Hulu Profits Enigma: What Would a Stock IPO Really Be Worth?

by InvestorPlace Contributor | June 24, 2011 4:00 am

Bloomberg News[1] yesterday reported that any buyer of Hulu would have to be prepared to shell out as much as 50 times earnings “for a chance at owning what may be the next Netflix (NASDAQ:NFLX[2]).” The problem is that no one has a clue what that figure is for Hulu, or how to use it to price a stock IPO.

Hulu, which started in 2007 as a venture between Providence Equity Partners, NBC Universal, News Corp (NASDAQ: NWS[3]) and Walt Disney Co. (NYSE: DIS[4]), said last year that it reached profitability in the fourth quarter of 2009. Oddly, few in the media pressed Hulu for its magical number because, as Billboard noted, many didn’t think it would ever make money:  “… [T]he point is that Hulu generated a profit – pretty momentous considering the high levels of doubt under which it has always operated,” the site stated.

Fast Company tried a convoluted approach to solving the puzzle of Hulu’s profitability – and failed.

“Let’s assume Hulu’s staff costs it $35 million in all-up costs: This leaves it some $40 million to $70 million to cover network/server costs as well as general business fees,” the site’s article noted. “The math could then easily result in zero profit or a net loss for Hulu, based on this thinking.”

Confused?  You should be.

The fact that Hulu has been coy about disclosing its net income figures could indicate that they are not much to brag about. Arianna Huffington played the same game with the Huffington Post. In late 2010, she bragged that her news aggregator site would turn an annual profit that year and triple sales to $100 million in 2012. Huffington didn’t disclose the profit figure then, either.

Sadly, this is just the tip of the iceberg. The profit picture at many white-hot tech companies is ambiguous. LinkedIn was able to score a market valuation of $9 billion after its recent IPO, notwithstanding that it only earned $16 million in profit over the past four quarters. Twitter co-founder Biz Stone said earlier this year that the microblogging site wasn’t planning an IPO because it was profitable and did not need the money (again, he wasn’t specific). Facebook, however, is the exception to the rule. Word leaked to the media earlier this year that the king of social networking sites earned a net profit of $355 million.

During the dot-com bubble, investors created a self-fulfilling prophecy that every company with a cool technology had a stock that would never fall — a notion proven tragically wrong. But today’s bubble proves that history may wind up repeating itself and burning investors.

To be sure, Hulu is a staggering popular site that many companies would love to own. A deal for the site, which has struggled to find a profitable business model, is not without risks. Its CEO Jason Kilar reportedly is feuding with the company’s backers over strategy. And Netfix Inc. (NASDAQ: NFLX[2]) continues to provide fierce competition.

Hulu, though, has many things going for it.  This year it expects to exceed 1 million paying users and have $500 million in total, up from the $260 million in revenue generated last year. SNL Kagan, a media research firm, estimates that the site will generate a profit of $45 million this year, giving it a market valuation topping $2 billion.

That’s a crazy price, of course, but odds are that Hulu will have no trouble fetching it.

  1. Bloomberg News:
  2. NFLX:
  3. NWS:
  4. DIS:

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