Let the bidding wars begin!
Following its recent $1.1-billion acquisition of blogging site Tumblr,
Yahoo (YHOO) isn't done shopping yet.
The company is among the bidders for the popular video streaming service, Hulu.
It had better bring a blank check, though.
According to
Reuters, Yahoo faces stiff competition from
Time Warner Cable (TWC),
DirecTV (DTV), Guggenheim Digital Media, former
News Corp. (NWS) president Peter Chernin, and private-equity powerhouse, Silver Lake.
So what is it about this five-year-old startup, with an $8 monthly subscription-based product, that has industry heavyweights lining up?
And more importantly, what are the investment implications?
Let's take a look...
Television's Biggest Nemesis
With organic growth hard to come by, Hulu represents an attractive way to boost a bidder's earnings potential.
For example, in August 2007, Hulu had zero users and zero sales.
Today, the company boasts over three million paid users and it churned out almost $700 million in sales at the end of 2012.
Impressive, for sure. But the heart of this bidding war is the fact that Hulu represents a paradigm shift away from traditional television. And, in turn, it's about survival for the cable companies.
You see, much like the internet squashed print media, it's about to do the same to traditional television.
Video content will simply be consumed online from providers like Hulu,
Netflix (NFLX), Aereo, YouTube,
Amazon (AMZN) Prime, iTunes video and
Google (GOOG) Play, among others.
The data underscores the imminent transition, too...
Trouble for the Tube
More than 100 million Americans still pay an average of about $55 per month for television. But subscriber growth has remained flat for the last two years.
In addition, countless Americans keep merrily paying their television bill, but aren't watching it as much.
Case in point: TV viewership has declined by about 13% over the last four years.
Coincidence? Hardly.
The trend syncs with the launch of online streaming services from Hulu and Netflix.
In other words, the transition away from traditional TV is already underway. And it's progressing quickly, too. In the last year alone, online video viewership jumped by 43%, according to
comScore (SCOR).
So why isn't this shift showing up in TV subscriber data yet?
Simply because Americans are reluctant to completely "cut the cord." Meaning they're paying for traditional TV service
and online service.
But it's clear that the number of TV subscribers is about to nosedive.
Or as BTIG media analyst, Rich Greenfield, says, "It's like the music business. They decline and decline and one day the bottom falls out."
Cutting the Cord on Cable
Indeed, almost five million Americans have already cut the cord and ditched cable TV altogether, according to a Nielsen study. And Deloitte says another 8% are currently considering it.
But it's the statistics for millennials (ages 23 to 36) that really highlight where traditional TV is headed.
- Less than half of millennials (46%) pay for TV.
- A staggering 20% watch TV shows on their smartphones, while another 25% watch TV on their tablets. Those numbers are up from just 2% and 5%, respectively, in about one year.
In other words, the next generation of TV watchers isn't actually watching TV at all. Instead, they're opting for more affordable, online content providers.
The bidding war for Hulu represents an attempt to capture this growth.
So what's the best way to profit as this transition to online video unfolds?
Opportunity Knocks... But Who's Going to Grab It?
Netflix remains the 800-lb gorilla in the online streaming industry, boasting over $3.6 billion in annual revenue and almost 30 million subscribers.
But that doesn't make it an automatic "Buy."
The truth is, the stock's overpriced. Netflix trades at 3.5 times sales, while Hulu's rumored acquisition price of $1 to $2 billion would value the company at about 1.4 to 2.9 times sales.
I don't recommend selling Netflix short, though, because that's already an overcrowded trade. Almost 25% of Netflix's float is currently sold short, which sets the stage for a massive short squeeze - and unlimited losses - if the stock continues to defy gravity.
Instead, I suggest playing a potential downturn for Netflix with long-dated put options. Doing so limits both your capital outlay
and any potential losses. In other words, it's a much more prudent way to speculate.
On the other hand, if you're looking for an opportunity to go "long" on online video providers, you'll have to wait.
No other publicly traded pure-plays exist... yet.
Ahead of the tape,
Louis Basenese
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