2023-05-19 10:39:05 ET
Summary
- Disney may consider divesting its Hulu streaming platform after acquiring the rest of the company, potentially unlocking significant value for shareholders.
- Hulu currently has 48.2 million paying subscribers and generates around $11.02 billion in revenue per year.
- Valuations for Hulu range from $30 billion to $58 billion, with a sale or spinoff possibly providing significant upside for Disney shareholders.
The Walt Disney Company ( DIS ) is undeniably one of the most interesting companies on the market. In my opinion, it's also one of the most attractive. That's why it's one of only nine companies that I own shares in at this moment, with the business accounting for 8.5% of my investment assets. After making some rather significant leadership changes, management embarked on some cost-cutting initiatives. One idea that many investors seem to circle back to is the possibility of Disney potentially divesting itself, eventually, of its Hulu streaming platform. Although it's very likely that the company will first buy the rest of Hulu because of contractual purposes, a sale would not be unreasonable and could go a long way toward awakening some rather significant value for the company and its shareholders.
A preview of what's around the corner
Back in 2019, when Disney acquired a larger stake in Hulu that it did not previously own, the company made a deal with NBC Universal, which is owned by entertainment conglomerate Comcast ( CMCSA ). That deal involved a put/call option whereby, starting in January 2024, NBC Universal can require Disney to buy the remaining 33% of Hulu or Disney can require NBC Universal to sell it said remaining ownership. According to the terms of the agreement, the purchase price will be determined by the equity value of Hulu at that time. However, it is subject to a floor of $27.5 billion for the company's value as a whole. For context, as of the end of the most recent quarter, NBC Universal's interest in Hulu is recorded at about $8.9 billion.
It's almost certain that this deal will come to fruition. After all, on May 16, during an interview , Brian Roberts, the CEO of Comcast, said that his company will very likely pull the trigger on forcing Disney to buy up this remaining stake. But this won't be a one-sided thing. While either side has the authority to force this transaction to go through, Roberts is of the opinion that both parties will want to make the transaction happen early next year. Even went so far as to suggest that the final price for Hulu will probably be above the $27.5 billion valuation that was set back in 2019. Disney's CEO, Bob Iger, has been a bit coyer when it comes to this particular topic. He acknowledged that there does seem to be some 'real value' in having general entertainment combined with the company's hallmark streaming service known as Disney+. But he also stated that 'I can't tell you and I can't really say where they (conversations between Disney and Comcast) end up'.
For Disney, this is in some respects an inopportune moment. While it's great that the company has an opportunity to further consolidate an incredibly valuable business under its roof and to position itself even more firmly in the streaming space than it already is, the business is fighting hard to cut costs by around $5.5 billion. The way I see it, picking up the rest of Hulu is a great long-term play, but may ultimately be a slightly painful short-term one. One thing that some investors have speculated is that Disney may ultimately decide to spin off or sell Hulu. Generally speaking, the company prefers to keep the high-quality assets that it picks up. But at a time when the business is trying to focus more on its core operations and getting costs under control, this may not make for a bad strategy. And in some ways, it may exercise some value that the market is not recognizing.
At the end of the most recent quarter , Hulu had 48.2 million paying subscribers on its platform. Although not as big as Disney+, Netflix ( NFLX ), Warner Bros. Discovery ( WBD )'s HBO Max, or Paramount Global ( PARA )'s Paramount+, it is a massive player in the streaming space. On top of that, it generates some rather significant revenue. Using data from the most recent quarter, the company generates around $19.06 per user per month. When applied to the total user base that it has, this works out to overall revenue of $11.02 billion per year. For context, Disney's overall revenue in 2022 was $82.72 billion. That's theme parks, movies, all three of its streaming platforms, resorts, toys, video games, and so much more. So at the end of the day, Hulu is not insignificant to the enterprise.
