billion acquisition of Sky plc.
Comcast, should it be able to sell its Hulu stake back to Disney, may reap a pretty penny. AT&T's sale valued Hulu at $15 billion -- a huge premium to where Hulu was valued as recently as November, despite shifting content partners. Here's how Hulu's surging value could play a pivotal role in the streaming wars.
A 50% gain in 6 months
Just last November, Disney valued Hulu at $9.26 billion, according to a regulatory filing. However, that was before Disney closed its deal with Twenty-First Century Fox, so Disney was likely incentivized to appraise Hulu at a lower valuation. Still, the $9.2 billion valuation was a significant step up from the near-$6 billion valuation Hulu garnered in 2016, when Time Warner bought its initial 9.5% stake.
It's curious that Hulu's value would appreciate so much so quickly, given that AT&T is likely to pull Time Warner's content for its own streaming service later this year, and that, if Comcast sells its stake, Comcast may not be far behind. Should Disney be the sole owner at some point, Hulu would deliver premium originals, ABC and Fox content, and content from outside partners such as Viacom (NASDAQ: VIA) (NASDAQ: VIAB). The current NBC and Time Warner content would leave for Comcast's and AT&T's streaming services, respectively.
On the other hand, Hulu has managed to grow subscribers at a good rate recently -- and it's still far cheaper than streaming rival Netflix (NASDAQ:NFLX), not only in absolute terms, but on a per-subscriber basis.
A big discount to Netflix
As of January, Hulu exceeded 25 million subscribers, an impressive mark that was up 50% from the prior year. Thus, the current $15 billion valuation would value Hulu at roughly $600 per subscriber, using the 25 million subscriber figure.
Though it has more subscribers now, Netflix's current $157 billion valuation on the 139 million subscribers it had at year-end 2018 (around the time the Hulu figure was given) values Netflix at $1,130 per subscriber, almost twice that of Hulu on a per-subscriber basis.
In addition, Hulu's 50% subscriber growth exceeded Netflix's mere 26% subscriber growth in 2018. Of course, Netflix's impressive growth is coming off of a much bigger base, and Netflix is also rapidly expanding globally, with local-language content, whereas Hulu is more of a domestic content cable substitute whose total addressable market may be more limited.
There's also more to it than subscribers
But while subscribers are nice, revenue and profits ultimately matter more for valuation. In order to get that 50% subscriber surge, Hulu has had to cut prices significantly, with a price cut back in late 2017 to $5.99 from $7.99 per month, a bundling promotion with Spotify (NYSE: SPOT) last April, then a huge holiday promotion in late 2018 for a year of service at just $0.99 per month. Hulu also continues to rack up large losses, to the tune of roughly $1.5 billion per year.
And while Netflix continues to post free cash flow losses due to continued content investment, it did earn about $1.6 billion in operating income in 2018, good for 10% operating margins on a GAAP basis (Generally Accepted Accounting Principles). And in contrast to Hulu's recent price cuts, Netflix has been raising its monthly subscription price regularly over the past couple of years with negligible churn.
Streaming battle royale
The next few years in domestic streaming will be quite interesting indeed. By next year, Netflix will be up against Disney's three different bundles (including Hulu), Comcast's OTT service, AT&T's streaming services, Sling, YouTube, and host of others not even on the radar yet. Whether or not any can emerge as a true threat to Netflix remains to be seen, but clearly, Disney is hoping Hulu will come out as one of the winners. The current surge in valuation shows it's on its way.