Comcast (NASDAQ:CMCSA) has entered into preliminary negotiations with Disney (NYSE:DIS) to sell its stake in Hulu. Though this could boost CMCSA stock in the short term, some analysts wonder where it leaves Comcast once Disney has full control of that streaming service. However, given the profit structure and the other streaming ventures of this media conglomerate, Comcast stands to benefit by selling its stake in the streaming company.
Comcast Remains Profitable, Although Debt Cloud Lingers
After earnings, Comcast looks strongly positioned at first glance. The company reported first-quarter earnings of 76 cents per share. This came in 8 cents per share ahead of estimates. Revenues of $26.86 billion fell short of consensus, though, by $410 million.
Although it missed sales expectations, CMCSA still saw a 17.9% increase in revenue on a year-over-year basis. The problem? Almost none of this benefit came from Hulu. Comcast still makes most of its money from pay TV, internet subscriptions and business services.
In this respect, it faces a similar situation to AT&T (NYSE:T), which recently sold its 10% stake in Hulu back. Like the telecommunications giant, it has found itself heavily indebted. With CMCSA, the debt comes in large part from its $39 billion purchase of Sky.
That acquisition helped take its long-term debt level to around $107.35 billion at the end of fiscal 2018. That liability fell to about $104.46 billion at the end of Q1 2019.
The AT&T deal places the total value of Hulu at around $15 billion. Since Comcast owns around one-third of Hulu, this would bring Comcast about $5 billion. Although that amount will only make a small dent in its debt, holding only $75 billion in stockholders’ equity puts pressure on the company to strengthen its balance sheet.
Hulu a Mixed Bag for Comcast Stock Strategically
A Hulu deal offers other benefits to Comcast stock. The company just announced that it will launch a $5-per-month streaming service called Xfinity Flex. It will compete with other streaming services but exclude live channels. Earlier this year, Comcast also announced a free, ad-supported NBC streaming service. Since numerous competing streaming services make the future of Hulu unclear, perhaps Comcast might want to sell now.
On the other hand, Disney+ will focus mostly on children’s content. Hulu would give Disney the platform needed to target content intended for adults.
Don’t Forget Profits!
Comcast currently provides around 17% of Hulu’s content. One could argue that CMCSA could compete more effectively by holding its percentage of Hulu. However, I think opponents of the deal seem to forget about one factor: profits. Across the entertainment industry, streaming has not delivered on the earnings front. Disney has said that Hulu will not turn a profit before 2024.
It’s not just Hulu. ESPN+ failed to make up for the profits lost from its parent ESPN channel as customers increasingly dropped cable. The one apparent exception to this fallout is Netflix (NASDAQ:NFLX), which technically generates positive earnings. Still, it finds itself absorbing increasing amounts of debt to stay relevant in the content race.
One would expect Comcast to face the same challenges as it launches both its namesake and NBC-branded streaming services. CMCSA is clearly eyeing the platform to deliver increasing amounts of content. However, investors must wait years for this arm to generate profits, if profits occur at all. Hence, prospective buyers need to still view Comcast as a cable, internet and business service provider, not a streaming provider.
Bottom Line on CMCSA Stock
Given the lack of profits in streaming, Comcast stock should benefit by selling its stake in Hulu. Selling the streaming service offers some help with CMCSA’s massive debt load. It also frees the company to focus on the Xfinity and NBC streaming services.
Moreover, for all of the focus on content, the profit centers on Comcast stock will not come from streaming anyway. Therefore, this situation negates most of the benefits of holding a stake in such a service.
The company must still fight to make content a profitable business for Comcast stock. It is precisely this bottom-line focus that makes spinning off Hulu a wise decision right now.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.