How Hulu Buyout Could Affect Netflix Valuation

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According to Seeking Alpha, Netflix’s business model is at risk and investors who purchase the stock at valuation don’t seem to notice.  The online magazine also discusses how the potential acquisition of Hulu by any large media company could severely impact Netflix’s ability to obtain content at a reasonable price.  If a HULU acquisition does materialize, this will also add another wrinkle to the Netflix valuation argument.

Hulu Valuation & How it Affects Netflix

Although Hulu is not a publicly traded company, a Reuter’s article reported that the company had approximately 4 million paying subscribers and generated $700 million in revenue in 2012.  Not taking into account the competitive risks associated with Hulu being acquired by another deep-pocketed company, a market valuation that can be applied to Netflix will be provided by the price paid for Hulu. 

Netflix has shifted its focus to the licensing of television series and producing its own content.  It has also moved away from its movies on demand service.  While the company will always have access to a library filled with old movies, consumer’s habits have transitioned into binge viewing of popular television shows.  Because of this, Netflix is very close to Hulu in the value proposition offered to consumers. Since the companies’ business models now coincide, the acquisition of Hulu can be used to determine the fair market value of Netflix.

At the current purchase price of $1 billion, subscribers are valued at $250 each.  This would value Hulu at approximately 1.4 times its 2012 revenue.  When you consider Netflix’s current valuation, Hulu’s valuation has some serious implications.  Netflix had approximately 33 million paid subscribers at the end of the first quarter and 2013.  At its current market capitalization of $12.7 billion, Netflix is valued at $385 per subscriber.  If Hulu is purchased for $1 billion, then Netflix would be valued at 50 percent higher per subscriber.  Netflix estimates that its revenues will be approximately $5 billion for 2013.  This would put Netflix’s valuation at approximately 2.5 times its forward revenue estimate. 

Although it can be argued that Netflix is a more valuable brand or platform than Hulu, and therefore deserves the premium consideration for which it currently trades, once the purchase price for Hulu was announced, the argument has less credibility. 

Seeking Alpha is expecting Netflix’s valuation to decrease based on the Hulu offer price.  We’ll just sit back and watch to see what happens.  It will be interesting to see how the Hulu valuation really affects Netflix.

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