Wall Streeters are supposed to be savvy about changes in the marketplace. But investors appear to have a blindspot when it comes to Hulu, a top analyst says today in a report that’s sure to attract a lot of attention.
J.P. Morgan’s Alexia Quadrani says that Hulu could be worth nearly $8 billion in 2017. That’s about $2 billion more than investors currently figure based on their valuations of the streaming service’s owners: Comcast, Disney and Fox. She made her deep-dive examination of Hulu in an effort to put a price on what she calls Fox’s “hidden assets.”
“With a recent strategic shift towards greater investment from its owners, more exclusive shows like Fear The Walking Dead, and a clearer focus on subscriber growth, popularity of the service has picked up and Hulu is becoming a more viable alternative to Netflix and Amazon Prime,” the analyst says.
Is that just sell-side puffery? Quadrani makes aggressive assumptions about Hulu’s trajectory. But last year’s No. 2 media analyst on Institutional Investor‘s All America Research Team is widely respected, and it’s interesting to see the estimates she makes about a company that discloses little about its finances.
She estimates that subscriptions will grow from 10 million at the end of this year to 16 million at the end of 2017. And Hulu’s revenues will rise from $1.6 billion (52% from subscriptions and the rest from ad sales) to nearly $2 billion next year (57% from subs) and close to $2.4 billion in 2017 (61% from subs).
The analyst says Hulu’s worth 3.2 times sales — which is “well below Netflix’s U.S. streaming service” valued at 4 times sales. That gets her to nearly $8 billion in 2017.
If she’s right, then the owners were prescient in 2013 when they scrapped an auction seeking $2 billion for Hulu, electing instead to hang on to it and invest an additional $750 million for content and technology.
“A healthy SVOD marketplace with several content buyers — including a strong Hulu poised to compete with Netflix — only helps content owners by ensuring multiple bidders for studio content as syndication and licensing options grow with these new platforms,” Quadrani says.
Hulu’s also investing in original shows. It hasn’t had a breakout hit, similar to Netflix’s House Of Cards, but “major Hollywood producers are onboard for upcoming releases, suggesting this buzzworthy title [for Hulu] could appear sooner rather than later.”
To be sure, Hulu’s far behind Netflix’s 42.3 million domestic subs. But it’s growing fast from 7.5 million in 2014 and 5.1 million the year before.
And unlike Netflix or Amazon Prime, Hulu will collect about $770 million this year from ad sales, she estimates. Buyers pay an average of $50 for every 1,000 viewers, which is “a meaningful premium to traditional media, so even on a limited basis (both in terms of number of ads and impressions) this model should be very lucrative for Hulu.”
Sales likely will grow at double digit rates, Quadrani figures. That could make Hulu profitable in 2017, despite its growing outlays for programming. “As the business reaches profitability and subscribers continue to grow, we think that the confluence of advertising and fee based revenue will lead to a virtuous cycle and make the asset more attractive. “
Will Hulu’s recent launch of an $11.99-a-month ad free tier cannibalize those sales? Probably not, or at least not much. Quadrani considers it an opportunity to reach people who don’t want to put up with commercials. The price “seems reasonable when considering the exclusive, next day availability of several popular shows such as Empire and Sleepy Hollow that may help justify the premium over Netflix, which is known for offering only past seasons of current shows.”
It’s also strategically useful because “Hulu’s owners likely would prefer to add subscribers by nearly any means necessary as opposed to seeing them sign up for rival services.”
And at some point “Hulu’s owners could eventually still seek a sale” — possibly to Fox.
“While we believe that Fox Now, as well as apps for its other core brands Fox News, FX Networks, Fox Sports, and NatGeo, are growing in popularity and usage, a widely distributed SVOD service like Hulu might be viewed as a desirable distribution outlet that allows them to unify these brands into one offering down the road,” Quadrani says.