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Credit Suisse analyst Omar Sheikh on Monday replaced Time Warner with 21st Century Fox on his firm’s U.S. and global lists of focus stocks, driven by a higher valuation on Hulu.
He boosted his target price on Fox’s stock to $40 from $37, as result of “a more bullish view on Hulu,” which he now values at $25 billion from $15 billion. Sheikh highlighted that this would mean more than 40 percent upside for Fox’s stock. Hulu is owned by Walt Disney, Fox and Comcast/NBCUniversal.
Late last year, reports said that Hulu was in discussions to sell a piece of itself to Time Warner in a deal that would have valued the streaming service at $5 billion. The deal never materialized.
About Time Warner, his previous focus list stock from the entertainment sector, Sheikh added: “We make no changes to our Time Warner forecasts or target price and remain bullish on the stock, but now see more upside with Fox, where we see 42 percent upside … versus 24 percent for Time Warner.”
Hulu plans to launch a new service that provides access to 50-plus live broadcast and cable networks plus an on-demand library and full in-season catch-up for $40 per month. “The product will have wide commercial appeal (the convenience of Netflix plus live) and attractive economics (circa $12 per sub per month in earnings before interest and taxes contribution),” said Sheikh. “After $1.4 billion of cumulative losses since 2008, we think it can help Hulu turn [operating profit] positive in 2018 and generate $2.2 billion per annum by 2020.”
The analyst conservatively predicts that Hulu’s live streaming will be a 10 million subscriber service by 2020. A more bullish scenario, in which Hulu’s live streaming gets to 20 million subscribers, Sheikh believes “would boost the platform’s 2020 earnings before interest and taxes to over $3 billion and its valuation to $35 billion.”
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