NFLX Stock: Hulu Is More of a Threat to Netflix, Inc. Than You Think

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Netflix, Inc. (NASDAQ:NFLX) stock has been a hot performer over the last five years. Shares are up about 200% over the past five years as the company transitioned from a DVD-by-mail rental service to a leader in the streaming media market.

NFLX Stock: Hulu Is More of a Threat to Netflix, Inc. Than You Think

While Netflix has enjoyed years of dominance in its market, competitors continue to encroach on NFLX and likewise Netflix stock.

Take Hulu, a streaming company jointly owned by media companies, and we can see a fierce battle looming that could send Netflix stock, already off its game in 2016, even lower.

How Hulu Plans to Take on NFLX

Hulu is ready to take Netflix head-on with a two-pronged approach at gaining subscribers and possibly poaching from Netflix’s nearly 80 million paid U.S. subscribers. For starters, it’s ditching its free model to put an even bigger emphasis on its monthly subscription amounts of $7.99 (with commercials) and $11.99 (ad free).

Hulu is betting big on skinny bundling with a recently announced cable style online television service. The offering would stream feeds of popular broadcast and cable channels and directly take on pay-TV providers. It’s expected to launch the new product in the first quarter of 2017.

While many companies have tried these skinny bundles before, Hulu has the backing of several major content providers and already has deals in place to get this offering going: Walt Disney Co (NYSE:DIS) is nearing a license deal that would give the Hulu channels like ABC, ESPN and Disney Channel; Twenty-First Century Fox Inc (NASDAQ:FOXA) is also in negotiations with Hulu to put channels like Fox, Fox News, FX, Fox Sports and regional sports channels on the plan.

Hulu also recently picked up content in an equity deal with Time Warner Inc (NYSE:TWX), providing TNT, TBS, CNN, Cartoon Network, Adult Swim, truTV, Boomerang and Turner Classic Movies to the new Hulu offering.

Time Warner, which paid $583 million to acquire 10% of Hulu, puts TWX into a joint partnership with Comcast Corporation (NASDAQ:CMCSA), Disney and Fox — each of whom own 30% of Hulu.

Hulu has 10 million subscribers of its current streaming services. Hulu has stepped up its game in original content and offers shows like The Mindy Project and the Golden Globe nominated Casual. Hulu is also the exclusive home to some content like Seinfeld, Fear the Walking Dead, Empire, and Homeland.

The new skinny bundle offering has not set price points, but many believe it will be in the $30 to $40 a month range. Hulu could likely offer a plan that combines its existing content and its new bundle, which could provide real value and really take on Netflix. Netflix doesn’t offer broadcast channels or live content after all.

Netflix stock has fallen 15% in 2016 due to disappointing financials and subscriber numbers. In the second-quarter letter to shareholders, Netflix shared that it struggled against rate hikes for grandfathered members and fell short of net addition guidance.

Revenue increased 28% to $2.1 billion in the first quarter, while subscriber additions fell from prior quarters, showing a possible loss to competitors like Hulu. Netflix only added 0.16 million paid U.S. subscribers in the second quarter. That came against prior guidance of 0.50 million. Worse yet, Netflix expects to add around 0.40 million in the third quarter, a low-ball estimate that hints that the growth era may be over. Keep in mind that Netflix added 2.23 million paid U.S. subscribers in the first quarter and 1.56 million in the fourth quarter.

Strong growth from its international business, however, may be good for Netflix stock as it faces more competition at home in the U.S. International revenue hit $758 million in the second quarter, compared to $455 million in the prior year and $652 million in the prior quarter. Churn increased due to the loss of members who had been paying a lower monthly price and higher streaming content cost obligations.

The streaming market is heating up and there is room for several players. NFLX has spent billions of dollars to give itself a huge library of exclusive content and original programming. Subscribers are leaving Netflix and the company is struggling to grow at its former rapid pace.

Netflix mentioned the number of offerings in the U.S. rising citing Hulu as a specific example, along with Amazon.com. Inc (NASDAQ:AMZN) Prime, YouTube Red and CBS All Access. Hulu has more upside here with its sights set on a two-prong attack in streaming and also taking on cable companies with its move into live television.

I wouldn’t be looking to buy Netflix stock anytime soon. In fact, I would pleasantly welcome a Hulu IPO as that is where I see the growth coming in this highly competitive streaming and cord-cutting market. Netflix is valued at $40 billion. Hulu was recently valued at less than $6 billion in its sale of equity to Time Warner. I think Hulu could be vastly undervalued here, and NFLX is likewise overvalued.

If you own NFLX, it might finally be time to sell.

As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/netflix-stock-nflx-hulu-ipo-cord-cutting/.

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