A big question is what the platform might ultimately be worth. We do know that the agreement between Disney and NBC Universal requires a floor of $27.5 billion for computing how much the company must pay for the 33% that it does not own. But as I mentioned already, Comcast is of the opinion that the valuation would be higher than that. Frankly, I'm inclined to agree with that assessment. While doing research for this article, I had initially hoped to value the company by drawing on multiple streaming platforms. But the problem with most players, such as Warner Bros. Discovery and Paramount Global, is that they have a lot more than just streaming. Really, the only pureplay out there that would be appropriate to compare Hulu to is Netflix.
I decided to value the company using four different approaches. The first of these is the enterprise value per user. For Netflix , this number came in at $738.34. The second approach is the market capitalization of the business per user. This is slightly lower at $709.92. The third approach is the enterprise value divided by the revenue that the company brings in. That gives us a multiple of 5.26. And the third is the market capitalization of the business divided by its revenue. That's 5.06.
As you can see in the table above, these approaches create some rather large differences in value when applied to Hulu. Of course, keep in mind that Hulu should continue to grow its user base this year. But because we don't know how much it will grow, I would prefer to value it based on its current size. In the most conservative scenario, we are looking at a total value for the company of $34.22 billion. Meanwhile, the most liberal is around $58 billion. The reason for this disparity is that the revenue generated per user per year for Hulu is greater than what it is for Netflix. And this is largely because of the 4.4 million subscribers on it that pay an average of $92.32 per month for both live TV and SVOD.
Also, while researching for this article, I did come across another way to look at the business. In late 2020, entertainment and telecommunications conglomerate AT&T ( T ) decided to sell off its Crunchyroll anime streaming platform to Sony Group ( SONY ) in a deal valued at $1.175 billion. At the time, I called the transaction a massive misstep , because I believed that, with around three million paying subscribers on its platform, the service was worth around $1.80 billion, with that number possibly climbing as high as $2.10 billion when factoring in the time lag between when data came out and when the purchase was ultimately made. This was based on an estimated value of $600 per subscriber. However, the ultimate purchase price ended up being about $392 per subscriber. At that point, Hulu would be worth closer to $18.89 billion. But that seems highly improbable given how much larger it is, as well as the greater amount of revenue that it brings in per subscriber.
The other method is from when Disney initially struck this deal with Comcast over Hulu. With 28 million subscribers at the time and an evaluation for the enterprise of $17.4 billion, this worked out to roughly $621 per paid subscriber. In this case, given the size of the company today, we would be looking at a number of around $29.93 billion. This is definitely the low end of what would be a realistic expectation.
No matter how you stack it, Hulu is a rather significant asset in terms of overall size. Its days of fast growth are long gone. But that doesn't change the fact that it continues to expand. As a standalone enterprise, the business is probably worth at least $30 billion. Though a valuation as high as $58 billion may not be unrealistic. To put this in perspective, Disney as a whole is being valued at $171.33 billion as of this writing. Even if we take a valuation closer to $35 billion to reflect the low end of what I calculated based on the Netflix comparison, bringing in that much in proceeds would be significant and may get the market to understand all of the other valuable properties that Disney owns. These include, amongst other things, its majority stake in ESPN, its theme parks that generate money hand over fist, its animation studios, content library, other streaming services, and so much more.
Takeaway
Between now and early next year, I believe that it is highly unlikely that any sort of sale regarding Hulu will take place. But given where Disney is from an operational perspective, and management's desire to awaken value within the enterprise, an eventual sale or spinoff of Hulu might make a great deal of sense. If this does come to pass, I imagine that a significant upside would exist for the shareholders of Disney. Even if this does not come to pass, I don't see it as some major loss. It may not be the most efficient or value creative path to take if management decides to keep Hulu. But with how undervalued the company looks with or without such a transaction, I'm quite comfortable with the 'strong buy' rating I assigned the stock previously.
For further details see:
The Walt Disney Company: Assessing A Sale Of Hulu